##### Table of Contents



UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended May 25, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 1-13859
 AMERICAN GREETINGS CORPORATION
  Ohio
    
    34-0065325(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)One American Road, Cleveland, Ohio
    
    44144(Address of principal executive offices)
    
    (Zip Code)
 (216) 252-7300
 
   þ o
  þ o o
 o þ
  Class A Common
    51,352,831Class B Common
    4,291,159




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##### 



AMERICAN GREETINGS CORPORATION
INDEX
 PageNumberPART I  FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    22Item 1A. Risk Factors
    
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 6. Exhibits
    
    
    23SIGNATURES
    
    
    23EXHIBITSEX-10.1EX-31.AEX-31.BEX-32




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##### Table of Contents



PART
I  FINANCIAL INFORMATION
 
 Item 1.
Financial Statements
 AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
 (Thousands of dollars except share and per share amounts)
 (Unaudited)Three Months EndedMay 25, 2007
    
    
    May 26, 2006Net sales
    
    $
    418,013
    
    
    $
    404,170Costs and expenses:Material, labor and other production costs
    
    
    161,128
    
    
    
    175,237Selling, distribution and marketing
    
    
    140,691
    
    
    
    142,580Administrative and general
    
    
    61,871
    
    
    
    61,348Interest expense
    
    
    4,757
    
    
    
    12,464Other income  net
    
    
    (5,347
    )
    
    
    (6,860
    )363,100
    
    
    
    384,769Income from continuing operations before income tax expense
    
    
    54,913
    
    
    
    19,401Income tax expense
    
    
    24,291
    
    
    
    2,851Income from continuing operations
    
    
    30,622
    
    
    
    16,550Loss from discontinued operations, net of tax
    
    
    (572
    )
    
    
    (1,158
    )Net income
    
    $
    30,050
    
    
    $
    15,392Earnings per share  basic:Income from continuing operations
    
    $
    0.55
    
    
    $
    0.28Loss from discontinued operations
    
    
    (0.01
    )
    
    
    (0.02
    )Net income
    
    $
    0.54
    
    
    $
    0.26Earnings per share  assuming dilution:Income from continuing operations
    
    $
    0.55
    
    
    $
    0.26Loss from discontinued operations
    
    
    (0.01
    )
    
    
    (0.02
    )Net income
    
    $
    0.54
    
    
    $
    0.24Average number of shares outstanding
    
    
    55,262,716
    
    
    
    58,137,230Average number of shares outstanding  assuming dilution
    
    
    55,650,033
    
    
    
    71,077,312Dividends declared per share
    
    $
    0.10
    
    
    $
    0.08
  3




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##### Table of Contents



AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Thousands of dollars)
 (Unaudited)
    
    
    (Note 1)
    
    
    (Unaudited)May 25, 2007
    
    
    February 28, 2007
    
    
    May 26, 2006ASSETSCurrent assetsCash and cash equivalents
    
    $
    132,582
    
    
    $
    144,713
    
    
    $
    205,468Short-term investments
    
    
    28,325
    
    
    
    
    
    
    
    83,100Trade accounts receivable, net
    
    
    119,145
    
    
    
    103,992
    
    
    
    124,885Inventories
    
    
    192,399
    
    
    
    182,618
    
    
    
    233,155Deferred and refundable income taxes
    
    
    76,892
    
    
    
    135,379
    
    
    
    163,051Assets of businesses held for sale
    
    
    2,507
    
    
    
    5,199
    
    
    
    23,621Prepaid expenses and other
    
    
    215,867
    
    
    
    227,380
    
    
    
    211,354Total current assets
    
    
    767,717
    
    
    
    799,281
    
    
    
    1,044,634Goodwill
    
    
    225,318
    
    
    
    224,105
    
    
    
    206,137Other assets
    
    
    397,567
    
    
    
    416,887
    
    
    
    527,630Deferred and refundable income taxes
    
    
    102,060
    
    
    
    52,869
    
    
    
    Property, plant and equipment  at cost
    
    
    947,156
    
    
    
    944,534
    
    
    
    965,588Less accumulated depreciation
    
    
    666,651
    
    
    
    659,462
    
    
    
    661,383Property, plant and equipment  net
    
    
    280,505
    
    
    
    285,072
    
    
    
    304,205$
    1,773,167
    
    
    $
    1,778,214
    
    
    $
    2,082,606LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesDebt due within one year
    
    $
    
    
    
    $
    
    
    
    $
    159,122Accounts payable
    
    
    100,914
    
    
    
    118,204
    
    
    
    124,789Accrued liabilities
    
    
    77,837
    
    
    
    80,389
    
    
    
    72,781Accrued compensation and benefits
    
    
    43,656
    
    
    
    61,192
    
    
    
    45,056Income taxes
    
    
    29,878
    
    
    
    26,385
    
    
    
    27,036Liabilities of businesses held for sale
    
    
    1,253
    
    
    
    1,932
    
    
    
    3,697Other current liabilities
    
    
    84,622
    
    
    
    84,898
    
    
    
    94,324Total current liabilities
    
    
    338,160
    
    
    
    373,000
    
    
    
    526,805Long-term debt
    
    
    223,800
    
    
    
    223,915
    
    
    
    239,838Other liabilities
    
    
    146,384
    
    
    
    162,410
    
    
    
    98,729Deferred income taxes and noncurrent income
taxes payable
    
    
    27,184
    
    
    
    6,315
    
    
    
    25,041Shareholders equityCommon shares  Class A
    
    
    51,148
    
    
    
    50,839
    
    
    
    53,386Common shares  Class B
    
    
    4,340
    
    
    
    4,283
    
    
    
    4,225Capital in excess of par value
    
    
    424,201
    
    
    
    414,859
    
    
    
    401,644Treasury stock
    
    
    (712,147
    )
    
    
    (710,414
    )
    
    
    (732,890
    )Accumulated other comprehensive income
(loss)
    
    
    6,030
    
    
    
    (1,013
    )
    
    
    23,952Retained earnings
    
    
    1,264,067
    
    
    
    1,254,020
    
    
    
    1,441,876Total shareholders equity
    
    
    1,037,639
    
    
    
    1,012,574
    
    
    
    1,192,193$
    1,773,167
    
    
    $
    1,778,214
    
    
    $
    2,082,606
  4




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AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of dollars)
 (Unaudited)Three Months EndedMay 25, 2007
    
    
    May 26, 2006OPERATING ACTIVITIES:Net income
    
    $
    30,050
    
    
    $
    15,392Loss from discontinued operations
    
    
    572
    
    
    
    1,158Income from continuing operations
    
    
    30,622
    
    
    
    16,550Adjustments to reconcile to net cash provided by operating activities:Net gain on disposal of fixed assets
    
    
    (116
    )
    
    
    (79
    )Loss on extinguishment of debt
    
    
    
    
    
    
    4,963Depreciation and amortization
    
    
    11,989
    
    
    
    11,764Deferred income taxes
    
    
    4,466
    
    
    
    (1,934
    )Other non-cash charges
    
    
    1,979
    
    
    
    3,926Changes in operating assets and liabilities, net of
acquisitions and dispositions:(Increase) decrease in trade accounts receivable
    
    
    (14,750
    )
    
    
    17,424Increase in inventories
    
    
    (7,389
    )
    
    
    (17,313
    )Decrease (increase) in other current assets
    
    
    646
    
    
    
    (8,708
    )Decrease in deferred costs  net
    
    
    11,691
    
    
    
    12,722Decrease in accounts payable and other liabilities
    
    
    (21,753
    )
    
    
    (22,438
    )Other  net
    
    
    4,236
    
    
    
    8,923Cash Provided by Operating Activities
    
    
    21,621
    
    
    
    25,800INVESTING ACTIVITIES:Proceeds from sale of short-term investments
    
    
    134,900
    
    
    
    448,320Purchases of short-term investments
    
    
    (163,225
    )
    
    
    (322,680
    )Property, plant & equipment additions
    
    
    (5,875
    )
    
    
    (9,591
    )Cash payments for business acquisitions
    
    
    (6,056
    )
    
    
    Cash receipts related to discontinued operations
    
    
    2,344
    
    
    
    Proceeds from sale of fixed assets
    
    
    890
    
    
    
    182Cash (Used) Provided by Investing Activities
    
    
    (37,022
    )
    
    
    116,231FINANCING ACTIVITIES:Increase in long-term debt
    
    
    
    
    
    
    200,000Reduction of long-term debt
    
    
    
    
    
    
    (281,363
    )Sale of stock under benefit plans
    
    
    9,358
    
    
    
    1,052Purchase of treasury shares
    
    
    (3,568
    )
    
    
    (59,529
    )Dividends to shareholders
    
    
    (5,536
    )
    
    
    (4,605
    )Debt issuance costs
    
    
    
    
    
    
    (7,276
    )Cash Provided (Used) by Financing Activities
    
    
    254
    
    
    
    (151,721
    )DISCONTINUED OPERATIONS:Cash used by operating activities from discontinued operations
    
    
    (542
    )
    
    
    (2,540
    )Cash provided by investing activities from discontinued operations
    
    
    
    
    
    
    1,644Cash Used by Discontinued Operations
    
    
    (542
    )
    
    
    (896
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    3,558
    
    
    
    2,441DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (12,131
    )
    
    
    (8,145
    )Cash and Cash Equivalents at Beginning of Year
    
    
    144,713
    
    
    
    213,613Cash and Cash Equivalents at End of Period
    
    $
    132,582
    
    
    $
    205,468
  5




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AMERICAN GREETINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Three Months Ended May 25, 2007 and May 26, 2006
 Note 1  Basis of Presentation
    Note 2  Seasonal Nature of Business
  Note 3  Recent Accounting Pronouncements
   6




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Note 4  Other Income  Net
 Three Months Ended(In thousands)
    
    May 25, 2007
    
    
    May 26, 2006Royalty revenue
    
    $
    (1,952
    )
    
    $
    (1,441
    )Foreign exchange gain
    
    
    (1,120
    )
    
    
    (1,427
    )Interest income
    
    
    (1,492
    )
    
    
    (2,830
    )Other
    
    
    (783
    )
    
    
    (1,162
    )$
    (5,347
    )
    
    $
    (6,860
    )
  Note 5  Earnings Per Share
  Three Months EndedMay 25, 2007
    
    
    May 26, 2006Numerator (in thousands):Income from continuing operations
    
    $
    30,622
    
    
    $
    16,550Add-backinterest on convertible subordinated notes, net of tax
    
    
    
    
    
    
    1,874Income from continuing operationsassuming dilution
    
    $
    30,622
    
    
    $
    18,424Denominator (in thousands):Weighted average shares outstanding
    
    
    55,263
    
    
    
    58,137Effect of dilutive securities:Convertible debt
    
    
    
    
    
    
    12,576Stock options and other
    
    
    387
    
    
    
    364Weighted average shares outstandingassuming dilution
    
    
    55,650
    
    
    
    71,077Income from continuing operations per share
    
    $
    0.55
    
    
    $
    0.28Income from continuing operations per shareassuming dilution
    
    $
    0.55
    
    
    $
    0.26
  Note 6  Comprehensive Income
  Three Months Ended(In thousands)
    
    May 25, 2007
    
    
    May 26, 2006Net income
    
    $
    30,050
    
    
    $
    15,392Other comprehensive income:Foreign currency translation adjustment and other
    
    
    7,043
    
    
    
    14,057Unrealized gain on securities
    
    
    
    
    
    
    72Total comprehensive income
    
    $
    37,093
    
    
    $
    29,521
 7




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Note 7  Trade Accounts Receivable, Net
  (In thousands)
    
    May 25, 2007
    
    
    February 28, 2007
    
    
    May 26, 2006Allowance for seasonal sales returns
    
    $
    73,909
    
    
    $
    62,567
    
    
    $
    82,917Allowance for doubtful accounts
    
    
    5,009
    
    
    
    6,350
    
    
    
    8,875Allowance for cooperative
advertising and marketing funds
    
    
    27,142
    
    
    
    24,048
    
    
    
    24,379Allowance for rebates
    
    
    47,965
    
    
    
    40,053
    
    
    
    57,205$
    154,025
    
    
    $
    133,018
    
    
    $
    173,376
 Note 8  Inventories
 (In thousands)
    
    May 25, 2007
    
    
    February 28, 2007
    
    
    May 26, 2006Raw materials
    
    $
    19,568
    
    
    $
    17,590
    
    
    $
    24,175Work in process
    
    
    14,957
    
    
    
    11,315
    
    
    
    18,898Finished products
    
    
    209,688
    
    
    
    207,676
    
    
    
    244,315244,213
    
    
    
    236,581
    
    
    
    287,388Less LIFO reserve
    
    
    80,567
    
    
    
    79,145
    
    
    
    79,802163,646
    
    
    
    157,436
    
    
    
    207,586Display materials and factory supplies
    
    
    28,753
    
    
    
    25,182
    
    
    
    25,569$
    192,399
    
    
    $
    182,618
    
    
    $
    233,155
  Note 9  Deferred Costs
  (In thousands)
    
    May 25, 2007
    
    
    February 28, 2007
    
    
    May 26, 2006Prepaid expenses and other
    
    $
    119,741
    
    
    $
    131,972
    
    
    $
    149,812Other assets
    
    
    337,358
    
    
    
    355,115
    
    
    
    466,926Deferred cost assets
    
    
    457,099
    
    
    
    487,087
    
    
    
    616,738Other current liabilities
    
    
    (47,609
    )
    
    
    (47,692
    )
    
    
    (63,555
    )Other liabilities
    
    
    (30,681
    )
    
    
    (49,648
    )
    
    
    (48,771
    )Deferred cost liabilities
    
    
    (78,290
    )
    
    
    (97,340
    )
    
    
    (112,326
    )Net deferred costs
    
    $
    378,809
    
    
    $
    389,747
    
    
    $
    504,412
 8




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Note 10  Debt
  (In thousands)
    
    May 25, 2007
    
    
    February 28, 2007
    
    
    May 26, 20066.10% Senior Notes, due 2028
    
    $
    22,690
    
    
    $
    22,690
    
    
    $
    22,6157.375% Senior Notes, due 2016
    
    
    200,000
    
    
    
    200,000
    
    
    
    200,0007.00% Convertible Subordinated
Notes, due 2006
    
    
    
    
    
    
    
    
    
    
    15,662Other
    
    
    1,110
    
    
    
    1,225
    
    
    
    1,561$
    223,800
    
    
    $
    223,915
    
    
    $
    239,838
     Note 11  Retirement Benefits
  Defined Benefit Pension
    
    
    Postretirement BenefitThree Months Ended
    
    
    Three Months Ended(In thousands)
    
    May 25, 2007
    
    
    May 26, 2006
    
    
    May 25, 2007
    
    
    May 26, 2006Service cost
    
    $
    244
    
    
    $
    212
    
    
    $
    1,050
    
    
    $
    999Interest cost
    
    
    2,265
    
    
    
    2,104
    
    
    
    2,150
    
    
    
    1,925Expected return on plan assets
    
    
    (2,154
    )
    
    
    (2,108
    )
    
    
    (1,250
    )
    
    
    (1,275
    )Amortization of prior service
cost (credit)
    
    
    64
    
    
    
    67
    
    
    
    (1,850
    )
    
    
    (1,849
    )Amortization of actuarial loss
    
    
    410
    
    
    
    761
    
    
    
    1,650
    
    
    
    1,700$
    829
    
    
    $
    1,036
    
    
    $
    1,750
    
    
    $
    1,500
   9




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Note 12  Income Taxes
     Note 13  Business Segment Information
       10




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##### Table of Contents



Operating Segment Information
 Net Sales
    
    
    Segment Earnings (Loss)Three Months Ended
    
    
    Three Months Ended(In thousands)
    
    May 25, 2007
    
    
    May 26, 2006
    
    
    May 25, 2007
    
    
    May 26, 2006North American Social
Expression Products
    
    $
    297,066
    
    
    $
    292,950
    
    
    $
    86,940
    
    
    $
    68,161Intersegment items
    
    
    (8,167
    )
    
    
    (17,548
    )
    
    
    (6,255
    )
    
    
    (12,910
    )Exchange rate adjustment
    
    
    5
    
    
    
    (63
    )
    
    
    5
    
    
    
    (33
    )Net
    
    
    288,904
    
    
    
    275,339
    
    
    
    80,690
    
    
    
    55,218International Social
Expression Products
    
    
    59,145
    
    
    
    63,865
    
    
    
    40
    
    
    
    497Exchange rate adjustment
    
    
    4,057
    
    
    
    (2,251
    )
    
    
    147
    
    
    
    46Net
    
    
    63,202
    
    
    
    61,614
    
    
    
    187
    
    
    
    543Retail Operations
    
    
    38,924
    
    
    
    43,501
    
    
    
    (2,781
    )
    
    
    (7,301
    )Exchange rate adjustment
    
    
    4
    
    
    
    (62
    )
    
    
    
    
    
    
    2Net
    
    
    38,928
    
    
    
    43,439
    
    
    
    (2,781
    )
    
    
    (7,299
    )AG Interactive
    
    
    19,894
    
    
    
    19,960
    
    
    
    3,296
    
    
    
    2,041Exchange rate adjustment
    
    
    3
    
    
    
    5
    
    
    
    (9
    )
    
    
    (1
    )Net
    
    
    19,897
    
    
    
    19,965
    
    
    
    3,287
    
    
    
    2,040Non-reportable segments
    
    
    7,082
    
    
    
    3,813
    
    
    
    927
    
    
    
    (2,095
    )Unallocated
    
    
    
    
    
    
    
    
    
    
    (27,393
    )
    
    
    (28,906
    )Exchange rate adjustment
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (100
    )Net
    
    
    
    
    
    
    
    
    
    
    (27,397
    )
    
    
    (29,006
    )Consolidated total
    
    $
    418,013
    
    
    $
    404,170
    
    
    $
    54,913
    
    
    $
    19,401
 Termination Benefits and Plant Closings
   Deferred Revenue
  11




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Note 14  Discontinued Operations
      Three Months Ended(In thousands)
    
    May 25, 2007
    
    
    May 26, 2006Net sales
    
    $
    302
    
    
    $
    6,168Pre-tax loss from operations
    
    $
    (405
    )
    
    $
    (1,155
    )Gain on sale
    
    
    195
    
    
    
    (210
    )
    
    
    (1,155
    )Income tax expense
    
    
    362
    
    
    
    3Loss from discontinued operations, net of tax
    
    $
    (572
    )
    
    $
    (1,158
    )
  (In thousands)
    
    May 25, 2007
    
    
    February 28, 2007
    
    
    May 26, 2006Assets of businesses held for sale:Current assets
    
    $
    118
    
    
    $
    2,933
    
    
    $
    19,844Other assets
    
    
    2,313
    
    
    
    2,185
    
    
    
    3,559Fixed assets
    
    
    76
    
    
    
    81
    
    
    
    218$
    2,507
    
    
    $
    5,199
    
    
    $
    23,621Liabilities of businesses held for sale:Current liabilities
    
    $
    41
    
    
    $
    610
    
    
    $
    3,594Noncurrent liabilities
    
    
    1,212
    
    
    
    1,322
    
    
    
    103$
    1,253
    
    
    $
    1,932
    
    
    $
    3,697
 12




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
  Overview
        13




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##### Table of Contents



Results of Operations
 Three months ended May 25, 2007 and May 26, 2006
   % Net
    
    
    
    
    
    
    % Net(Dollars in thousands)
    
    2007
    
    
    Sales
    
    
    2006
    
    
    SalesNet sales
    
    $
    418,013
    
    
    
    100.0
    %
    
    $
    404,170
    
    
    
    100.0
    %Material, labor and other production costs
    
    
    161,128
    
    
    
    38.6
    %
    
    
    175,237
    
    
    
    43.4
    %Selling, distribution and marketing
    
    
    140,691
    
    
    
    33.7
    %
    
    
    142,580
    
    
    
    35.3
    %Administrative and general
    
    
    61,871
    
    
    
    14.8
    %
    
    
    61,348
    
    
    
    15.2
    %Interest expense
    
    
    4,757
    
    
    
    1.1
    %
    
    
    12,464
    
    
    
    3.0
    %Other income  net
    
    
    (5,347
    )
    
    
    (1.3
    %)
    
    
    (6,860
    )
    
    
    (1.7
    %)363,100
    
    
    
    86.9
    %
    
    
    384,769
    
    
    
    95.2
    %Income from continuing operations before
income tax expense
    
    
    54,913
    
    
    
    13.1
    %
    
    
    19,401
    
    
    
    4.8
    %Income tax expense
    
    
    24,291
    
    
    
    5.8
    %
    
    
    2,851
    
    
    
    0.7
    %Income from continuing operations
    
    
    30,622
    
    
    
    7.3
    %
    
    
    16,550
    
    
    
    4.1
    %Loss from discontinued operations, net of tax
    
    
    (572
    )
    
    
    (0.1
    %)
    
    
    (1,158
    )
    
    
    (0.3
    %)Net income
    
    $
    30,050
    
    
    
    7.2
    %
    
    $
    15,392
    
    
    
    3.8
    %
    14




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##### Table of Contents



Wholesale Unit and Pricing Analysis for Greeting Cards
  Increase (Decrease) From the Prior YearEveryday Cards
    
    Seasonal Cards
    
    Total Greeting Cards2007
    
    2006
    
    2007
    
    2006
    
    2007
    
    2006Unit volume
    
    
    8.0
    %
    
    
    (13.2
    %)
    
    
    (1.5
    %)
    
    
    4.6
    %
    
    
    4.3
    %
    
    
    (7.2
    %)Selling prices
    
    
    (4.7
    %)
    
    
    7.0
    %
    
    
    1.5
    %
    
    
    (1.5
    %)
    
    
    (2.5
    %)
    
    
    4.3
    %Overall increase / (decrease)
    
    
    2.9
    %
    
    
    (7.1
    %)
    
    
    0.0
    %
    
    
    3.0
    %
    
    
    1.7
    %
    
    
    (3.2
    %)
    Expense Overview
   15




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##### Table of Contents



Segment Information
   16




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##### Table of Contents



North American Social Expression Products Segment
 Three Months Ended(Dollars in thousands)
    
    May 25, 2007
    
    May 26, 2006
    
    % ChangeNet sales
    
    $
    288,899
    
    
    $
    275,402
    
    
    
    4.9
    %Segment earnings
    
    
    80,685
    
    
    
    55,251
    
    
    
    46.0
    %
   International Social Expression Products Segment
 Three Months Ended(Dollars in thousands)
    
    May 25, 2007
    
    May 26, 2006
    
    % ChangeNet sales
    
    $
    59,145
    
    
    $
    63,865
    
    
    
    (7.4
    %)Segment earnings
    
    
    40
    
    
    
    497
    
    
    
    (92.0
    %)
   Retail Operations Segment
 Three Months Ended(Dollars in thousands)
    
    May 25, 2007
    
    May 26, 2006
    
    % ChangeNet sales
    
    $
    38,924
    
    
    $
    43,501
    
    
    
    (10.5
    %)Segment loss
    
    
    (2,781
    )
    
    
    (7,301
    )
    
    
    61.9
    %
   17




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##### Table of Contents



AG Interactive Segment
 Three Months Ended(Dollars in thousands)
    
    May 25, 2007
    
    May 26, 2006
    
    % ChangeNet sales
    
    $
    19,894
    
    
    $
    19,960
    
    
    
    (0.3
    %)Segment earnings
    
    
    3,296
    
    
    
    2,041
    
    
    
    61.4
    %
   Liquidity and Capital Resources
  Operating Activities
       18




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Investing Activities
  Financing Activities
   Credit Sources
     19




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##### Table of Contents



Critical Accounting Policies
  Factors That May Affect Future Results
  
    
    retail consolidations, acquisitions and bankruptcies, including the possibility of
resulting adverse changes to retail contract terms;
    
    our ability to successfully implement our strategy to invest in our core greeting
card business;
 20




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##### Table of Contents




    
    the timing and impact of investments in new retail or product strategies as well
as new product introductions and achieving the desired benefits from those
investments;
    
    the ability to execute share repurchase programs or the ability to achieve the
desired accretive effect from such repurchases;
    
    our ability to successfully complete, or achieve the desired benefits associated with, dispositions;
    
    a weak retail environment;
    
    consumer acceptance of products as priced and marketed;
    
    the impact of technology on core product sales;
    
    competitive terms of sale offered to customers;
    
    successful implementation of supply chain improvements and achievement of
projected cost savings from those improvements;
    
    increases in the cost of material, energy, freight and other production costs;
    
    our ability to comply with our debt covenants;
    
    fluctuations in the value of currencies in major areas where we operate, including
the U.S. Dollar, Euro, U.K. Pound Sterling and Canadian Dollar;
    
    escalation in the cost of providing employee health care;
    
    successful integration of acquisitions; and
    
    the outcome of any legal claims known or unknown.
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
   21




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
    
    Not applicable.(b)
    
    Not applicable.(c)
    
    The following table provides information with respect to our purchases of our common shares
during the three months ended May 25, 2007.
 Maximum Number ofTotal Number of
    
    Shares (or ApproximateShares Purchased as
    
    Dollar Value) that MayTotal Number of Shares
    
    Average Price
    
    Part of Publicly
    
    Yet Be PurchasedPeriod
    
    Repurchased
    
    Paid per Share
    
    Announced Plans
    
    Under the PlansMarch 2007
    
    Class A 
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Class B 
    
    
    2,756
    (1)
    
    $
    22.87
    
    
    
    April 2007
    
    Class A 
    
    
    35,000
    
    
    $
    25.45
    (2)
    
    
    35,000
    (3)
    
    $
    99,109,342Class B 
    
    
    2,381
    (1)
    
    $
    25.20
    
    
    
    May 2007
    
    Class A 
    
    
    100,000
    
    
    $
    25.51
    (2)
    
    
    100,000
    (3)
    
    $
    96,558,472Class B 
    
    
    
    
    
    
    
    
    
    
    Total
    
    Class A 
    
    
    135,000
    
    
    
    
    
    
    
    135,000
    (3)Class B 
    
    
    5,137
    (1)
    
    
    
    
    
    
    
 
 (1)
    
    There is no public market for our Class B common shares. Pursuant to our Amended Articles of
Incorporation, all of the Class B common shares were repurchased by American Greetings for
cash pursuant to its right of first refusal.(2)
    
    Excludes commissions paid, if any, related to the share repurchase transactions.(3)
    
    On April 17, 2007, American Greetings announced that its Board of Directors authorized a new
program to repurchase up to $100 million of its Class A common shares. There is no set
expiration date for this repurchase program and these repurchases are made through a 10b5-1
program in open market or privately negotiated transactions which are intended to be in
compliance with the SECs Rule 10b-18, subject to market conditions, applicable legal
requirements and other factors. 
 22




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##### Table of Contents



Item 6. Exhibits
  ExhibitNumber
    
    Description10.1
    
    Form of Employee Stock Option Agreement under the American
Greetings Corporation 2007 Omnibus Incentive Compensation
Plan(31) a
    
    Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002(31) b
    
    Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002(32)
    
    Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 
   AMERICAN GREETINGS CORPORATIONBy:
    /s/ Joseph B. CipolloneJoseph B. CipolloneVice President, Corporate
Controller, and       Chief Accounting
Officer  *  
 *
    
    (Signing on behalf of Registrant as a duly authorized officer of the Registrant and signing as
the chief accounting officer of the Registrant.) 23