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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended August 25, 2006

OR



| ̈ | 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



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AMERICAN GREETINGS CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Ohio                                                           |  | 34-0065325                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|One American Road, Cleveland, Ohio       |  | 44144     
|(Address of principal executive offices) |  | (Zip Code)

(216) 252-7300

(Registrants telephone number, including area code)



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act. (Check one):



|                           |  |                    |  |                       
|-------------------------- |  | ------------------ |  | ----------------------
|Large accelerated filer  x |  | Accelerated filer ̈ |  | Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes ̈No  x

As of September 29, 2006, the number of shares outstanding of each of the issuers classes of common stock was:



| |  |  |  |                |  |            |  |  |  | 
| |  |  |  | -------------- |  | ---------- |  |  |  | 
| |  |  |  | Class A Common |  | 55,736,999 |  |  |  | 
| |  |  |  | Class B Common |  | 4,226,997  |  |  |  | 



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AMERICAN GREETINGS CORPORATION

INDEX



|                               |  |                                                                                       |  |            
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | -----------
|                               |  |                                                                                       |  | Page Number
|PART I - FINANCIAL INFORMATION |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Financial Statements                                                                  |  | 3          
|                               |  |                                                                                      
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 20         
|                               |  |                                                                                      
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 35         
|                               |  |                                                                                      
|Item 4.                        |  | Controls and Procedures                                                               |  | 35         
|                               | 
|PART II - OTHER INFORMATION    |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Legal Proceedings                                                                     |  | 36         
|                               |  |                                                                                      
|Item 1A.                       |  | Risk Factors                                                                          |  | 36         
|                               |  |                                                                                      
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 36         
|                               |  |                                                                                      
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                   |  | 37         
|                               |  |                                                                                      
|Item 6.                        |  | Exhibits                                                                              |  | 37         
|                               |  |                                                                                      
|SIGNATURES                     |  |                                                                                       |  | 38         
|                               |  |                                                                                      
|EXHIBITS                       |  |                                                                                       |  |            



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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN GREETINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Thousands of dollars except share and per share amounts)



|                                                                             |  |                    |            |   |                  |   |            |                |  |   |                |   |  |   |            |  
|---------------------------------------------------------------------------- |  | ------------------ | ---------- | - | ---------------- | - | ---------- | -------------- |  | - | -------------- | - |  | - | ---------- | -
|                                                                             |  | (Unaudited)        |           
|                                                                             |  | Three Months Ended |            |   | Six Months Ended |  
|                                                                             |  | August 25,2006     |            |   | August 26,2005   |   |            | August 25,2006 |  |   | August 26,2005 |  
|Net sales                                                                    |  | $                  | 360,075    |   |                  | $ | 384,965    |                |  | $ | 766,646        |   |  | $ | 824,434    |  
|                                                                             |  |                    |            |  
|Costs and expenses:                                                          |  |                    |            |   |                  |   |            |                |  |   |                |   |  |   |            |  
|Material, labor and other production costs                                   |  |                    | 174,193    |   |                  |   | 174,571    |                |  |   | 350,514        |   |  |   | 353,001    |  
|Selling, distribution and marketing                                          |  |                    | 152,839    |   |                  |   | 145,982    |                |  |   | 296,608        |   |  |   | 299,780    |  
|Administrative and general                                                   |  |                    | 57,496     |   |                  |   | 58,539     |                |  |   | 119,502        |   |  |   | 121,014    |  
|Interest expense                                                             |  |                    | 7,609      |   |                  |   | 8,586      |                |  |   | 20,073         |   |  |   | 18,263     |  
|Other income  net                                                           |  |                    | (17,409    | ) |                  |   | (11,571    | )              |  |   | (24,289        | ) |  |   | (20,066    | )
|                                                                             |  |                    |            |   |                  |   |            |                |  |   |                |   |  |   |            |  
|                                                                             |  |                    | 374,728    |   |                  |   | 376,107    |                |  |   | 762,408        |   |  |   | 771,992    |  
|                                                                             |  |                    |            |   |                  |   |            |                |  |   |                |   |  |   |            |  
|(Loss) income from continuing operations before income tax (benefit) expense |  |                    | (14,653    | ) |                  |   | 8,858      |                |  |   | 4,238          |   |  |   | 52,442     |  
|Income tax (benefit) expense                                                 |  |                    | (1,409     | ) |                  |   | 5,054      |                |  |   | 1,445          |   |  |   | 21,730     |  
|                                                                             |  |                    |            |   |                  |   |            |                |  |   |                |   |  |   |            |  
|(Loss) income from continuing operations                                     |  |                    | (13,244    | ) |                  |   | 3,804      |                |  |   | 2,793          |   |  |   | 30,712     |  
|Income (loss) from discontinued operations, net of tax                       |  |                    | 2,746      |   |                  |   | (563       | )              |  |   | 2,101          |   |  |   | (1,057     | )
|                                                                             |  |                    |            |   |                  |   |            |                |  |   |                |   |  |   |            |  
|Net (loss) income                                                            |  | $                  | (10,498    | ) |                  | $ | 3,241      |                |  | $ | 4,894          |   |  | $ | 29,655     |  
|                                                                             |  |                    |            |   |                  |   |            |                |  |   |                |   |  |   |            |  
|(Loss) earnings per share  basic:                                           |  |                    |            |   |                  |   |            |                |  |   |                |   |  |   |            |  
|(Loss) income from continuing operations                                     |  | $                  | (0.23      | ) |                  | $ | 0.06       |                |  | $ | 0.04           |   |  | $ | 0.46       |  
|Income (loss) from discontinued operations                                   |  |                    | 0.05       |   |                  |   | (0.01      | )              |  |   | 0.04           |   |  |   | (0.02      | )
|                                                                             |  |                    |            |   |                  |   |            |                |  |   |                |   |  |   |            |  
|Net (loss) income                                                            |  | $                  | (0.18      | ) |                  | $ | 0.05       |                |  | $ | 0.08           |   |  | $ | 0.44       |  
|                                                                             |  |                    |            |   |                  |   |            |                |  |   |                |   |  |   |            |  
|(Loss) earnings per share  assuming dilution:                               |  |                    |            |   |                  |   |            |                |  |   |                |   |  |   |            |  
|(Loss) income from continuing operations                                     |  | $                  | (0.23      | ) |                  | $ | 0.06       |                |  | $ | 0.04           |   |  | $ | 0.42       |  
|Income (loss) from discontinued operations                                   |  |                    | 0.05       |   |                  |   | (0.01      | )              |  |   | 0.04           |   |  |   | (0.01      | )
|                                                                             |  |                    |            |   |                  |   |            |                |  |   |                |   |  |   |            |  
|Net (loss) income                                                            |  | $                  | (0.18      | ) |                  | $ | 0.05       |                |  | $ | 0.08           |   |  | $ | 0.41       |  
|                                                                             |  |                    |            |   |                  |   |            |                |  |   |                |   |  |   |            |  
|Average number of common shares outstanding                                  |  |                    | 58,133,066 |   |                  |   | 67,101,944 |                |  |   | 58,135,148     |   |  |   | 67,848,865 |  
|                                                                             |  |                    |            |  
|Average number of common shares outstanding  assuming dilution              |  |                    | 58,133,066 |   |                  |   | 67,913,912 |                |  |   | 59,990,069     |   |  |   | 81,240,972 |  
|                                                                             |  |                    |            |  
|Dividends declared per share                                                 |  | $                  | 0.08       |   |                  | $ | 0.08       |                |  | $ | 0.16           |   |  | $ | 0.16       |  

See notes to condensed consolidated financial statements (unaudited).



3



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AMERICAN GREETINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(Thousands of
dollars)



|                                        |  |                            |           |   |                            |   |           |                             |  |   |           |  
|--------------------------------------- |  | -------------------------- | --------- | - | -------------------------- | - | --------- | --------------------------- |  | - | --------- | -
|                                        |  | (Unaudited)August 25, 2006 |           |   | (Note 1) February 28, 2006 |   |           | (Unaudited) August 26, 2005 | 
|ASSETS                                  |  |                            |           |   |                            |   |           |                             |  |   |           |  
|Current assets                          |  |                            |           |   |                            |   |           |                             |  |   |           |  
|Cash and cash equivalents               |  | $                          | 89,113    |   |                            | $ | 213,613   |                             |  | $ | 159,739   |  
|Short-term investments                  |  |                            |          |   |                            |   | 208,740   |                             |  |   | 208,750   |  
|Trade accounts receivable, net          |  |                            | 86,264    |   |                            |   | 142,087   |                             |  |   | 169,864   |  
|Inventories                             |  |                            | 277,456   |   |                            |   | 217,318   |                             |  |   | 291,333   |  
|Deferred and refundable income taxes    |  |                            | 171,827   |   |                            |   | 154,327   |                             |  |   | 176,265   |  
|Assets of businesses held for sale      |  |                            |          |   |                            |   | 12,990    |                             |  |   | 20,850    |  
|Prepaid expenses and other              |  |                            | 194,552   |   |                            |   | 213,067   |                             |  |   | 219,190   |  
|                                        |  |                            |           |   |                            |   |           |                             |  |   |           |  
|Total current assets                    |  |                            | 819,212   |   |                            |   | 1,162,142 |                             |  |   | 1,245,991 |  
|                                        |  |                            |          
|Goodwill                                |  |                            | 217,804   |   |                            |   | 203,599   |                             |  |   | 257,887   |  
|Other assets                            |  |                            | 550,764   |   |                            |   | 549,162   |                             |  |   | 600,310   |  
|                                        |  |                            |          
|Property, plant and equipment  at cost |  |                            | 967,610   |   |                            |   | 953,981   |                             |  |   | 966,139   |  
|Less accumulated depreciation           |  |                            | 666,090   |   |                            |   | 649,922   |                             |  |   | 651,128   |  
|                                        |  |                            |           |   |                            |   |           |                             |  |   |           |  
|Property, plant and equipment  net     |  |                            | 301,520   |   |                            |   | 304,059   |                             |  |   | 315,011   |  
|                                        |  |                            |           |   |                            |   |           |                             |  |   |           |  
|                                        |  | $                          | 1,889,300 |   |                            | $ | 2,218,962 |                             |  | $ | 2,419,199 |  
|                                        |  |                            |           |   |                            |   |           |                             |  |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY    |  |                            |           |   |                            |   |           |                             |  |   |           |  
|Current liabilities                     |  |                            |           |   |                            |   |           |                             |  |   |           |  
|Debt due within one year                |  | $                          | 20,000    |   |                            | $ | 174,792   |                             |  | $ |          |  
|Accounts payable                        |  |                            | 122,217   |   |                            |   | 126,061   |                             |  |   | 130,811   |  
|Accrued liabilities                     |  |                            | 83,105    |   |                            |   | 73,046    |                             |  |   | 109,981   |  
|Accrued compensation and benefits       |  |                            | 49,083    |   |                            |   | 69,016    |                             |  |   | 51,228    |  
|Income taxes                            |  |                            | 6,420     |   |                            |   | 16,887    |                             |  |   | 21,461    |  
|Liabilities of businesses held for sale |  |                            |          |   |                            |   | 3,016     |                             |  |   | 4,164     |  
|Other current liabilities               |  |                            | 99,389    |   |                            |   | 96,165    |                             |  |   | 125,198   |  
|                                        |  |                            |           |   |                            |   |           |                             |  |   |           |  
|Total current liabilities               |  |                            | 380,214   |   |                            |   | 558,983   |                             |  |   | 442,843   |  
|                                        |  |                            |          
|Long-term debt                          |  |                            | 224,078   |   |                            |   | 300,516   |                             |  |   | 476,218   |  
|Other liabilities                       |  |                            | 101,754   |   |                            |   | 116,554   |                             |  |   | 145,545   |  
|Deferred income taxes                   |  |                            | 25,886    |   |                            |   | 22,884    |                             |  |   | 37,077    |  
|                                        |  |                            |          
|Shareholders equity                    |  |                            |           |   |                            |   |           |                             |  |   |           |  
|Common shares  Class A                 |  |                            | 56,858    |   |                            |   | 56,130    |                             |  |   | 62,170    |  
|Common shares  Class B                 |  |                            | 4,226     |   |                            |   | 4,218     |                             |  |   | 4,221     |  
|Capital in excess of par value          |  |                            | 412,919   |   |                            |   | 398,505   |                             |  |   | 391,174   |  
|Treasury stock                          |  |                            | (569,143  | ) |                            |   | (676,436  | )                           |  |   | (536,249  | )
|Accumulated other comprehensive income  |  |                            | 29,726    |   |                            |   | 9,823     |                             |  |   | 12,853    |  
|Retained earnings                       |  |                            | 1,222,782 |   |                            |   | 1,427,785 |                             |  |   | 1,383,347 |  
|                                        |  |                            |           |   |                            |   |           |                             |  |   |           |  
|Total shareholders equity              |  |                            | 1,157,368 |   |                            |   | 1,220,025 |                             |  |   | 1,317,516 |  
|                                        |  |                            |           |   |                            |   |           |                             |  |   |           |  
|                                        |  | $                          | 1,889,300 |   |                            | $ | 2,218,962 |                             |  | $ | 2,419,199 |  
|                                        |  |                            |           |   |                            |   |           |                             |  |   |           |  

See notes to condensed consolidated financial statements (unaudited).



4



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AMERICAN GREETINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Thousands of dollars)



|                                                                          |  |                              |           |   |                 |   |            |  
|------------------------------------------------------------------------- |  | ---------------------------- | --------- | - | --------------- | - | ---------- | -
|                                                                          |  | (Unaudited) Six Months Ended |          
|                                                                          |  | August 25, 2006              |           |   | August 26, 2005 |  
|OPERATING ACTIVITIES:                                                     |  |                              |           |   |                 |   |            |  
|Net income                                                                |  | $                            | 4,894     |   |                 | $ | 29,655     |  
|(Income) loss from discontinued operations                                |  |                              | (2,101    | ) |                 |   | 1,057      |  
|                                                                          |  |                              |           |   |                 |   |            |  
|Income from continuing operations                                         |  |                              | 2,793     |   |                 |   | 30,712     |  
|Adjustments to reconcile to net cash provided by operating activities:    |  |                              |           |   |                 |   |            |  
|(Gain) loss on disposal of fixed assets                                   |  |                              | (24       | ) |                 |   | 1,632      |  
|Loss on extinguishment of debt                                            |  |                              | 4,972     |   |                 |   | 863        |  
|Depreciation and amortization                                             |  |                              | 24,849    |   |                 |   | 28,091     |  
|Deferred income taxes                                                     |  |                              | 15,234    |   |                 |   | 25,773     |  
|Other non-cash charges                                                    |  |                              | 7,016     |   |                 |   | 1,749      |  
|Changes in operating assets and liabilities, net of acquisitions:         |  |                              |           |   |                 |   |            |  
|Decrease in trade accounts receivable                                     |  |                              | 59,718    |   |                 |   | 7,577      |  
|Increase in inventories                                                   |  |                              | (56,560   | ) |                 |   | (74,628    | )
|Increase in other current assets                                          |  |                              | (24,203   | ) |                 |   | (17,820    | )
|Decrease in deferred costs  net                                          |  |                              | 26,787    |   |                 |   | 51,435     |  
|Decrease in accounts payable and other liabilities                        |  |                              | (34,961   | ) |                 |   | (29,532    | )
|Other  net                                                               |  |                              | 619       |   |                 |   | (3,057     | )
|                                                                          |  |                              |           |   |                 |   |            |  
|Cash Provided by Operating Activities                                     |  |                              | 26,240    |   |                 |   | 22,795     |  
|                                                                          |  |                             
|INVESTING ACTIVITIES:                                                     |  |                              |           |   |                 |   |            |  
|Proceeds from sale of short-term investments                              |  |                              | 1,026,280 |   |                 |   | 1,070,480  |  
|Purchases of short-term investments                                       |  |                              | (817,540  | ) |                 |   | (1,070,490 | )
|Property, plant and equipment additions                                   |  |                              | (18,699   | ) |                 |   | (18,618    | )
|Cash payments for business acquisitions, net of cash acquired             |  |                              | (11,154   | ) |                 |   |           |  
|Cash receipts related to discontinued operations                          |  |                              | 9,559     |   |                 |   |           |  
|Proceeds from sale of fixed assets                                        |  |                              | 461       |   |                 |   | 7,365      |  
|                                                                          |  |                              |           |   |                 |   |            |  
|Cash Provided (Used) by Investing Activities                              |  |                              | 188,907   |   |                 |   | (11,263    | )
|                                                                          |  |                             
|FINANCING ACTIVITIES:                                                     |  |                              |           |   |                 |   |            |  
|Increase in long-term debt                                                |  |                              | 200,000   |   |                 |   |           |  
|Reduction of long-term debt                                               |  |                              | (440,505  | ) |                 |   | (10,782    | )
|Increase in short-term debt                                               |  |                              | 20,000    |   |                 |   |           |  
|Sale of stock under benefit plans                                         |  |                              | 2,804     |   |                 |   | 21,302     |  
|Purchase of treasury shares                                               |  |                              | (108,674  | ) |                 |   | (98,026    | )
|Dividends to shareholders                                                 |  |                              | (9,164    | ) |                 |   | (10,906    | )
|Debt issuance costs                                                       |  |                              | (8,136    | ) |                 |   |           |  
|                                                                          |  |                              |           |   |                 |   |            |  
|Cash Used by Financing Activities                                         |  |                              | (343,675  | ) |                 |   | (98,412    | )
|                                                                          |  |                             
|DISCONTINUED OPERATIONS:                                                  |  |                              |           |   |                 |   |            |  
|Cash (used) provided by operating activities from discontinued operations |  |                              | (399      | ) |                 |   | 170        |  
|Cash provided by investing activities from discontinued operations        |  |                              | 1,647     |   |                 |   | 563        |  
|                                                                          |  |                              |           |   |                 |   |            |  
|Cash Provided by Discontinued Operations                                  |  |                              | 1,248     |   |                 |   | 733        |  
|                                                                          |  |                             
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                   |  |                              | 2,780     |   |                 |   | (1,913     | )
|                                                                          |  |                              |           |   |                 |   |            |  
|DECREASE IN CASH AND CASH EQUIVALENTS                                     |  |                              | (124,500  | ) |                 |   | (88,060    | )
|                                                                          |  |                             
|Cash and Cash Equivalents at Beginning of Year                            |  |                              | 213,613   |   |                 |   | 247,799    |  
|                                                                          |  |                              |           |   |                 |   |            |  
|Cash and Cash Equivalents at End of Period                                |  | $                            | 89,113    |   |                 | $ | 159,739    |  
|                                                                          |  |                              |           |   |                 |   |            |  

See notes to condensed consolidated financial statements (unaudited).



5



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AMERICAN GREETINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Three and Six Months Ended August 25, 2006 and August 26, 2005

Note 1  Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of
American Greetings Corporation and its subsidiaries (the Corporation) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary to fairly present financial position, results of operations and cash flows for the periods have been included.

The Corporations fiscal year ends on February 28 or 29. References to a particular year refer to the fiscal year ending in February of that year. For example,
2006 refers to the year ended February 28, 2006. For 2006, AG Interactive changed its fiscal year-end to coincide with the Corporations fiscal year-end. As a result, the six months ended August 26, 2005 included eight months of AG
Interactives operations. The additional two months of activity generated revenues of approximately $11 million for the six months ended August 26, 2005, but had no significant impact on earnings.

These interim financial statements should be read in conjunction with the Corporations financial statements and notes thereto included in its Annual Report on Form
10-K for the year ended February 28, 2006, from which the Condensed Consolidated Statement of Financial Position at February 28, 2006, presented herein, has been derived. Certain amounts in the prior year financial statements have been
reclassified to conform to the 2007 presentation.

Note 2  Seasonal Nature of Business

A significant portion of the Corporations business is seasonal in nature. Therefore, the results of operations for interim periods are not necessarily indicative of
the results for the fiscal year taken as a whole.

Note 3  Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (the FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151
(SFAS 151), Inventory Costs  an amendment of ARB No. 43, Chapter 4. SFAS 151 seeks to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) in
the determination of inventory carrying costs. The statement requires such costs to be treated as a current period expense. SFAS 151 also establishes the concept of normal capacity and requires the allocation of fixed production overhead
to inventory based on the normal capacity of the production



6



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facilities. Any unallocated overhead would be treated as a current period expense in the period incurred. This statement is effective for fiscal years
beginning after July 15, 2005. The adoption of SFAS 151, effective March 1, 2006, did not significantly impact the Corporations consolidated financial statements.

In October 2005, the FASB issued FASB Staff Position No. FAS 13-1 (FSP 13-1), Accounting for Rental Costs Incurred During a Construction Period, to clarify the proper accounting for rental
costs incurred on building or ground operating leases during a construction period. FSP 13-1 requires that rental costs incurred during a construction period be expensed, not capitalized. The statement is effective for the first reporting period
beginning after December 15, 2005. The adoption of FSP 13-1, effective March 1, 2006, did not materially affect the Corporations consolidated financial statements.

In June 2006, the FASB ratified Emerging Issues Task Force Issue No. 06-3 (EITF 06-3), How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement (That Is, Gross versus Net Presentation). The scope of EITF 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer. This
issue provides that a company may adopt a policy of presenting taxes either gross within revenue or net. If taxes subject to this issue are significant, a company is required to disclose its accounting policy for presenting taxes and the amount of
such taxes that are recognized on a gross basis. EITF 06-3 is effective for the first interim or annual reporting period beginning after December 15, 2006. The Corporation currently accounts for taxes on a net basis; therefore the adoption of
EITF 06-3 should not have any material impact on the Corporations consolidated financial statements.

In July 2006, the FASB issued FASB
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109. FIN 48 clarifies what criteria must be met prior to recognition of the
financial statement benefit of a position taken in a tax return. FIN 48 requires a company to include additional qualitative and quantitative disclosures within its financial statements. The disclosures include potential tax benefits from positions
taken for tax return purposes that have not been recognized for financial reporting purposes and a tabular presentation of significant changes during each period. The disclosures also include a discussion of the nature of uncertainties, factors
which could cause a change and an estimated range of reasonably possible changes in tax uncertainties. FIN 48 requires a company to recognize a financial statement benefit for a position taken for tax return purposes when it is more-likely-than-not
that the position will be sustained. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Corporation is currently assessing the impact FIN 48 will have on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158 (SFAS 158), Employers Accounting for Defined Benefit Pension and Other Postretirement Plans
 an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS 158 requires an employer to recognize a plans funded status in its statement of financial position, measure a plans assets and obligations as of the end
of the employers fiscal year and recognize the changes in a defined benefit postretirement plans funded status in



7



---

comprehensive income in the year in which the changes occur. SFAS 158s requirement to recognize the funded status of a benefit plan and new disclosure
requirements are effective as of the end of the fiscal year ending after December 15, 2006 (the current fiscal year-end for the Corporation). The requirement to measure plan assets and benefit obligations as of the date of the employers
fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The Corporation is currently assessing the impact SFAS 158 will have on its consolidated financial statements.

Note 4  Other Income  Net



|                             |  |                    |         |   |                  |   |         |                |  |   |                |   |  |   |         |  
|---------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------- | -------------- |  | - | -------------- | - |  | - | ------- | -
|                             |  | Three Months Ended |         |   | Six Months Ended |  
|(In thousands)               |  | August 25,2006     |         |   | August 26,2005   |   |         | August 25,2006 |  |   | August 26,2005 |  
|Royalty revenue              |  | $                  | (14,053 | ) |                  | $ | (9,481  | )              |  | $ | (15,500        | ) |  | $ | (15,160 | )
|Foreign exchange (gain) loss |  |                    | (300    | ) |                  |   | (710    | )              |  |   | (1,736         | ) |  |   | 299     |  
|Interest income              |  |                    | (2,632  | ) |                  |   | (2,615  | )              |  |   | (5,467         | ) |  |   | (5,188  | )
|Other                        |  |                    | (424    | ) |                  |   | 1,235   |                |  |   | (1,586         | ) |  |   | (17     | )
|                             |  |                    |         |   |                  |   |         |                |  |   |                |   |  |   |         |  
|                             |  | $                  | (17,409 | ) |                  | $ | (11,571 | )              |  | $ | (24,289        | ) |  | $ | (20,066 | )
|                             |  |                    |         |   |                  |   |         |                |  |   |                |   |  |   |         |  

Other includes, among other things, gains and losses on asset disposals and rental income.

Note 5  (Loss) Earnings Per Share

The following table
sets forth the computation of (loss) earnings per share and (loss) earnings per shareassuming dilution:



|                                                                       |  |                    |         |                  |                |   |                |  |                |        |  |   |       
|---------------------------------------------------------------------- |  | ------------------ | ------- | ---------------- | -------------- | - | -------------- |  | -------------- | ------ |  | - | ------
|                                                                       |  | Three Months Ended |         | Six Months Ended
|                                                                       |  | August 25,2006     |         |                  | August 26,2005 |   | August 25,2006 |  | August 26,2005
|Numerator (in thousands):                                              |  |                    |         |                  |                |   |                |  |                |        |  |   |       
|(Loss) income from continuing operations                               |  | $                  | (13,244 | )                |                | $ | 3,804          |  | $              | 2,793  |  | $ | 30,712
|Add-back  interest on convertible subordinated notes, net of tax      |  |                    |        |                  |                |   |               |  |                |       |  |   | 3,750 
|                                                                       |  |                    |         |                  |                |   |                |  |                |        |  |   |       
|(Loss) income from continuing operations  assuming dilution           |  | $                  | (13,244 | )                |                | $ | 3,804          |  | $              | 2,793  |  | $ | 34,462
|                                                                       |  |                    |         |                  |                |   |                |  |                |        |  |   |       
|Denominator (in thousands):                                            |  |                    |         |                  |                |   |                |  |                |        |  |   |       
|Weighted average shares outstanding                                    |  |                    | 58,133  |                  |                |   | 67,102         |  |                | 58,135 |  |   | 67,849
|Effect of dilutive securities:                                         |  |                    |         |                  |                |   |                |  |                |        |  |   |       
|Convertible debt  old series                                          |  |                    |        |                  |                |   |               |  |                |       |  |   | 12,591
|Convertible debt  new series  net share settlement feature           |  |                    |        |                  |                |   |               |  |                | 1,460  |  |   |      
|Stock options and other                                                |  |                    |        |                  |                |   | 812            |  |                | 395    |  |   | 801   
|                                                                       |  |                    |         |                  |                |   |                |  |                |        |  |   |       
|Weighted average shares outstanding  assuming dilution                |  |                    | 58,133  |                  |                |   | 67,914         |  |                | 59,990 |  |   | 81,241
|                                                                       |  |                    |         |                  |                |   |                |  |                |        |  |   |       
|(Loss) income from continuing operations per share                     |  | $                  | (0.23   | )                |                | $ | 0.06           |  | $              | 0.04   |  | $ | 0.46  
|                                                                       |  |                    |         |                  |                |   |                |  |                |        |  |   |       
|(Loss) income from continuing operations per share  assuming dilution |  | $                  | (0.23   | )                |                | $ | 0.06           |  | $              | 0.04   |  | $ | 0.42  
|                                                                       |  |                    |         |                  |                |   |                |  |                |        |  |   |       



8



---

Approximately 7.2 million and 4.7 million stock options outstanding in the three and six month periods ended
August 25, 2006, respectively, were excluded because the effect would have been antidilutive (1.6 million and 1.7 million stock options outstanding in the three and six month periods ended August 26, 2005, respectively). In addition,
the effect of the convertible subordinated notes  old series has been excluded for the three and six month periods ended August 25, 2006, as well as for the three months ended August 26, 2005, because the effect would have been
antidilutive. The effect of the convertible subordinated notes  new series  net share settlement feature has been excluded from the three months ended August 25, 2006, because the effect would have been antidilutive. This net share
settlement feature was not in place during 2006. See Note 10 for further discussion.

Note 6  Comprehensive (Loss) Income

The Corporations total comprehensive (loss) income is as follows:



|                                                  |  |                    |         |   |                  |   |        |                |  |                |        |  |   |         |  
|------------------------------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------ | -------------- |  | -------------- | ------ |  | - | ------- | -
|                                                  |  | Three Months Ended |         |   | Six Months Ended |  
|(In thousands)                                    |  | August 25,2006     |         |   | August 26,2005   |   |        | August 25,2006 |  | August 26,2005 |       
|Net (loss) income                                 |  | $                  | (10,498 | ) |                  | $ | 3,241  |                |  | $              | 4,894  |  | $ | 29,655  |  
|Other comprehensive (loss) income:                |  |                    |         |   |                  |   |        |                |  |                |        |  |   |         |  
|Foreign currency translation adjustment and other |  |                    | 5,821   |   |                  |   | (2,043 | )              |  |                | 19,878 |  |   | (16,187 | )
|Unrealized (loss) gain on securities              |  |                    | (47     | ) |                  |   | 2      |                |  |                | 25     |  |   | 1       |  
|                                                  |  |                    |         |   |                  |   |        |                |  |                |        |  |   |         |  
|Total comprehensive (loss) income                 |  | $                  | (4,724  | ) |                  | $ | 1,200  |                |  | $              | 24,797 |  | $ | 13,469  |  
|                                                  |  |                    |         |   |                  |   |        |                |  |                |        |  |   |         |  

Note 7  Trade Accounts Receivable, Net

Trade accounts receivable are reported net of certain allowances and discounts. The most significant of these are as follows:



|                                                          |  |                |         |                  |   |                |  |   |        
|--------------------------------------------------------- |  | -------------- | ------- | ---------------- | - | -------------- |  | - | -------
|(In thousands)                                            |  | August 25,2006 |         | February 28,2006 |   | August 26,2005
|Allowance for seasonal sales returns                      |  | $              | 41,221  |                  | $ | 73,275         |  | $ | 39,354 
|Allowance for doubtful accounts                           |  |                | 9,131   |                  |   | 8,138          |  |   | 16,960 
|Allowance for cooperative advertising and marketing funds |  |                | 26,883  |                  |   | 21,658         |  |   | 28,394 
|Allowance for rebates                                     |  |                | 54,165  |                  |   | 51,957         |  |   | 45,782 
|                                                          |  |                |         |                  |   |                |  |   |        
|                                                          |  | $              | 131,400 |                  | $ | 155,028        |  | $ | 130,490
|                                                          |  |                |         |                  |   |                |  |   |        



9



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Note 8  Inventories



|                                       |  |                |         |                  |   |                |  |   |        
|-------------------------------------- |  | -------------- | ------- | ---------------- | - | -------------- |  | - | -------
|(In thousands)                         |  | August 25,2006 |         | February 28,2006 |   | August 26,2005
|Raw materials                          |  | $              | 25,943  |                  | $ | 19,806         |  | $ | 32,461 
|Work in process                        |  |                | 16,006  |                  |   | 15,399         |  |   | 23,005 
|Finished products                      |  |                | 289,829 |                  |   | 239,866        |  |   | 288,243
|                                       |  |                |         |                  |   |                |  |   |        
|                                       |  |                | 331,778 |                  |   | 275,071        |  |   | 343,709
|Less LIFO reserve                      |  |                | 80,686  |                  |   | 79,403         |  |   | 77,444 
|                                       |  |                |         |                  |   |                |  |   |        
|                                       |  |                | 251,092 |                  |   | 195,668        |  |   | 266,265
|Display materials and factory supplies |  |                | 26,364  |                  |   | 21,650         |  |   | 25,068 
|                                       |  |                |         |                  |   |                |  |   |        
|                                       |  | $              | 277,456 |                  | $ | 217,318        |  | $ | 291,333
|                                       |  |                |         |                  |   |                |  |   |        

The valuation of inventory under the Last-In, First-Out (LIFO) method is made at the end of each fiscal year based
on inventory levels and costs at that time. Accordingly, interim LIFO calculations, by necessity, are based on estimates of expected fiscal year-end inventory levels and costs and are subject to final fiscal year-end LIFO inventory calculations.

Note 9  Deferred Costs

As of
August 25, 2006, February 28, 2006 and August 26, 2005, deferred costs and future payment commitments are included in the following financial statement captions:



|                           |  |                |          |   |                  |   |          |                |  |   |          |  
|-------------------------- |  | -------------- | -------- | - | ---------------- | - | -------- | -------------- |  | - | -------- | -
|(In thousands)             |  | August 25,2006 |          |   | February 28,2006 |   |          | August 26,2005 | 
|Prepaid expenses and other |  | $              | 133,992  |   |                  | $ | 156,442  |                |  | $ | 161,689  |  
|Other assets               |  |                | 471,430  |   |                  |   | 489,286  |                |  |   | 537,256  |  
|                           |  |                |          |   |                  |   |          |                |  |   |          |  
|Deferred cost assets       |  |                | 605,422  |   |                  |   | 645,728  |                |  |   | 698,945  |  
|                           |  |                |         
|Other current liabilities  |  |                | (64,590  | ) |                  |   | (61,391  | )              |  |   | (96,653  | )
|Other liabilities          |  |                | (50,138  | ) |                  |   | (68,695  | )              |  |   | (80,905  | )
|                           |  |                |          |   |                  |   |          |                |  |   |          |  
|Deferred cost liabilities  |  |                | (114,728 | ) |                  |   | (130,086 | )              |  |   | (177,558 | )
|                           |  |                |          |   |                  |   |          |                |  |   |          |  
|Net deferred costs         |  | $              | 490,694  |   |                  | $ | 515,642  |                |  | $ | 521,387  |  
|                           |  |                |          |   |                  |   |          |                |  |   |          |  

Note 10  Debt

On April 4, 2006, the Corporation entered into a new $650 million secured credit agreement. The new credit agreement includes a $350 million revolving credit facility and a $300 million delay draw term loan. The
Corporation may request one or more term loans until April 4, 2007. In connection with the execution of this new agreement, the Corporations amended and restated credit agreement dated May 11, 2004 was terminated and deferred
financing fees of $1.0 million were written off. The obligations under the new credit agreement are guaranteed by the Corporations material domestic subsidiaries and are secured by substantially all of the personal property of American
Greetings Corporation and each of its material domestic subsidiaries, including a pledge of all of the capital stock in substantially all of the Corporations domestic subsidiaries and 65% of the capital stock of the Corporations first
tier foreign subsidiaries. The revolving credit facility will mature on April 4, 2011 and any outstanding term loans will mature on April 4, 2013. Each term loan will amortize in



10



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equal quarterly installments equal to 0.25% of the amount of such term loan, beginning on April 4, 2007, with the balance payable on April 4, 2013.

Revolving loans denominated in U.S. dollars under the new credit agreement will bear interest at a rate per annum based on the then applicable London
Inter-Bank Offer Rate (LIBOR) or the alternate base rate (ABR), as defined in the credit agreement, in each case, plus margins adjusted according to the Corporations leverage ratio. Term loans will bear interest at a
rate per annum based on either LIBOR plus 150 basis points or based on the ABR, as defined in the credit agreement, plus 25 basis points. The Corporation pays an annual commitment fee of 25 basis points on the undrawn portion of the revolving credit
facility and 62.5 basis points on the undrawn portion of the term loan. In accordance with the terms of the new credit agreement, the commitment fee on the revolving facility will fluctuate based on the Corporations leverage ratio beginning
November 30, 2006. The commitment fee on the term loan terminates on April 4, 2007.

The credit agreement contains certain restrictive covenants
that are customary for similar credit arrangements, including covenants relating to limitations on liens, dispositions, issuance of debt, investments, payment of dividends, repurchases of capital stock, acquisitions and transactions with affiliates.
There are also financial performance covenants that require the Corporation to maintain a maximum leverage ratio and a minimum interest coverage ratio. The credit agreement also requires the Corporation to make certain mandatory prepayments of
outstanding indebtedness using the net cash proceeds received from certain dispositions, events of loss and additional indebtedness that the Corporation may incur from time to time.

As of August 25, 2006, the balance outstanding under this agreement, from the revolving credit facility, was $20.0 million, at an interest rate of approximately 6.6%.

Also, on April 4, 2006, the Corporation reduced the available financing under its accounts receivable securitization financing agreement from $200 million to $150
million. Under the terms of the agreement, the Corporation transfers receivables to a wholly-owned consolidated subsidiary that in turn utilizes the receivables to secure borrowings through a credit facility with a financial institution. Borrowings
are limited based on the Corporations eligible receivables, as defined in the agreement. The maturity date for this agreement is August 1, 2007. The related interest rate is commercial paper-based. The Corporation pays an annual
commitment fee of 25 basis points on the undrawn portion of the accounts receivable facility. There were no outstanding balances under this agreement at August 25, 2006.

On May 24, 2006, the Corporation issued $200.0 million of 7.375% senior unsecured notes, due on June 1, 2016. The proceeds from this issuance were used for the repurchase of the Corporations 6.10%
senior notes due on August 1, 2028 that were tendered in the Corporations tender offer and consent solicitation for these notes that was completed on May 25, 2006.

On May 25, 2006, the Corporation repurchased $277.3 million of its 6.10% senior notes due on August 1, 2028 and recorded a charge of $5.0 million for the consent payment and other fees associated with the
notes repurchased, as well as for the write-off of



11



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related deferred financing costs. In conjunction with the tender, the indenture governing the 6.10% senior notes was amended to eliminate certain restrictive
covenants and events of default. The remaining 6.10% senior notes may be put back to the Corporation on August 1, 2008, at the option of the holders, at 100% of the principal amount provided the holders exercise this option between July 1,
2008 and August 1, 2008.

On May 26, 2006, $159.1 million of the Corporations 7.00% convertible subordinated notes due on July 15,
2006 were exchanged (modified) for a new series of 7.00% convertible subordinated notes due on July 15, 2006. The Corporation paid an exchange fee of $0.8 million that was deferred at May 26, 2006 and amortized over the remaining term of
the new convertible subordinated notes. The terms of the new notes were substantially the same as the old notes except that upon conversion, the new notes were settled in cash and Class A common shares. Upon conversion, the old notes could only
be settled in Class A common shares. The Corporation issued 1,126,026 Class A common shares during the quarter ended August 25, 2006, upon conversion of $15.7 million of the old series of 7.00% convertible subordinated notes. Upon
conversion of the new series of 7.00% convertible subordinated notes, on August 3, 2006, in accordance with the terms of the notes, the Corporation paid $159.1 million in cash and issued 4,379,339 Class A common shares. The
5.5 million Class A common shares issued upon conversion of the convertible notes were issued from the Corporations treasury shares. This issuance resulted in a treasury stock loss of approximately $200 million, which was recorded to
retained earnings during the period.

At August 25, 2006, the Corporation was in compliance with its financial
covenants.

At August 25, 2006 and February 28, 2006, debt due within one year, totaled $20.0 million and $174.8 million, respectively. There was
no debt due within one year at August 26, 2005.

At August 25, 2006, February 28, 2006 and August 26, 2005, long-term debt and
their related calendar year due dates were as follows:



|                                               |  |                |         |                  |   |                |  |   |        
|---------------------------------------------- |  | -------------- | ------- | ---------------- | - | -------------- |  | - | -------
|(In thousands)                                 |  | August 25,2006 |         | February 28,2006 |   | August 26,2005
|6.10% Senior Notes, due 2028                   |  | $              | 22,624  |                  | $ | 298,910        |  | $ | 298,703
|7.375% Senior Notes, due 2016                  |  |                | 200,000 |                  |   |               |  |   |       
|7.00% Convertible Subordinated Notes, due 2006 |  |                |        |                  |   |               |  |   | 175,000
|Other                                          |  |                | 1,454   |                  |   | 1,606          |  |   | 2,515  
|                                               |  |                |         |                  |   |                |  |   |        
|                                               |  | $              | 224,078 |                  | $ | 300,516        |  | $ | 476,218
|                                               |  |                |         |                  |   |                |  |   |        



12



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Note 11  Retirement Benefits

The components of periodic benefit cost for the Corporations defined benefit pension and postretirement benefit plans are as follows:



|                                   |  |                           |        |   |                         |   |        |          |  |   |          |   |  |   |        |  
|---------------------------------- |  | ------------------------- | ------ | - | ----------------------- | - | ------ | -------- |  | - | -------- | - |  | - | ------ | -
|                                   |  | Defined Benefit Pension   |       
|                                   |  | Three Months Ended August |        |   | Six Months Ended August |  
|(In thousands)                     |  | 25, 2006                  |        |   | 26, 2005                |   |        | 25, 2006 |  |   | 26, 2005 |  
|Service cost                       |  | $                         | 135    |   |                         | $ | 128    |          |  | $ | 270      |   |  | $ | 256    |  
|Interest cost                      |  |                           | 1,845  |   |                         |   | 1,811  |          |  |   | 3,630    |   |  |   | 3,622  |  
|Expected return on plan assets     |  |                           | (1,775 | ) |                         |   | (1,721 | )        |  |   | (3,550   | ) |  |   | (3,442 | )
|Amortization of prior service cost |  |                           | 65     |   |                         |   | 23     |          |  |   | 130      |   |  |   | 46     |  
|Amortization of actuarial loss     |  |                           | 505    |   |                         |   | 358    |          |  |   | 1,170    |   |  |   | 716    |  
|                                   |  |                           |        |   |                         |   |        |          |  |   |          |   |  |   |        |  
|                                   |  | $                         | 775    |   |                         | $ | 599    |          |  | $ | 1,650    |   |  | $ | 1,198  |  
|                                   |  |                           |        |   |                         |   |        |          |  |   |          |   |  |   |        |  



|                                     |  |                           |        |   |                         |   |        |          |  |   |          |   |  |   |        |  
|------------------------------------ |  | ------------------------- | ------ | - | ----------------------- | - | ------ | -------- |  | - | -------- | - |  | - | ------ | -
|                                     |  | Postretirement Benefit    |       
|                                     |  | Three Months Ended August |        |   | Six Months Ended August |  
|(In thousands)                       |  | 25, 2006                  |        |   | 26, 2005                |   |        | 25, 2006 |  |   | 26, 2005 |  
|Service cost                         |  | $                         | 999    |   |                         | $ | 711    |          |  | $ | 1,998    |   |  | $ | 1,422  |  
|Interest cost                        |  |                           | 1,925  |   |                         |   | 1,872  |          |  |   | 3,850    |   |  |   | 3,744  |  
|Expected return on plan assets       |  |                           | (1,275 | ) |                         |   | (1,201 | )        |  |   | (2,550   | ) |  |   | (2,402 | )
|Amortization of prior service credit |  |                           | (1,849 | ) |                         |   | (1,849 | )        |  |   | (3,698   | ) |  |   | (3,698 | )
|Amortization of actuarial loss       |  |                           | 1,700  |   |                         |   | 1,771  |          |  |   | 3,400    |   |  |   | 3,542  |  
|                                     |  |                           |        |   |                         |   |        |          |  |   |          |   |  |   |        |  
|                                     |  | $                         | 1,500  |   |                         | $ | 1,304  |          |  | $ | 3,000    |   |  | $ | 2,608  |  
|                                     |  |                           |        |   |                         |   |        |          |  |   |          |   |  |   |        |  

The Corporation has a non-contributory profit-sharing plan with a contributory 401(k) provision covering most of
its United States employees. There was no profit-sharing plan expense for the six months ended August 25, 2006, compared to $3.5 million in the prior year period. The profit-sharing plan expense for the six month periods are estimates as actual
contributions to the profit-sharing plan are made after fiscal year-end and are contingent upon final year-end results. The Corporation matches a portion of 401(k) employee contributions contingent upon meeting specified annual operating results
goals. The expenses recognized for the three and six month periods ended August 25, 2006 were $1.1 million and $2.2 million ($1.1 million and $1.8 million for the three and six month periods ended August 26, 2005), respectively.

Note 12  Stock-Based Compensation

Effective March 1, 2006, the Corporation adopted SFAS No. 123R (SFAS 123R), Share-Based Payment, utilizing the modified prospective method as described in SFAS 123R. In the modified
prospective method, compensation cost is recognized for all share-based payments granted after the effective date and for all unvested awards granted prior to the effective date. In accordance with SFAS 123R, prior period amounts were not
restated. SFAS 123R also requires the tax benefits associated with these share-based payments to be classified as financing activities in the Condensed Consolidated Statement of Cash Flows, rather than as operating cash flows as required under
previous accounting guidance. Total stock-based compensation expense, recognized in Administrative and general expenses on the Condensed Consolidated Statement of Operations, was $4.2 million ($2.3 million net of tax), which reduced
earnings per share and earnings per share  assuming



13



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dilution by $0.04 per share during the six months ended August 25, 2006. For the three months ended August 25, 2006, stock-based compensation
expense was $1.8 million ($0.8 million net of tax), which reduced earnings per share and earnings per share  assuming dilution by $0.01 per share.

Prior to the effective date, the Corporation followed Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations for its stock options granted to employees and
directors. Because the exercise price of the Corporations stock options equals the fair market value of the underlying stock on the date of grant, no compensation expense was recognized. The Corporation had adopted the disclosure-only
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure. Pro-forma information regarding the impact
of total stock-based compensation on net income and earnings per share for prior periods is required by SFAS 123R.

The following illustrates the pro-forma
information, determined as if the Corporation had applied the fair value method of accounting for stock options, during the three months and six months ended August 26, 2005:



|                                                                                              |  |                                   |       |                                 |   |       
|--------------------------------------------------------------------------------------------- |  | --------------------------------- | ----- | ------------------------------- | - | ------
|(In thousands, except per share amounts)                                                      |  | Three Months EndedAugust 26, 2005 |       | Six Months EndedAugust 26, 2005
|Net income as reported                                                                        |  | $                                 | 3,241 |                                 | $ | 29,655
|Add: Stock-based compensation expense included in net income, net of tax                      |  |                                   | 451   |                                 |   | 451   
|Deduct: Stock-based compensation expense determined under fair value based method, net of tax |  |                                   | 1,849 |                                 |   | 2,878 
|                                                                                              |  |                                   |       |                                 |   |       
|Pro forma net income                                                                          |  | $                                 | 1,843 |                                 | $ | 27,228
|                                                                                              |  |                                   |       |                                 |   |       
|Earnings per share:                                                                           |  |                                   |       |                                 |   |       
|As reported                                                                                   |  | $                                 | 0.05  |                                 | $ | 0.44  
|Pro forma                                                                                     |  |                                   | 0.03  |                                 |   | 0.40  
|                                                                                              |  |                                  
|Earnings per share  assuming dilution:                                                       |  |                                   |       |                                 |   |       
|As reported                                                                                   |  | $                                 | 0.05  |                                 | $ | 0.41  
|Pro forma                                                                                     |  |                                   | 0.03  |                                 |   | 0.38  

Under the Corporations stock option plans, options to purchase Class A and/or Class B common shares are
granted to directors, officers and other key employees at fair market value on the date of grant. In general, subject to continuing service, options become exercisable commencing twelve months after date of grant in annual installments and expire
over a period of not more than ten years from the date of grant. The majority of options granted vest in annual installments over a two-year period. The Corporation, from time to time, makes certain grants whereby the vesting or exercise periods
have the potential to be accelerated if the market value of the Corporations Class A common shares reaches certain specified prices. These grants are subject to the terms of the applicable option plans and agreements. These types of
grants are not material to the total number of options outstanding at August 25, 2006. The Corporation generally issues new shares when options to purchase Class A common shares are exercised and treasury shares when options to purchase
Class B shares are exercised.



14



---

Stock option transactions and prices are summarized as follows:



|                                 |  |                          |   |  |                                |       |                                                     |     |                                        |   |       
|-------------------------------- |  | ------------------------ | - |  | ------------------------------ | ----- | --------------------------------------------------- | --- | -------------------------------------- | - | ------
|                                 |  | Number ofClass A Options |   |  | Weighted-AverageExercise Price |       | Weighted-AverageRemainingContractual Term(in years) |     | AggregateIntrinsicValue (in thousands)
|Outstanding at February 28, 2006 |  | 5,395,480                |   |  | $                              | 22.12 |                                                     |     |                                        | $ | 9,072 
|Granted                          |  | 1,052,575                |   |  |                                | 22.52 |                                                     |     |                                        |   |       
|Exercised                        |  | (146,760                 | ) |  |                                | 17.33 |                                                     |     |                                        |   |       
|Cancelled                        |  | (185,434                 | ) |  |                                | 24.90 |                                                     |     |                                        |   |       
|                                 |  |                          |   |  |                                |       |                                                     |     |                                        |   |       
|Outstanding at August 25, 2006   |  | 6,115,861                |   |  | $                              | 22.28 |                                                     | 6.2 |                                        | $ | 16,023
|                                 |  |                          |   |  |                                |       |                                                     |     |                                        |   |       
|Exercisable at August 25, 2006   |  | 4,387,237                |   |  | $                              | 21.95 |                                                     | 5.4 |                                        | $ | 13,965
|                                 |  |                          |   |  |                                |       |                                                     |     |                                        |   |       



|                                 |  |                          |   |  |                                |       |                                                     |     |                                         |   |    
|-------------------------------- |  | ------------------------ | - |  | ------------------------------ | ----- | --------------------------------------------------- | --- | --------------------------------------- | - | ---
|                                 |  | Number ofClass B Options |   |  | Weighted-AverageExercise Price |       | Weighted-AverageRemainingContractual Term(in years) |     | AggregateIntrinsic Value (in thousands)
|Outstanding at February 28, 2006 |  | 893,882                  |   |  | $                              | 26.28 |                                                     |     |                                         | $ | 122
|Granted                          |  | 193,000                  |   |  |                                | 22.65 |                                                     |     |                                         |   |    
|Cancelled                        |  | (2,400                   | ) |  |                                | 9.95  |                                                     |     |                                         |   |    
|                                 |  |                          |   |  |                                |       |                                                     |     |                                         |   |    
|Outstanding at August 25, 2006   |  | 1,084,482                |   |  | $                              | 25.66 |                                                     | 5.0 |                                         | $ | 850
|                                 |  |                          |   |  |                                |       |                                                     |     |                                         |   |    
|Exercisable at August 25, 2006   |  | 707,483                  |   |  | $                              | 27.08 |                                                     | 4.0 |                                         | $ | 426
|                                 |  |                          |   |  |                                |       |                                                     |     |                                         |   |    

The fair value of the Corporations stock options was estimated at the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions for all options granted during the six months ended August 25, 2006 and August 26, 2005:



|                          |  |                  |   |  |                 |  
|------------------------- |  | ---------------- | - |  | --------------- | -
|                          |  | Six Months Ended |  
|                          |  | August 25, 2006  |   |  | August 26, 2005 |  
|Risk-free interest rate   |  | 5.00             | % |  | 3.35            | %
|Dividend yield            |  | 1.41             | % |  | 0.08            | %
|Expected stock volatility |  | 0.24             |   |  | 0.33            |  
|Expected life in years    |  | 2.24             |   |  | 3.96            |  

The weighted-average grant date fair value of options granted during the six months ended August 25, 2006 and
August 26, 2005 was $3.80 and $7.53, respectively. The total intrinsic value of options exercised during the six months ended August 25, 2006 was $0.8 million, including $0.5 million during the second quarter.

During 2006, approximately 180,000 performance shares were awarded to certain executive officers under the American Greetings 1997 Equity and Performance Incentive Plan.
The performance shares represent the right to receive Class B common shares, at no cost to the officer, upon achievement of management objectives over a performance period of up to five years. The performance shares are in lieu of a portion of the
officers annual cash bonus. The number of performance shares actually earned will be based on the percentage of the officers target incentive award, if any, that the officer achieves during the performance period under the
Corporations Key Management Annual Incentive Plan. The Corporation recognizes compensation



15



---

expense related to performance shares ratably over the estimated vesting period. The fair value per share of the performance shares in 2007 was $20.73, using
the following assumptions: risk-free interest rate of 4.74%; dividend yield of 1.52%; volatility of 0.24; and an expected life of one year. The fair value per share of the performance shares in 2006 was $24.88, using the following assumptions:
risk-free rate of 3.20%; dividend yield of 0.06%; volatility of 0.24; and an expected life of one year.

As of August 25, 2006, the Corporation had
unrecognized compensation expense of approximately $9 million, before taxes, related to stock options and performance shares. The unrecognized compensation expense is expected to be recognized over an average period of approximately 1.5 years.

Note 13  Business Segment Information

The Corporation is organized and managed according to a number of factors, including product categories, geographic locations and channels of distribution. During the fourth quarter of 2006, the Corporation modified its segment reporting to
reflect changes in how the Corporations operations are managed, viewed and evaluated. Prior periods have been reclassified to conform to the new segment disclosures.

The North American Social Expression Products and International Social Expression Products segments primarily design, manufacture and sell greeting cards and other related products through various channels of
distribution with mass retailers as the primary channel.

At August 25, 2006, the Corporation owned and operated 493 card and gift retail stores in
the United States and Canada through its Retail Operations segment. The stores are primarily located in malls and strip shopping centers. The stores sell products purchased from the North American Social Expression Products segment as well as
products purchased from other vendors.

AG Interactive is an electronic provider of social expression content through the
Internet and wireless platforms.

The Corporations non-reportable operating segments primarily include licensing activities, distribution of
supplemental educational products and the design, manufacture and sale of display fixtures.

Segment results are internally reported and evaluated at
consistent exchange rates between years to eliminate the impact of foreign currency fluctuations. An exchange rate adjustment is included in the reconciliation of the segment results to the consolidated results; this adjustment represents the impact
on the segment results of the difference between the exchange rates used for segment reporting and evaluation and the actual exchange rates for the periods presented.

Centrally incurred and managed costs are not allocated back to the operating segments. The unallocated items include interest expense on centrally-incurred debt, domestic profit-sharing expense and stock-based
compensation expense. In addition, the costs associated with corporate operations including the senior management, corporate finance, legal and human resource functions, among other costs, are included in the unallocated items.



16



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Operating Segment Information



|                                          |  |                           |         |   |                         |   |         |          |  |   |          |   |  |   |         |  
|----------------------------------------- |  | ------------------------- | ------- | - | ----------------------- | - | ------- | -------- |  | - | -------- | - |  | - | ------- | -
|                                          |  | Three Months Ended August |         |   | Six Months Ended August |  
|(In thousands)                            |  | 25, 2006                  |         |   | 26, 2005                |   |         | 25, 2006 |  |   | 26, 2005 |  
|Net Sales:                                |  |                           |         |   |                         |   |         |          |  |   |          |   |  |   |         |  
|North American Social Expression Products |  | $                         | 240,574 |   |                         | $ | 267,703 |          |  | $ | 529,147  |   |  | $ | 572,679 |  
|Intersegment items                        |  |                           | (14,084 | ) |                         |   | (13,879 | )        |  |   | (30,461  | ) |  |   | (25,554 | )
|Exchange rate adjustment                  |  |                           | 2,533   |   |                         |   | 1,407   |          |  |   | 5,676    |   |  |   | 2,973   |  
|                                          |  |                           |         |   |                         |   |         |          |  |   |          |   |  |   |         |  
|Net                                       |  |                           | 229,023 |   |                         |   | 255,231 |          |  |   | 504,362  |   |  |   | 550,098 |  
|                                          |  |                           |         |  
|International Social Expression Products  |  |                           | 55,679  |   |                         |   | 57,136  |          |  |   | 113,002  |   |  |   | 112,475 |  
|Exchange rate adjustment                  |  |                           | 6,250   |   |                         |   | 4,467   |          |  |   | 10,541   |   |  |   | 11,973  |  
|                                          |  |                           |         |   |                         |   |         |          |  |   |          |   |  |   |         |  
|Net                                       |  |                           | 61,929  |   |                         |   | 61,603  |          |  |   | 123,543  |   |  |   | 124,448 |  
|                                          |  |                           |         |  
|Retail Operations                         |  |                           | 36,547  |   |                         |   | 39,085  |          |  |   | 77,225   |   |  |   | 81,945  |  
|Exchange rate adjustment                  |  |                           | 3,089   |   |                         |   | 1,557   |          |  |   | 5,850    |   |  |   | 2,939   |  
|                                          |  |                           |         |   |                         |   |         |          |  |   |          |   |  |   |         |  
|Net                                       |  |                           | 39,636  |   |                         |   | 40,642  |          |  |   | 83,075   |   |  |   | 84,884  |  
|                                          |  |                           |         |  
|AG Interactive                            |  |                           | 20,446  |   |                         |   | 19,583  |          |  |   | 40,406   |   |  |   | 47,630  |  
|Exchange rate adjustment                  |  |                           | 40      |   |                         |   | (98     | )        |  |   | 45       |   |  |   | 116     |  
|                                          |  |                           |         |   |                         |   |         |          |  |   |          |   |  |   |         |  
|Net                                       |  |                           | 20,486  |   |                         |   | 19,485  |          |  |   | 40,451   |   |  |   | 47,746  |  
|                                          |  |                           |         |  
|Non-reportable segments                   |  |                           | 8,999   |   |                         |   | 6,936   |          |  |   | 15,213   |   |  |   | 15,142  |  
|                                          |  |                           |         |  
|Unallocated items  net                   |  |                           | 2       |   |                         |   | 1,068   |          |  |   | 2        |   |  |   | 2,116   |  
|                                          |  |                           |         |   |                         |   |         |          |  |   |          |   |  |   |         |  
|Consolidated total                        |  | $                         | 360,075 |   |                         | $ | 384,965 |          |  | $ | 766,646  |   |  | $ | 824,434 |  
|                                          |  |                           |         |   |                         |   |         |          |  |   |          |   |  |   |         |  
|Segment Earnings (Loss):                  |  |                           |         |   |                         |   |         |          |  |   |          |   |  |   |         |  
|North American Social Expression Products |  | $                         | 13,820  |   |                         | $ | 44,648  |          |  | $ | 79,648   |   |  | $ | 124,123 |  
|Intersegment items                        |  |                           | (10,040 | ) |                         |   | (10,162 | )        |  |   | (22,068  | ) |  |   | (18,697 | )
|Exchange rate adjustment                  |  |                           | 800     |   |                         |   | 581     |          |  |   | 2,218    |   |  |   | 1,263   |  
|                                          |  |                           |         |   |                         |   |         |          |  |   |          |   |  |   |         |  
|Net                                       |  |                           | 4,580   |   |                         |   | 35,067  |          |  |   | 59,798   |   |  |   | 106,689 |  
|                                          |  |                           |         |  
|International Social Expression Products  |  |                           | 535     |   |                         |   | 2,514   |          |  |   | 1,016    |   |  |   | 4,584   |  
|Exchange rate adjustment                  |  |                           | 42      |   |                         |   | 319     |          |  |   | 104      |   |  |   | 611     |  
|                                          |  |                           |         |   |                         |   |         |          |  |   |          |   |  |   |         |  
|Net                                       |  |                           | 577     |   |                         |   | 2,833   |          |  |   | 1,120    |   |  |   | 5,195   |  
|                                          |  |                           |         |  
|Retail Operations                         |  |                           | (9,021  | ) |                         |   | (11,049 | )        |  |   | (16,199  | ) |  |   | (17,287 | )
|Exchange rate adjustment                  |  |                           | (55     | ) |                         |   | (133    | )        |  |   | (176     | ) |  |   | (175    | )
|                                          |  |                           |         |   |                         |   |         |          |  |   |          |   |  |   |         |  
|Net                                       |  |                           | (9,076  | ) |                         |   | (11,182 | )        |  |   | (16,375  | ) |  |   | (17,462 | )
|                                          |  |                           |         |  
|AG Interactive                            |  |                           | 1,208   |   |                         |   | 485     |          |  |   | 3,249    |   |  |   | 815     |  
|Exchange rate adjustment                  |  |                           | 2       |   |                         |   | 41      |          |  |   | 1        |   |  |   | (54     | )
|                                          |  |                           |         |   |                         |   |         |          |  |   |          |   |  |   |         |  
|Net                                       |  |                           | 1,210   |   |                         |   | 526     |          |  |   | 3,250    |   |  |   | 761     |  
|                                          |  |                           |         |  
|Non-reportable segments                   |  |                           | 5,972   |   |                         |   | 3,826   |          |  |   | 3,353    |   |  |   | 7,958   |  
|                                          |  |                           |         |  
|Unallocated items  net                   |  |                           | (17,964 | ) |                         |   | (22,421 | )        |  |   | (47,008  | ) |  |   | (50,974 | )
|Exchange rate adjustment                  |  |                           | 48      |   |                         |   | 209     |          |  |   | 100      |   |  |   | 275     |  
|                                          |  |                           |         |   |                         |   |         |          |  |   |          |   |  |   |         |  
|Net                                       |  |                           | (17,916 | ) |                         |   | (22,212 | )        |  |   | (46,908  | ) |  |   | (50,699 | )
|                                          |  |                           |         |   |                         |   |         |          |  |   |          |   |  |   |         |  
|Consolidated total                        |  | $                         | (14,653 | ) |                         | $ | 8,858   |          |  | $ | 4,238    |   |  | $ | 52,442  |  
|                                          |  |                           |         |   |                         |   |         |          |  |   |          |   |  |   |         |  



17



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Termination Benefits and Plant Closings

Termination benefits are primarily considered part of an ongoing benefit arrangement, accounted for in accordance with SFAS No. 112, Employers Accounting for Postemployment Benefits, and are
recorded when payment of the benefits is probable and can be reasonably estimated.

During 2006, the Corporation recorded a severance charge of $4.4
million related to the planned Lafayette, Tennessee plant closure and other headcount reductions. The plant closed in the second quarter of 2007.

During
the six months ended August 26, 2005, the North American Social Expression Products segment recorded a charge of $5.3 million for shutdown and relocation costs incurred during the period in connection with the Franklin, Tennessee plant closure,
including $2.1 million incurred during the second quarter.

The balance of the severance accrual was $4.5 million, $9.1 million and $8.7 million at
August 25, 2006, February 28, 2006 and August 26, 2005, respectively.

Deferred Revenue

Deferred revenue, included in Other current liabilities on the Condensed Consolidated Statement of Financial Position, totaled $29.6 million, $28.4 million
and $25.3 million at August 25, 2006, February 28, 2006 and August 26, 2005, respectively. The amounts relate primarily to the Corporations AG Interactive segment and the licensing activities included in non-reportable
segments.

Acquisition

During the second quarter of
2007, the AG Interactive segment acquired an online greeting card business for approximately $21 million. Approximately $15 million was paid in the second quarter and approximately $6 million, recorded in Accrued liabilities on the
Condensed Consolidated Statement of Financial Position, will be paid in 2008. Cash paid, net of cash acquired, was $11.2 million and is reflected in investing activities in the Condensed Consolidated Statement of Cash Flows. In connection with this
acquisition, intangible assets and goodwill of approximately $13 million and $8 million, respectively, were recorded. The allocation of the purchase price has not yet been finalized for this acquisition. The financial results of this acquisition are
included in the Corporations consolidated results from the date of acquisition. The pro forma results of operations have not been presented because the effect of this acquisition was not deemed material.



18



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Note 14  Discontinued Operations

In February 2006, the Corporation committed to a plan to sell its South African business unit. It had been determined that the business unit was no longer a strategic fit for the Corporation. The sale closed in the
second quarter of 2007 during which the Corporation recorded a pre-tax gain of $0.7 million. Immediately prior to, but in conjunction with, the sale of the South African business, approximately 50% of the shares owned by the Corporation were sold
back to the South African business for $4.0 million. The remaining outstanding shares owned by the Corporation were sold to a third party for proceeds of $5.5 million. The total of $9.5 million is included in Cash receipts related to
discontinued operations in the Condensed Consolidated Statement of Cash Flows.

The South African business unit meets the definition of a
component of an entity and has been accounted for as a discontinued operation under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Accordingly, the Corporations condensed consolidated
financial statements and related notes have been presented to reflect it as a discontinued operation for all periods presented. The South African business unit was previously included within the former Social Expression Products segment.

The following summarizes the results of discontinued operations:



|                                                       |  |                    |        |   |                  |   |       |                |  |   |                |   |  |   |        |  
|------------------------------------------------------ |  | ------------------ | ------ | - | ---------------- | - | ----- | -------------- |  | - | -------------- | - |  | - | ------ | -
|                                                       |  | Three Months Ended |        |   | Six Months Ended |  
|                                                       |  | August 25,2006     |        |   | August 26,2005   |   |       | August 25,2006 |  |   | August 26,2005 |  
|Net sales                                              |  | $                  | 377    |   |                  | $ | 2,591 |                |  | $ | 4,144          |   |  | $ | 6,398  |  
|                                                       |  |                    |        |   |                  |   |       |                |  |   |                |   |  |   |        |  
|Pre-tax loss from operations                           |  | $                  | (58    | ) |                  | $ | (571  | )              |  | $ | (703           | ) |  | $ | (1,065 | )
|Gain on sale                                           |  |                    | 684    |   |                  |   |      |                |  |   | 684            |   |  |   |       |  
|                                                       |  |                    |        |   |                  |   |       |                |  |   |                |   |  |   |        |  
|                                                       |  |                    | 626    |   |                  |   | (571  | )              |  |   | (19            | ) |  |   | (1,065 | )
|Income tax benefit                                     |  |                    | (2,120 | ) |                  |   | (8    | )              |  |   | (2,120         | ) |  |   | (8     | )
|                                                       |  |                    |        |   |                  |   |       |                |  |   |                |   |  |   |        |  
|Income (loss) from discontinued operations, net of tax |  | $                  | 2,746  |   |                  | $ | (563  | )              |  | $ | 2,101          |   |  | $ | (1,057 | )
|                                                       |  |                    |        |   |                  |   |       |                |  |   |                |   |  |   |        |  

Assets of businesses held for sale and Liabilities of businesses held for sale in the
Condensed Consolidated Statement of Financial Position include the following:



|                                         |  |                   |        |                 |   |       
|---------------------------------------- |  | ----------------- | ------ | --------------- | - | ------
|(In thousands)                           |  | February 28, 2006 |        | August 26, 2005
|Assets of businesses held for sale:      |  |                   |        |                 |   |       
|Current assets                           |  | $                 | 11,277 |                 | $ | 11,078
|Other assets                             |  |                   | 1,713  |                 |   | 5,836 
|Fixed assets                             |  |                   |       |                 |   | 3,936 
|                                         |  |                   |        |                 |   |       
|                                         |  | $                 | 12,990 |                 | $ | 20,850
|                                         |  |                   |        |                 |   |       
|Liabilities of businesses held for sale: |  |                   |        |                 |   |       
|Current liabilities                      |  | $                 | 3,016  |                 | $ | 4,159 
|Noncurrent liabilities                   |  |                   |       |                 |   | 5     
|                                         |  |                   |        |                 |   |       
|                                         |  | $                 | 3,016  |                 | $ | 4,164 
|                                         |  |                   |        |                 |   |       



19



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

This
Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited consolidated financial statements. This discussion and analysis, and other statements made in this Report,
contain forward-looking statements, see Factors That May Affect Future Results at the end of this discussion and analysis for a discussion of the uncertainties, risks and assumptions associated with these statements. Unless otherwise
indicated or the context otherwise requires, the Corporation, we, our, us and American Greetings are used in this Report to refer to the businesses of American Greetings Corporation and its
consolidated subsidiaries.

Overview

We
experienced lower net sales and earnings during the second quarter of 2007, compared to the prior year quarter, primarily driven by our North American Social Expression Products segment where the implementation of our strategy to invest in our core
greeting card business (investment in cards strategy) and scan-based trading (SBT) implementations directly impacted both net sales and earnings during the period. As we noted in our 2006 Annual Report on Form 10-K, we have
committed to spend at least $100 million over the next two years for these initiatives, including approximately $75 million in the current year. These expenditures, which we expect to be weighted toward the second half of the year, will
significantly reduce our operating earnings during 2007. During the second quarter, actions related to the investment in cards strategy decreased net sales by approximately $7 million and SBT implementations reduced net sales by approximately $8
million. In total, actions related to our investment in cards strategy and SBT implementations reduced consolidated pre-tax income by approximately $16 million. In addition, both of our social expression products segments experienced generally soft
demand for their products.

For the six months ended August 25, 2006, net sales were reduced approximately $13 million for actions related to our
investment in cards strategy and approximately $15 million for SBT implementations. Pre-tax income was approximately $32 million lower in the current six months due to actions related to our investment in cards strategy and SBT implementations.

In our AG Interactive business, the online product group continued to show sales growth from both advertising and subscriptions. The improvement in
subscription revenue stems from both the ongoing business and the acquisition of an online greeting card business during the second quarter. This increase was partially offset by continued shortfalls in the mobile product group.

On March 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payments, using the
modified prospective transition method. As a result, stock-based compensation expense recognized during the six months ended August 25, 2006, was $4.2 million and is included in Administrative and general expenses on the
Condensed Consolidated Statement of Operations, including $1.8 million during the second quarter.



20



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The effective tax rate for the second quarter of 2007 was 9.6% compared to 57.1% in the second quarter of 2006. This
significant difference in the effective tax rate was due to several discrete events that reduced the income tax benefit in the current period and unrelated discrete events that increased income tax expense in the prior period.

During the second quarter of 2007, we completed the strategic financing activities begun during the first quarter by retiring the remaining $174.8 million of convertible
subordinated notes with $159.1 million of cash and issuance of approximately 5.5 million Class A common shares.

The prior year second quarter
included $2.1 million pre-tax for shutdown and relocation costs incurred during the period in connection with a plant closure.

Also in the prior year, AG
Interactive changed its fiscal year-end from December 31 to February 28/29. As a result, the six months ended August 26, 2005 included eight months of AG Interactives operations.

Results of Operations

Three months ended
August 25, 2006 and August 26, 2005

Net loss was $10.5 million, or $0.18 per share, in the quarter compared to net income of $3.2
million, or $0.05 per share, in the prior year second quarter (all per-share amounts assume dilution).

Our results for the three months ended
August 25, 2006 and August 26, 2005 are summarized below:



|                                                                             |  |      |         |   |            |       |    |      |   |         |            |  |       |   
|---------------------------------------------------------------------------- |  | ---- | ------- | - | ---------- | ----- | -- | ---- | - | ------- | ---------- |  | ----- | --
|(Dollars in thousands)                                                       |  | 2006 |         |   | % NetSales |       |    | 2005 |   |         | % NetSales | 
|Net sales                                                                    |  | $    | 360,075 |   |            | 100.0 | %  |      | $ | 384,965 |            |  | 100.0 | % 
|Material, labor and other production costs                                   |  |      | 174,193 |   |            | 48.4  | %  |      |   | 174,571 |            |  | 45.4  | % 
|Selling, distribution and marketing                                          |  |      | 152,839 |   |            | 42.4  | %  |      |   | 145,982 |            |  | 37.9  | % 
|Administrative and general                                                   |  |      | 57,496  |   |            | 16.0  | %  |      |   | 58,539  |            |  | 15.2  | % 
|Interest expense                                                             |  |      | 7,609   |   |            | 2.1   | %  |      |   | 8,586   |            |  | 2.2   | % 
|Other income  net                                                           |  |      | (17,409 | ) |            | (4.8  | )% |      |   | (11,571 | )          |  | (3.0  | )%
|                                                                             |  |      |         |   |            |       |    |      |   |         |            |  |       |   
|                                                                             |  |      | 374,728 |   |            | 104.1 | %  |      |   | 376,107 |            |  | 97.7  | % 
|                                                                             |  |      |         |   |            |       |    |      |   |         |            |  |       |   
|(Loss) income from continuing operations before income tax (benefit) expense |  |      | (14,653 | ) |            | (4.1  | )% |      |   | 8,858   |            |  | 2.3   | % 
|Income tax (benefit) expense                                                 |  |      | (1,409  | ) |            | (0.4  | )% |      |   | 5,054   |            |  | 1.3   | % 
|                                                                             |  |      |         |   |            |       |    |      |   |         |            |  |       |   
|(Loss) income from continuing operations                                     |  |      | (13,244 | ) |            | (3.7  | )% |      |   | 3,804   |            |  | 1.0   | % 
|Income (loss) from discontinued operations, net of tax                       |  |      | 2,746   |   |            | 0.8   | %  |      |   | (563    | )          |  | (0.2  | )%
|                                                                             |  |      |         |   |            |       |    |      |   |         |            |  |       |   
|Net (loss) income                                                            |  | $    | (10,498 | ) |            | (2.9  | )% |      | $ | 3,241   |            |  | 0.8   | % 
|                                                                             |  |      |         |   |            |       |    |      |   |         |            |  |       |   



21



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For the three months ended August 25, 2006, consolidated net sales were $360.1 million, down from $385.0 million in
the prior year second quarter. This 6.5% or approximately $25 million decrease was primarily the result of lower sales in our North American Social Expression Products segment of approximately $27 million and our Retail Operations segment of
approximately $3 million. These decreases were partially offset by favorable foreign currency translation impacts of approximately $5 million.

Net sales
of our North American Social Expression Products segment decreased approximately $27 million. Approximately $7 million of the decrease was due to the implementation of our investment in cards strategy, approximately $8 million resulted from SBT
implementations and the remaining decrease was from lower sales of everyday cards, party goods, candles and gift packaging.

Our Retail Operations segment
was down approximately $3 million, or 6.5%, due to a reduction in same-store sales of 0.5% and a decrease in store doors of approximately 7%.

Wholesale Unit and Pricing Analysis for Greeting Cards

Unit and pricing comparatives (on a sales less returns basis)
for the three months ended August 25, 2006 and August 26, 2005 are summarized below:



|                            |  |                                     |    |  |                |    |  |                      |    |  |      |    |  |       |    |  |      |   
|--------------------------- |  | ----------------------------------- | -- |  | -------------- | -- |  | -------------------- | -- |  | ---- | -- |  | ----- | -- |  | ---- | --
|                            |  | Increase (Decrease) From Prior Year |   
|                            |  | Everyday Cards                      |    |  | Seasonal Cards |    |  | Total Greeting Cards |   
|                            |  | 2006                                |    |  | 2005           |    |  | 2006                 |    |  | 2005 |    |  | 2006  |    |  | 2005 |   
|Unit volume                 |  | (18.8                               | )% |  | 0.7            | %  |  | (13.5                | )% |  | 42.7 | %  |  | (18.1 | )% |  | 4.6  | % 
|Selling prices              |  | 12.3                                | %  |  | (1.1           | )% |  | 15.0                 | %  |  | (5.7 | )% |  | 12.7  | %  |  | (1.3 | )%
|Overall increase/(decrease) |  | (8.9                                | )% |  | (0.4           | )% |  | (0.5                 | )% |  | 34.6 | %  |  | (7.8  | )% |  | 3.3  | % 

During the second quarter, combined everyday and seasonal greeting card sales less returns fell 7.8% compared to
the prior year quarter. Approximately 30% of this decrease was the result of the SBT buybacks during the quarter.

Everyday card unit volume, down 18.8%,
and selling prices, up 12.3%, were significantly impacted during the second quarter by the SBT buybacks. Approximately 50% of the decrease in everyday card unit volume and approximately 69% of the increase in selling prices was the direct result of
the product mix of the SBT buybacks. The remaining everyday card sales less returns decreased 6.1%, including a decline of unit volume of 9.5% and an increase in selling prices of 3.8%. Unit volume was down across all business units. Selling prices
increased due to a richer mix within the non-value line of cards and lower overall mix of value line cards compared to the prior year period.

Seasonal
card unit volume decreased 13.5% compared to the prior year quarter due primarily to lower Fathers Day unit sales. The increase in selling prices of seasonal cards is due to a change in the mix of Fathers Day and Graduation cards to
higher priced product.



22



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Expense Overview

Material, labor and other production costs (MLOPC) for the three months ended August 25, 2006 were $174.2 million, a decrease from $174.6 million for the comparable period in the prior year. As a
percentage of net sales, these costs were 48.4% in the current period compared to 45.4% for the three months ended August 26, 2005. The $0.4 million decrease from the prior year period is due to favorable volume variances of approximately $11
million due to the lower sales volume in the current period substantially offset by unfavorable product and business mix of approximately $6 million, higher inventory adjustments and SBT scrap costs of approximately $2 million and unfavorable
foreign currency translation impacts of approximately $2 million.

Selling, distribution and marketing costs for the three months ended August 25,
2006 were $152.8 million, increasing from $146.0 million for the comparable period in the prior year. The increase of $6.8 million is due primarily to increases in field sales expense of approximately $2 million, in advertising expenses of
approximately $1 million and in agency fees and other licensing related spending of approximately $2 million. Foreign currency translation impacts of approximately $2 million also contributed to the increase. The increase in agency fees and other
licensing related expenses is attributable to the increase in royalty income during the period. A reduction in lease costs and store expenses in our Retail Operations segment due primarily to prior year store closings partially offset these
increases.

Administrative and general expenses were $57.5 million for the three months ended August 25, 2006, a decrease from $58.5 million for the
three months ended August 26, 2005. The decrease of $1.0 million is attributable to reduced bad debt expense of approximately $2 million due to recoveries recorded in the period and lower information technology related expenses of approximately
$1 million. These reductions were partially offset by stock-based compensation expense of approximately $2 million recorded in the current period in accordance with SFAS No. 123 (revised 2004).

Interest expense for the three months ended August 25, 2006 was $7.6 million, a decrease from $8.6 million for the prior year quarter. The decrease of $1.0 million
is attributable to $5.7 million of interest savings associated with the reduced debt levels for the 6.10% senior notes and the 7.00% convertible subordinated notes partially offset by $3.7 million of interest expense on the new 7.375% senior notes
and increased amortization of deferred financing costs of $0.8 million associated with the new credit facility and the exchange of our 7.00% convertible subordinated notes.

Other income  net was $17.4 million for the three months ended August 25, 2006, an increase from $11.6 million for the comparable period in the prior year. The increase of $5.8 million is principally
related to higher royalty income of $4.6 million and a $0.6 million decrease in loss on disposal of assets. The increase in royalty income is driven entirely by audit recoveries of approximately $5 million relating to favorable product performance
in prior years.

For the three months ended August 25, 2006, the tax benefit was $1.4 million on a pre-tax loss from continuing operations of $14.7
million compared to tax expense of $5.1 million on pre-tax income from continuing operations of $8.9 million in the prior year quarter. The effective tax rate on income (loss) from continuing operations was 9.6% and 57.1% for the three months



23



---

ended August 25, 2006 and August 26, 2005, respectively. Since the second quarter has seasonally low income (loss) from continuing operations
before income tax expense (benefit), discrete items or changes to the tax assets and reserves on the Condensed Consolidated Statement of Financial Position have a more significant impact on the Corporations quarterly effective tax rate. The
decrease in the effective tax rate relates to several discrete events during the current year period, including interest expense on estimated tax payments, return to provision adjustments and the effect of amended tax returns on deferred tax assets.
During the prior year period, we eliminated deferred tax assets related to certain foreign net operating loss carryforwards and we reduced our deferred tax assets to reflect changes in Ohio tax laws.

Results of Operations

Six months ended August 25,
2006 and August 26, 2005

Net income was $4.9 million, or $0.08 per share, for the six months compared to $29.7 million, or $0.41 per share, in
the prior year period.

Our results for the six months ended August 25, 2006 and August 26, 2005 are summarized below:



|                                                            |  |      |         |   |            |       |    |      |   |         |            |  |       |   
|----------------------------------------------------------- |  | ---- | ------- | - | ---------- | ----- | -- | ---- | - | ------- | ---------- |  | ----- | --
|(Dollars in thousands)                                      |  | 2006 |         |   | % NetSales |       |    | 2005 |   |         | % NetSales | 
|Net sales                                                   |  | $    | 766,646 |   |            | 100.0 | %  |      | $ | 824,434 |            |  | 100.0 | % 
|Material, labor and other production costs                  |  |      | 350,514 |   |            | 45.7  | %  |      |   | 353,001 |            |  | 42.8  | % 
|Selling, distribution and marketing                         |  |      | 296,608 |   |            | 38.7  | %  |      |   | 299,780 |            |  | 36.3  | % 
|Administrative and general                                  |  |      | 119,502 |   |            | 15.6  | %  |      |   | 121,014 |            |  | 14.7  | % 
|Interest expense                                            |  |      | 20,073  |   |            | 2.6   | %  |      |   | 18,263  |            |  | 2.2   | % 
|Other income  net                                          |  |      | (24,289 | ) |            | (3.2  | )% |      |   | (20,066 | )          |  | (2.4  | )%
|                                                            |  |      |         |   |            |       |    |      |   |         |            |  |       |   
|                                                            |  |      | 762,408 |   |            | 99.4  | %  |      |   | 771,992 |            |  | 93.6  | % 
|                                                            |  |      |         |   |            |       |    |      |   |         |            |  |       |   
|Income from continuing operations before income tax expense |  |      | 4,238   |   |            | 0.6   | %  |      |   | 52,442  |            |  | 6.4   | % 
|Income tax expense                                          |  |      | 1,445   |   |            | 0.2   | %  |      |   | 21,730  |            |  | 2.7   | % 
|                                                            |  |      |         |   |            |       |    |      |   |         |            |  |       |   
|Income from continuing operations                           |  |      | 2,793   |   |            | 0.4   | %  |      |   | 30,712  |            |  | 3.7   | % 
|Income (loss) from discontinued operations, net of tax      |  |      | 2,101   |   |            | 0.2   | %  |      |   | (1,057  | )          |  | (0.1  | )%
|                                                            |  |      |         |   |            |       |    |      |   |         |            |  |       |   
|Net income                                                  |  | $    | 4,894   |   |            | 0.6   | %  |      | $ | 29,655  |            |  | 3.6   | % 
|                                                            |  |      |         |   |            |       |    |      |   |         |            |  |       |   

For the six months ended August 25, 2006, consolidated net sales were $766.6 million, down from $824.4
million in the prior year six months. This 7.0% or approximately $58 million decrease was primarily the result of lower sales in our North American Social Expression Products segment of approximately $48 million, AG Interactive of approximately $7
million and our Retail Operations segment of approximately $5 million. Favorable foreign currency translation increased net sales by approximately $4 million.



24



---

Net sales of our North American Social Expression Products segment decreased approximately $48 million. Approximately $13
million of the decrease was due to the implementation of our investment in cards strategy, approximately $15 million resulted from SBT implementations and the remaining decrease was from lower sales of everyday cards, party goods, candles and gift
packaging. These decreases were partially offset by improvements in seasonal card sales.

The reduction in AG Interactives net sales was due to the
prior period including eight months of activity due to the change in fiscal year-ends partially offset by growth in the online product group. The additional two months in the prior year added approximately $11 million to net sales. Growth in both
advertising and subscription revenue in the online product group added approximately $4 million to net sales in the current period.

Our Retail Operations
segment was down approximately $5 million, or 5.8%, as favorable same-store sales of 0.9% were more than offset by the decrease in store doors of approximately 7%.

Wholesale Unit and Pricing Analysis for Greeting Cards

Unit and pricing comparatives (on a sales less returns basis) for the six months ended August 25, 2006 and August 26, 2005 are summarized below:



|                            |  |                                     |    |  |                |    |  |                      |    |  |      |    |  |       |    |  |      |   
|--------------------------- |  | ----------------------------------- | -- |  | -------------- | -- |  | -------------------- | -- |  | ---- | -- |  | ----- | -- |  | ---- | --
|                            |  | Increase (Decrease) From Prior Year |   
|                            |  | Everyday Cards                      |    |  | Seasonal Cards |    |  | Total Greeting Cards |   
|                            |  | 2006                                |    |  | 2005           |    |  | 2006                 |    |  | 2005 |    |  | 2006  |    |  | 2005 |   
|Unit volume                 |  | (16.1                               | )% |  | 0.3            | %  |  | (0.6                 | )% |  | (4.0 | )% |  | (12.3 | )% |  | (0.8 | )%
|Selling prices              |  | 9.6                                 | %  |  | (0.1           | )% |  | 2.8                  | %  |  | 2.0  | %  |  | 8.1   | %  |  | 0.3  | % 
|Overall increase/(decrease) |  | (8.0                                | )% |  | 0.2            | %  |  | 2.2                  | %  |  | (2.1 | )% |  | (5.2  | )% |  | (0.4 | )%

For the six month period, combined everyday and seasonal greeting card sales less returns fell 5.2% compared to
the prior year period. Approximately 40% of this decrease was the result of the SBT buybacks during the period.

Everyday card unit volume, down 16.1%, and
selling prices, up 9.6%, were significantly impacted during the six month period by the SBT buybacks. Approximately 50% of the decrease in everyday card unit volume and approximately 68% of the increase in selling prices was the direct result of the
product mix of the SBT buybacks. The remaining everyday card sales less returns decreased 5.2%, including a decline in unit volume of 8.0% and an increase in selling prices of 3.1%. Unit volume was down across all business units. Selling prices
increased due to a richer mix within the non-value line of cards and lower overall mix of value line cards compared to the prior year period.

Seasonal
card unit volume decreased 0.6% compared to the prior year six months as lower unit volume in Fathers Day and Graduation were substantially offset by improvements in Mothers Day and Easter unit sales. The increase in selling prices of
seasonal cards is due to a change in the mix of Easter and Graduation cards to higher priced product.



25



---

Expense Overview

MLOPC for the six months ended August 25, 2006 were $350.5 million, a decrease from $353.0 million for the comparable period in the prior year. As a percentage of net sales, these costs were 45.7% in the current
period compared to 42.8% for the six months ended August 26, 2005. The $2.5 million decrease from the prior year is due to favorable volume variances of approximately $25 million due to the lower sales volume in the current period substantially
offset by unfavorable product and business mix of approximately $13 million, higher inventory adjustments and SBT scrap costs of approximately $7 million and unfavorable foreign currency translation impacts of approximately $2 million.

Selling, distribution and marketing expenses for the six months ended August 25, 2006 were $296.6 million, decreasing from $299.8 million for the comparable
period in the prior year. The decrease of $3.2 million is due primarily to a reduction of approximately $4 million in AG Interactives expenses as the prior year period included an additional two months of activity as well as integration costs
for the fiscal 2005 acquisitions. A reduction in lease costs and store expenses of approximately $4 million in our Retail Operations segment further reduced expenses in the current period due to fewer stores. Partially offsetting these reductions
are an increase in advertising expenses of approximately $3 million and unfavorable foreign currency translation impacts of approximately $2 million.

Administrative and general expenses were $119.5 million for the six months ended August 25, 2006, a decrease from $121.0 million for the six months ended August 26, 2005. The decrease of $1.5 million is due to reduced bad debt
expense of approximately $2 million due to recoveries recorded in the current period and lower information technology related expenses of approximately $3 million. Also contributing to the decrease is approximately $1 million of lower
corporate-owned life insurance (COLI) expenses. These reductions were partially offset by stock-based compensation expense of approximately $4 million recorded in the current period in accordance with SFAS No. 123 (revised 2004).

Interest expense for the six months ended August 25, 2006 was $20.1 million, an increase from $18.3 million for the prior year period. The increase of $1.8 million
is attributable to $5.0 million of expense related to the early retirement of substantially all of our 6.10% senior notes including the consent payment, fees paid and the write-off of deferred financing costs. Expenses associated with both our new
and old credit facilities are $2.2 million higher which is attributable to increased commitment fees due to the level of available financing under the new facility and the write-off of $1.0 million of deferred financing costs from the old facility
that was terminated in April 2006. Additionally, interest expense increased $3.7 million due to the 7.375% senior notes issued in May 2006 and $0.6 million due to increased amortization of fees for the 7.00% convertible subordinated notes. These
amounts were partially offset by $2.4 million for the net gain recognized on the interest rate derivative entered into and settled during the three months ended May 26, 2006, interest savings of $6.0 million attributable to the reduced debt
levels for the 6.10% senior notes and the 7.00% convertible subordinated notes and $1.3 million for prior period expenses for the retirement of the remaining $10.2 million of our 11.75% senior subordinated notes.

Other income  net was $24.3 million for the six months ended August 25, 2006, an increase from $20.1 million for the comparable period in the prior year. The
increase of $4.2 million is



26



---

attributable to swings of $2.0 million from a foreign exchange loss in the prior year period to a gain in the current period and $1.7 million from a loss on
disposal of assets in the prior period to a gain in the current six months. Higher royalty income of $0.3 million and interest income of $0.3 million also contributed to the increase.

The effective tax rate on income from continuing operations was 34.1% and 41.4% for the six months ended August 25, 2006 and August 26, 2005, respectively. During the prior year period, we established
additional tax reserves to cover anticipated examination adjustments and we reduced our deferred tax assets to reflect changes in Ohio tax laws.

Segment Information

Our operations are organized and managed according to a number of factors, including product categories,
geographic locations and channels of distribution. Our North American Social Expression Products and our International Social Expression Products segments primarily design, manufacture and sell greeting cards and other related products through
various channels of distribution, with mass retailers as the primary channel. As permitted under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, certain operating divisions have been aggregated
into both the North American Social Expression Products and International Social Expression Products segments. The aggregated operating divisions have similar economic characteristics, products, production processes, types of customers and
distribution methods. At August 25, 2006, we owned and operated 493 card and gift retail stores in the United States and Canada through our Retail Operations segment. The stores are primarily located in malls and strip shopping centers. The
stores sell products purchased from our North American Social Expression Products segment as well as products purchased from other vendors. AG Interactive is an electronic provider of social expression content through the Internet and wireless
platforms.

We review segment results using consistent exchange rates between periods to eliminate the impact of foreign currency fluctuations.

North American Social Expression Products Segment



|                       |          |                           |          |          |   |          |                         |          |          |  |   |         |  |   |         |  |       |   
|---------------------- | -------- | ------------------------- | -------- | -------- | - | -------- | ----------------------- | -------- | -------- |  | - | ------- |  | - | ------- |  | ----- | --
|(Dollars in thousands) |          | Three Months Ended August |          | % Change |   |          | Six Months Ended August |          | % Change | 
|                       | 25, 2006 |                           | 26, 2005 |          |   | 25, 2006 |                         | 26, 2005 |         
|Net sales              |          | $                         | 226,490  |          | $ | 253,824  |                         | (10.8    | )%       |  | $ | 498,686 |  | $ | 547,125 |  | (8.9  | )%
|Segment earnings       |          |                           | 3,780    |          |   | 34,486   |                         | (89.0    | )%       |  |   | 57,580  |  |   | 105,426 |  | (45.4 | )%

Net sales of our North American Social Expression Products segment for the three months ended August 25,
2006, excluding the impact of foreign exchange and intersegment items, decreased $27.3 million or 10.8% from the prior year quarter. The implementation of our investment in cards strategy and SBT conversions reduced net sales by approximately $7
million and $8 million, respectively, during the period. The remaining decrease was due to lower net sales of everyday cards, party goods, candles and gift packaging. For the six months ended August 25, 2006, net sales decreased $48.4 million
or 8.9% from the prior year six months. The implementation of our investment in cards strategy and SBT conversions reduced net sales by approximately $13 million and $15 million, respectively, during the period. The remaining decrease was due to
lower net sales of everyday cards, party goods, candles and gift packaging, partially offset by improvements in seasonal card sales.



27



---

Segment earnings, excluding the impact of foreign exchange and intersegment items, decreased $30.7 million or 89.0%
compared to the prior year second quarter. The combined impact of the investment in cards strategy and SBT implementations decreased segment earnings by approximately $16 million compared to the prior year quarter. The remaining decline was due
primarily to lower unit volume across most product lines and unfavorable field sales, advertising and bad debt expenses. For the six months ended August 25, 2006, segment earnings decreased $47.8 million or 45.4% compared to the six months
ended August 26, 2005. The combined impact of the investment in cards strategy and SBT implementations decreased segment earnings by approximately $29 million compared to the prior year six months. The remaining decline was due primarily to
lower unit volume across most product lines and higher SBT scrap costs.

International Social Expression Products Segment



|                       |          |                           |          |          |   |          |                         |          |          |  |   |         |  |   |         |  |       |   
|---------------------- | -------- | ------------------------- | -------- | -------- | - | -------- | ----------------------- | -------- | -------- |  | - | ------- |  | - | ------- |  | ----- | --
|(Dollars in thousands) |          | Three Months Ended August |          | % Change |   |          | Six Months Ended August |          | % Change | 
|                       | 25, 2006 |                           | 26, 2005 |          |   | 25, 2006 |                         | 26, 2005 |         
|Net sales              |          | $                         | 55,679   |          | $ | 57,136   |                         | (2.6     | )%       |  | $ | 113,002 |  | $ | 112,475 |  | 0.5   | % 
|Segment earnings       |          |                           | 535      |          |   | 2,514    |                         | (78.7    | )%       |  |   | 1,016   |  |   | 4,584   |  | (77.8 | )%

Net sales of our International Social Expression Products segment, excluding the impact of foreign exchange,
decreased $1.5 million, or 2.6%, compared to the prior year quarter. This decrease was due to lower everyday card and calendar sales partially offset by less seasonal returns. Net sales for the six months ended August 25, 2006, increased $0.5
million from the prior year six months. This increase was due to improvements in seasonal card sales, primarily Easter and Mothers Day, partially offset by lower everyday card and calendar sales.

Segment earnings for the three months ended August 25, 2006, excluding the impact of foreign exchange, decreased $2.0 million compared to the three months ended
August 26, 2005. This decrease in segment earnings is due primarily to the decrease in net sales and higher administrative costs in the United Kingdom (U.K.). Segment earnings for the six months ended August 25, 2006, decreased
$3.6 million compared to the prior year period. The decrease is due to increased operating costs in the U.K., primarily merchandiser expenses, inventory adjustments and other plant operating costs.

Retail Operations Segment



|                       |          |                           |        |          |          |   |         |                         |  |      |          |  |   |         |   |  |   |         |   |  |      |   
|---------------------- | -------- | ------------------------- | ------ | -------- | -------- | - | ------- | ----------------------- |  | ---- | -------- |  | - | ------- | - |  | - | ------- | - |  | ---- | --
|(Dollars in thousands) |          | Three Months Ended August |        |          | % Change |   |         | Six Months Ended August |  |      | % Change | 
|                       | 25, 2006 |                           |        | 26, 2005 |          |   |         | 25, 2006                |  |      | 26, 2005 |  |  
|Net sales              |          | $                         | 36,547 |          |          | $ | 39,085  |                         |  | (6.5 | )%       |  | $ | 77,225  |   |  | $ | 81,945  |   |  | (5.8 | )%
|Segment loss           |          |                           | (9,021 | )        |          |   | (11,049 | )                       |  | 18.4 | %        |  |   | (16,199 | ) |  |   | (17,287 | ) |  | 6.3  | % 

Net sales, excluding the impact of foreign exchange, in our Retail Operations segment decreased $2.5 million or
6.5% for the three months ended August 25, 2006, compared to the prior year period due to a reduction in same-store sales of 0.5% and fewer store doors. Net sales for the quarter decreased approximately $2 million due to fewer stores. For the
six



28



---

months ended August 25, 2006, net sales decreased $4.7 million compared to the prior year period as favorable same-store sales of 0.9% were more than
offset by the reduction in store doors. The average number of stores was approximately 7% less than in the prior year period, which accounted for approximately $5 million of the decrease in net sales.

Segment earnings, excluding the impact of foreign exchange, was a loss of $9.0 million in the three months ended August 25, 2006, compared to a loss of $11.0
million in the three months ended August 26, 2005. Gross margins increased by approximately 1.5 percentage points as less promotional pricing was utilized in the current quarter compared to the prior period. Segment earnings also benefited from
lower store rent, operating expenses and associate costs of approximately $1 million due to fewer stores and lower information technology expenses. The quarter ended August 26, 2005 was unfavorably impacted by certain noncapitalizable
implementation costs associated with a systems infrastructure upgrade. For the six months ended August 25, 2006, segment earnings was a loss of $16.2 million compared to a loss of $17.3 million in the prior year period. The impact on earnings
of the lower sales in the period was substantially offset by lower store expenses due to fewer stores. Lower information technology expenses in the current period also contributed to the reduced segment loss in the period due to the prior period
costs associated with a systems upgrade. Gross margins decreased by approximately 3.3 percentage points between periods.

AG Interactive Segment



|                       |          |                           |          |          |   |          |                         |          |          |  |   |        |  |   |        |  |       |   
|---------------------- | -------- | ------------------------- | -------- | -------- | - | -------- | ----------------------- | -------- | -------- |  | - | ------ |  | - | ------ |  | ----- | --
|(Dollars in thousands) |          | Three Months Ended August |          | % Change |   |          | Six Months Ended August |          | % Change | 
|                       | 25, 2006 |                           | 26, 2005 |          |   | 25, 2006 |                         | 26, 2005 |         
|Net sales              |          | $                         | 20,446   |          | $ | 19,583   |                         | 4.4      | %        |  | $ | 40,406 |  | $ | 47,630 |  | (15.2 | )%
|Segment earnings       |          |                           | 1,208    |          |   | 485      |                         | 149.1    | %        |  |   | 3,249  |  |   | 815    |  | 298.7 | % 

For 2006, AG Interactive changed its fiscal year-end from December 31 to February 28/29. As a result,
the six months ended August 26, 2005 included eight months of AG Interactives operations.

Net sales of AG Interactive for the three months
ended August 25, 2006, excluding the impact of foreign exchange, increased $0.9 million compared to the prior year second quarter. The $0.9 million increase is primarily due to the online greeting card acquisition during the quarter. Growth in
advertising and subscription revenue in the online product group was substantially offset by decreases in the mobile product group. For the six months ended August 25, 2006, net sales decreased $7.2 million compared to the six months ended
August 26, 2005. This decrease is primarily due to approximately $11 million of net sales associated with the additional two months of activity in the prior year period. The decrease due to the change in fiscal year-ends was partially offset by
advertising and subscription revenue growth in the online product group, which contributed approximately $4 million to net sales in the current period. The increase in the current period attributable to the second quarter acquisition was
substantially offset by decreased sales in the mobile product group. At the end of the second quarter of 2007, AG Interactive had approximately 3.3 million online paid subscribers versus 2.3 million at the prior year quarter end.
Approximately 0.6 million of the increase in subscribers is due to the second quarter acquisition.



29



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Segment earnings, excluding the impact of foreign exchange, increased by $0.7 million for the quarter ended
August 25, 2006, compared to the prior year period. The improvement is due to reduced costs in the mobile product group. For the six months ended August 25, 2006, segment earnings increased $2.4 million compared to the prior year six
months. The mobile product group contributed approximately two-thirds of the improvement while the online product group added one-third. The additional two months of activity in the prior year period had no significant impact on segment earnings.

Liquidity and Capital Resources

The seasonal
nature of our business precludes a useful comparison of the current period and the fiscal year-end financial statements; therefore, a Condensed Consolidated Statement of Financial Position as of August 26, 2005, has been included.

Operating Activities

Operating activities provided $26.2 million
of cash during the six months ended August 25, 2006, compared to $22.8 million of cash in the prior year period.

Other non-cash charges were $7.0
million for the six months ended August 25, 2006, compared to $1.7 million in the prior year period. This increase is primarily related to the stock-based compensation expense of $4.2 million recorded during the current period and the write-off
of deferred financing fees associated with our old credit facility.

Accounts receivable provided $59.7 million of cash from February 28, 2006,
compared to $7.6 million during the six months ended August 26, 2005. As a percentage of the prior twelve months net sales, net accounts receivable were 4.7% at August 25, 2006, compared to 9.0% at August 26, 2005. This
improvement is primarily driven by additional customers moving to the SBT business model. In general, customers on the SBT business model tend to have shorter payment terms than non-SBT customers.

Inventory was a use of $56.6 million from February 28, 2006, compared to a use of $74.6 million in the prior year period. The reduced usage in the current period is
related to less inventory build due to anticipated lower sales in 2007 compared to the prior year, primarily associated with our promotional and gift packaging products.

Other current assets used $24.2 million of cash from February 28, 2006, compared to $17.8 million in the prior year six months. The difference is due to prepaid and refundable tax amounts in the current year.

Deferred costs - net represents payments under agreements with retailers net of the related amortization of those payments. During the six months ended
August 25, 2006, amortization exceeded payments by $26.8 million; in the six months ended August 26, 2005, amortization exceeded payments by $51.4 million. See Note 9 to the condensed consolidated financial statements for further
detail of deferred costs related to customer agreements.

Accounts payable and other liabilities were a use of $35.0 million during the six months ended
August 25, 2006, compared to $29.5 million in the prior year period. The change from the prior year is due primarily to the change in profit-sharing payments and accruals during the respective periods.



30



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Investing Activities

Investing activities provided $188.9 million of cash during the six months ended August 25, 2006, compared to using $11.3 million in the prior year period. The source of cash in the current year is primarily related to sales of
short-term investments exceeding purchases. Short-term investments decreased from $208.7 million at February 28, 2006 to zero at August 25, 2006. This source of cash was partially offset by a net use of cash of $11.2 million for AG
Interactives online greeting card business acquisition in the second quarter.

Financing Activities

Financing activities used $343.7 million of cash during the six months ended August 25, 2006, compared to $98.4 million during the six months ended August 26,
2005. The current year amount relates primarily to our debt activities in the period. We issued $200.0 million of 7.375% senior unsecured notes and retired $277.3 million of our 6.10% senior notes, approximately 92% of the total outstanding, during
the first quarter. In the second quarter, we repaid $159.1 million of our 7.00% convertible subordinated notes and borrowed $20.0 million under our new credit facility. We paid $8.1 million of debt issuance costs during the current period for our
new credit facility, the 7.375% senior unsecured notes and the exchange offer on our 7.00% convertible subordinated notes. These amounts were deferred and will be amortized over the respective periods of the instruments. Our Class A common
share repurchase programs also contributed to the cash used for financing activities in both periods. These repurchases were made through 10b5-1 programs, which are intended to be in compliance with the Securities & Exchange
Commissions Rule 10b-18. During the six months ended August 25, 2006, $108.6 million was paid to repurchase approximately 4.9 million shares under the repurchase program, compared to $96.6 million used in the prior year period to
repurchase approximately 3.9 million shares.

Our receipt of the exercise price on stock options provided $2.8 million and $21.3 million during the
six months ended August 25, 2006 and August 26, 2005, respectively. In accordance with SFAS No. 123 (revised 2004), tax benefits associated with share-based payments are classified as financing activities in the Condensed Consolidated
Statement of Cash Flows, rather than as operating cash flows as required under previous accounting guidance. Prior period amounts were not reclassified.

During the six months ended August 25, 2006 and August 26, 2005, we paid quarterly dividends of $0.08 per common share, which totaled $9.2 million and $10.9 million, respectively.

Credit Sources

Substantial credit sources are available to us. In
total, we had available sources of approximately $800 million at August 25, 2006. This included our $650 million senior secured credit facility and our $150 million accounts receivable securitization financing. We borrowed $20.0 million under
our credit facility at August 25, 2006. We have continued to borrow on a short-term basis in the ordinary course of business under our revolving credit facility subsequent to August 25, 2006, as our fiscal third quarter is our seasonal peak for
working capital requirements.



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On April 4, 2006, we entered into a new $650 million credit agreement. The new credit agreement includes a $350
million revolving credit facility and a $300 million delay draw term loan. We may request one or more term loans until April 4, 2007. In connection with the execution of this new agreement, our amended and restated credit agreement dated
May 11, 2004 was terminated. The obligations under the new credit agreement are guaranteed by our material domestic subsidiaries and are secured by substantially all of the personal property of American Greetings Corporation and each of our
material domestic subsidiaries, including a pledge of all of the capital stock in substantially all of our domestic subsidiaries and 65% of the capital stock of our first tier foreign subsidiaries. The revolving credit facility will mature on
April 4, 2011, and any outstanding term loans will mature on April 4, 2013. Each term loan will amortize in equal quarterly installments equal to 0.25% of the amount of such term loan, beginning on April 4, 2007, with the balance
payable on April 4, 2013.

Revolving loans denominated in U.S. dollars under the new credit agreement will bear interest at a rate per annum based on
the then applicable London Inter-Bank Offer Rate (LIBOR) or the alternate base rate (ABR), as defined in the credit agreement, in each case, plus margins adjusted according to our leverage ratio. Term loans will bear interest
at a rate per annum based on either LIBOR plus 150 basis points or based on the ABR, as defined in the credit agreement, plus 25 basis points. We pay an annual commitment fee of 25 basis points on the undrawn portion of the revolving credit facility
and 62.5 basis points on the undrawn portion of the term loan. Effective November 30, 2006, the commitment fee on the revolving facility will fluctuate based on our leverage ratio. The commitment fee on the term loan terminates on April 4,
2007.

The credit agreement contains certain restrictive covenants that are customary for similar credit arrangements, including covenants relating to
limitations on liens, dispositions, issuance of debt, investments, payment of dividends, repurchases of capital stock, acquisitions and transactions with affiliates. There are also financial performance covenants that require us to maintain a
maximum leverage ratio and a minimum interest coverage ratio. The credit agreement also requires us to make certain mandatory prepayments of outstanding indebtedness using the net cash proceeds received from certain dispositions, events of loss and
additional indebtedness that we may incur from time to time.

Also, on April 4, 2006, we reduced the available financing under our accounts receivable
securitization financing agreement from $200 million to $150 million. Under the terms of the agreement, we transfer receivables to a wholly-owned consolidated subsidiary that in turn utilizes the receivables to secure borrowings through a credit
facility with a financial institution. Borrowings are limited based on our eligible receivables, as defined in the agreement. The maturity date for this agreement is August 1, 2007. The related interest rate is commercial paper-based. We pay an
annual commitment fee of 25 basis points on the undrawn portion of the facility.

On May 24, 2006, we issued $200 million of 7.375% senior unsecured
notes, due on June 1, 2016. The proceeds from this issuance were used for the repurchase of our 6.10% senior notes that were tendered in our tender offer and consent solicitation for these notes that was completed on May 25, 2006.

On May 25, 2006, we repurchased $277.3 million of our 6.10% senior notes and recorded a charge of $5.0 million for the consent payment and other fees
associated with the notes



32



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repurchased as well as for the write-off of related deferred financing costs. In conjunction with the tender offer for the 6.10% senior notes, the indenture
governing the 6.10% senior notes was amended to eliminate certain restrictive covenants and events of default. The remaining 6.10% senior notes may be put back to the Corporation on August 1, 2008, at the option of the holders, at 100% of the
principal amount provided the holders exercise this option between July 1, 2008 and August 1, 2008.

On May 26, 2006, $159.1 million of our
7.00% convertible subordinated notes due on July 15, 2006 were exchanged (modified) for a new series of 7.00% convertible subordinated notes due on July 15, 2006. We paid an exchange fee of $0.8 million that was deferred at May 26,
2006 and amortized over the remaining term of the new convertible subordinated notes. The terms of the new notes were substantially the same as the old notes except that upon conversion, the new notes were settled in cash and Class A common
shares. Upon conversion, the old notes could only be settled in our Class A common shares. We issued 1,126,026 of our Class A common shares during the quarter ended August 25, 2006, upon conversion of $15.7 million of the old series
of our 7.00% convertible subordinated notes. Upon conversion of the new series of 7.00% convertible subordinated notes, on August 3, 2006, in accordance with the terms of the notes, we paid $159.1 million in cash and issued 4,379,339
Class A common shares.

Our future operating cash flow and borrowing availability under our credit agreement and our accounts receivable
securitization financing program are expected to meet currently anticipated funding requirements. The seasonal nature of the business results in peak working capital requirements that may be financed through short-term borrowings.

Contractual Obligations

The following table presents our long-term
debt and capital lease obligations and our interest payment obligations as reported in our Annual Report on Form 10-K for the year ended February 28, 2006 and as adjusted to reflect the debt transactions completed in the first quarter of 2007
as if they had been completed on February 28, 2006:



|                                  |  |                                               |         |      |   |        |  |      |        |      |   |            |  |       |        |  |   |         |  |   |        
|--------------------------------- |  | --------------------------------------------- | ------- | ---- | - | ------ |  | ---- | ------ | ---- | - | ---------- |  | ----- | ------ |  | - | ------- |  | - | -------
|                                  |  | Payment Due by Period as of February 28, 2006
|(In thousands)                    |  | 2007                                          |         | 2008 |   | 2009   |  | 2010 |        | 2011 |   | Thereafter |  | Total
|As reported:                      |  |                                               |         |      |   |        |  |      |        |      |   |            |  |       |        |  |   |         |  |   |        
|Long-term debt and capital leases |  | $                                             | 174,792 |      | $ | 671    |  | $    | 134    |      | $ | 118        |  | $     | 118    |  | $ | 299,475 |  | $ | 475,308
|Interest payments                 |  |                                               | 25,578  |      |   | 19,148 |  |      | 18,447 |      |   | 18,349     |  |       | 18,331 |  |   | 318,738 |  |   | 418,591
|                                  |  |                                               |         |      |   |        |  |      |        |      |   |            |  |       |        |  |   |         |  |   |        
|                                  |  | $                                             | 200,370 |      | $ | 19,819 |  | $    | 18,581 |      | $ | 18,467     |  | $     | 18,449 |  | $ | 618,213 |  | $ | 893,899
|                                  |  |                                               |         |      |   |        |  |      |        |      |   |            |  |       |        |  |   |         |  |   |        
|As adjusted:                      |  |                                               |         |      |   |        |  |      |        |      |   |            |  |       |        |  |   |         |  |   |        
|Long-term debt and capital leases |  | $                                             | 159,122 |      | $ | 671    |  | $    | 134    |      | $ | 118        |  | $     | 118    |  | $ | 223,135 |  | $ | 383,298
|Interest payments                 |  |                                               | 28,338  |      |   | 17,460 |  |      | 17,135 |      |   | 17,133     |  |       | 17,115 |  |   | 101,751 |  |   | 198,932
|                                  |  |                                               |         |      |   |        |  |      |        |      |   |            |  |       |        |  |   |         |  |   |        
|                                  |  | $                                             | 187,460 |      | $ | 18,131 |  | $    | 17,269 |      | $ | 17,251     |  | $     | 17,233 |  | $ | 324,886 |  | $ | 582,230
|                                  |  |                                               |         |      |   |        |  |      |        |      |   |            |  |       |        |  |   |         |  |   |        

Critical Accounting Policies

Please refer to the discussion of our Critical Accounting Policies as disclosed in our Annual Report on Form 10-K for the year ended February 28, 2006.



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Factors That May Affect Future Results

Certain statements in this report may constitute forward-looking statements within the meaning of the Federal securities laws. These statements can be identified by the fact that they do not relate strictly to
historic or current facts. They use such words as anticipate, estimate, expect, project, intend, plan, believe and other words and terms of similar meaning in
connection with any discussion of future operating or financial performance. These forward-looking statements are based on currently available information, but are subject to a variety of uncertainties, unknown risks and other factors concerning our
operations and business environment, which are difficult to predict and may be beyond our control. Important factors that could cause actual results to differ materially from those suggested by these forward-looking statements, and that could
adversely affect our future financial performance, include, but are not limited to, the following:



| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | -------------------------------------------------

Risks pertaining
specifically to AG Interactive include the viability of online advertising, subscriptions as revenue generators and the publics acceptance of online greetings and other social expression products and the ability of the mobile product group to
compete effectively in the wireless content aggregation market.

The risks and uncertainties identified above are not the only risks we face. Additional
risks and uncertainties not presently known to us or that we believe to be immaterial also may adversely affect us. Should any known or unknown risks or uncertainties develop into actual events, or underlying assumptions prove inaccurate, these
developments could have material adverse effects on our business, financial condition and results of operations. For further information concerning the risks we face and issues that could materially affect our financial



34



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performance related to forward-looking statements, refer to our periodic filings with the Securities and Exchange Commission, including the Risk
Factors section of our Annual Report on Form 10-K for the fiscal year ended February 28, 2006.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

During the six months ended August 25, 2006,
we entered into an interest rate derivative designed to offset the interest rate risk related to the forecasted issuance of $200 million of senior indebtedness. The interest rate derivative agreement expired during the quarter ended May 26,
2006. We did not designate this agreement as a hedging instrument pursuant to the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Accordingly, the change in the fair value of this agreement
was recognized currently and included in Interest expense in the Condensed Consolidated Statement of Operations. We have no derivative financial instruments outstanding as of August 25, 2006.

Also, during the six months ended August 25, 2006, we significantly modified our debt structure. See Liquidity and Capital Resources above for more
information.

For further information, refer to our Annual Report on Form 10-K for the year ended February 28, 2006. Except as described above, there
were no material changes in market risk, specifically interest rate and foreign currency exposure, for us from February 28, 2006, the end of our preceding fiscal year, to August 25, 2006, the end of our most recent fiscal quarter.

Item 4. Controls and Procedures

American Greetings maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in its reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Commissions rules and forms and
that such information is accumulated and communicated to the Corporations management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing
and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

American Greetings carries out a variety of on-going procedures, under the supervision and with the participation of the Corporations management, including its
Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of the Corporations disclosure controls and procedures. Based on the foregoing, the Chief Executive Officer and Chief Financial
Officer of American Greetings concluded that the Corporations disclosure controls and procedures were effective as of the end of the period covered by this report.

There has been no change in the Corporations internal control over financial reporting during the Corporations most recent fiscal quarter that has materially affected, or is reasonably likely to materially
affect, the Corporations internal control over financial reporting.



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PART II  OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in certain legal proceedings arising in the ordinary course of business. We,
however, do not believe that any of the litigation in which we are currently engaged, either individually or in the aggregate, will have a material adverse effect on our business, consolidated financial position or results of operations.

Item 1A. Risk Factors

There have been no material changes in the risk factors that were discussed in our Annual Report
on Form 10-K for the year ended February 28, 2006.

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 August 25, 2006.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------



|            |  |                                                    |  |                             |            |     |                                                                   |            |     |                                                                                              |   |           
|----------- |  | -------------------------------------------------- |  | --------------------------- | ---------- | --- | ----------------------------------------------------------------- | ---------- | --- | -------------------------------------------------------------------------------------------- | - | ----------
|Period      |  | Total Number of Shares Repurchased                 |  | Average Price Paidper Share |            |     | Total Number of SharesPurchased as Part ofPublicly AnnouncedPlans |            |     | Maximum Number ofShares (or ApproximateDollar Value) that MayYet Be PurchasedUnder the
Plans
|June 2006   |  | Class A     650,000 Class B          1,148 (1)   |  | $$                          | 23.7224.21 | (2) |                                                                   | 650,000   | (3) |                                                                                              | $ | 82,454,157
|July 2006   |  | Class A       95,000 Class B             500 (1) |  | $$                          | 21.8621.10 | (2) |                                                                   | 95,000    | (3) |                                                                                              | $ | 80,377,271
|August 2006 |  | Class A  1,381,300 Class B
                     |  | $                           | 22.84     | (2) |                                                                   | 1,381,300 | (3) |                                                                                              | $ | 48,826,642
|Total       |  | Class A  2,126,300 Class B 
        1,648 (1)    |  |                             |            |     |                                                                   | 2,126,300 | (3) |                                                                                              |   |           

---

|(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 February 1, 2006, American Greetings announced that its Board of Directors authorized a program to repurchase up to $200 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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Item 4. Submission of Matters to a Vote of Security Holders

Our Annual Meeting of Shareholders was
held on June 23, 2006, at which the following individuals were elected to Class II of our Board of Directors with a term expiring in 2009: Joseph S. Hardin, Jr., Jerry Sue Thornton and Jeffrey Weiss.

The following individuals were continuing Class III directors with a term expiring in 2007: Scott S. Cowen, Harriet Mouchly-Weiss, Charles A. Ratner and
Zev Weiss.

The following individuals were continuing Class I directors with a term expiring in 2008: Morry Weiss and Stephen R. Hardis.

The voting result at the Annual Meeting of Shareholders for the election of Class II directors was as follows:



|                      |  |            |  |               
|--------------------- |  | ---------- |  | --------------
|Nominee               |  | Votes For  |  | Votes Withheld
|Joseph S. Hardin, Jr. |  | 74,651,032 |  | 15,811,666    
|Jerry Sue Thornton    |  | 86,845,098 |  | 3,617,600     
|Jeffrey Weiss         |  | 87,715,906 |  | 2,746,792     

Item 6. Exhibits

Exhibits required by Item 601 of Regulation S-K



|              |  |                                                                                                                               
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                   
|              | 
|(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



37



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.



AMERICAN GREETINGS CORPORATIONBy:

/s/ Joseph B. CipolloneJoseph B. CipolloneVice President, Corporate Controller, and Chief Accounting Officer *


October 4, 2006



---

|* | (Signing on behalf of Registrant as a duly authorized officer of the Registrant and signing as the chief accounting officer of the Registrant.)
|- | -----------------------------------------------------------------------------------------------------------------------------------------------



38