UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

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

For the quarterly period ended November 30, 2004

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                         to                                        

Commission file number 1-13859

AMERICAN GREETINGS CORPORATION

(216) 252-7300

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 þ Noo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ Noo

As of January 3, 2005, the number of shares outstanding of each of the issuer’s classes of common stock was:

AMERICAN GREETINGS CORPORATION
INDEX

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)

See notes to condensed consolidated financial statements (unaudited).

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AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(Thousands of dollars)

See notes to condensed consolidated financial statements (unaudited).

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AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Thousands of dollars)

See notes to condensed consolidated financial statements (unaudited).

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AMERICAN GREETINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Three and Nine Months Ended November 30, 2004 and 2003

Note 1 – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements 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 period have been included.

These interim financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended February 29, 2004 of American Greetings Corporation (the “Corporation”), from which the Condensed Consolidated Statement of Financial Position at February 29, 2004, presented herein, has been derived. Certain amounts in the prior year financial statements have been reclassified to conform to the 2005 presentation.

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, 2004 refers to the year ended February 29, 2004. The Corporation’s subsidiary, AG Interactive (formerly AmericanGreetings.com), is consolidated on a two-month lag corresponding with its fiscal year-end of December 31.

During the quarter ended November 30, 2004, the Corporation incurred certain charges that do not have comparative charges in the prior year period. Net sales of the Social Expression Products segment were reduced approximately $13 million related to the implementation of a new merchandising strategy for seasonal space management. In addition, the quarter included pre-tax expenses of $16.6 million associated with an overhead reduction program that eliminated approximately 300 positions and $8.2 million related to a plant to be closed during the fourth quarter. Substantially all of the remaining plant closing costs of approximately $7 million will be recorded during the fourth quarter.

The current period expenses impacted the Condensed Consolidated Statement of Operations as follows:

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The $24.8 million of current period expenses impacted the Corporation’s business segments as follows:

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 January 2003, the Financial Accounting Standards Board (the “FASB”) issued Financial Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46 provides guidance for identifying a controlling interest in a Variable Interest Entity (“VIE”) established by means other than voting interests. FIN 46 also requires consolidation of a VIE by an enterprise that holds such a controlling interest. On December 17, 2003, the FASB completed deliberations of the proposed modifications to FIN 46 (“Revised Interpretation”); the decisions reached include:

Based on the FASB’s decisions, all public companies must apply the provisions of the Interpretation or the Revised Interpretation to variable interests in a special purpose entity (“SPE”) created before February 1, 2003 no later than periods ending after December 15, 2003. Companies are required to apply the revised provisions to variable interests in non-SPEs held in the entity no later than the end of the first interim or annual reporting period ending after March 15, 2004. The Statement had no material impact on the consolidated financial statements of the Corporation relative to SPEs or non-SPEs.

On May 19, 2004, the FASB issued FASB Staff Position 106-2 (“FSP 106-2”), “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” FSP 106-2, which requires measures of the Accumulated Postretirement Benefit Obligation (“APBO”) and net periodic postretirement benefit cost to reflect the effects of The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”), supersedes FSP 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug,

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Improvement and Modernization Act of 2003.” FSP 106-2 is effective for the first interim or annual period beginning after June 15, 2004. The Corporation adopted FSP 106-2 effective September 1, 2004. See Note 11 for further discussion.

In October 2004, the American Jobs Creation Act of 2004 was signed into law. The Corporation is in the process of evaluating the impact of the new law on the Corporation’s tax provision for the fiscal year ending February 28, 2005.

On November 24, 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 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. This statement is effective for fiscal years beginning after July 15, 2005. The Corporation does not believe that the adoption of SFAS 151 will have a significant impact on the Corporation’s consolidated financial statements.

On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS 123(R) requires that compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. This statement eliminates the alternative to use the intrinsic value method of accounting per Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” The Corporation is in the process of evaluating the impact adoption of this statement will have on the consolidated financial statements. This statement is effective for the first interim or annual period beginning after June 15, 2005. Refer to Note 12 for the Corporation’s current accounting for stock-based compensation.

Note 4 – Other (Income) – Net

During the three months ended November 30, 2004, “Other (income) – net” included $12.3 million of royalty revenue, $5.3 million of foreign exchange gain and $1.0 million of interest income. In the prior year third quarter, “Other (income) – net” included $8.4 million of royalty revenue and $2.0 million of foreign exchange gain.

During the nine months ended November 30, 2004, “Other (income) – net” included $24.2 million of royalty revenue, a $10.0 million one-time receipt related to licensing activities, $5.7 million of foreign exchange gain and $3.2 million of interest income. Income of $3.1 million on the sale of an equity investment was also recorded during the nine months ended November 30, 2004. The proceeds received from the sale of the investment totaled $19.1 million and are included in “Other - net” investing activities in the Condensed Consolidated Statement of Cash Flows for the period. In the prior year nine months, “Other (income) – net” included $14.7 million of royalty revenue and $1.6 million of interest income. The agency fee expenses related to the royalty revenue are included in “Selling, distribution and marketing” on the Condensed Consolidated Statement of Operations. The agency fee expenses totaled $9.7 million and $5.0 million in the nine months ended November 30, 2004 and 2003, respectively.

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Note 5 – Restructure Reserves

In Fiscal 2002, the Corporation undertook a restructure of the Corporation’s domestic and foreign manufacturing and distribution operations and recorded a charge of $56.7 million. All activities required to complete the restructure were substantially completed by February 28, 2002, with the exception of ongoing termination benefit payments, which will not be completed until 2007. The following table summarizes the remaining reserve associated with the 2002 restructure charge:

Included in “Accrued liabilities” at November 30, 2004 is $0.5 million, representing the portion of severance costs not yet disbursed.

Note 6 – Earnings Per Share

The following table sets forth the computation of earnings per share and earnings per share - assuming dilution:

Approximately 1.6 million and 3.2 million stock options outstanding in the three and nine month periods ended November 30, 2004, respectively, were excluded because the effect would have been antidilutive (4.0 million and 4.5 million stock options outstanding in the three and nine month periods ended November 30, 2003, respectively).

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Note 7 – Comprehensive Income

The Corporation’s total comprehensive income is as follows:

Note 8 – Inventories

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

In the normal course of its business, the Corporation enters into agreements with certain customers for the supply of greeting cards and related products. Under these agreements, the customer typically receives from the Corporation a combination of cash payments, credits, discounts, allowances and other incentive considerations to be earned by the customer as product is purchased from the Corporation over the effective time period of the agreement to meet a minimum purchase volume commitment. The Corporation periodically reviews the progress toward the commitment and adjusts the estimated amortization period accordingly to match the costs with the revenue associated with the agreement. In the event a contract is not completed, the Corporation has a claim for unearned advances under the agreement. The agreements

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may or may not specify the Corporation as the sole supplier of social expression products to the customer.

The Corporation classifies the total contractual amount of the incentive consideration committed to the customer but not yet earned as a deferred cost asset at the inception of an agreement, or any future amendments. Deferred costs estimated to be earned by the customer and charged to operations during the next twelve months are classified as “Prepaid expenses and other” in the Condensed Consolidated Statement of Financial Position, and the remaining amounts to be charged beyond the next twelve months are classified as “Other assets.”

A portion of the total consideration may be payable by the Corporation at the time the agreement is consummated. All future payment commitments are classified as liabilities at inception until paid. The payments that are expected to be made in the next twelve months are classified as “Other current liabilities” in the Condensed Consolidated Statement of Financial Position, and the remaining payment commitments beyond the next twelve months are classified as “Other liabilities.” The Corporation maintains adequate reserves for deferred costs related to supply agreements and does not expect that the non-completion of any particular contract would result in a material loss.

As of November 30, 2004, February 29, 2004 and November 30, 2003, deferred costs and future payment commitments are included in the following financial statement captions:

Note 10 – Debt

On May 11, 2004, the Corporation amended and restated its senior secured credit facility. This facility was originally entered into on August 9, 2001, as a $350 million facility and was amended on July 22, 2002 to a $320 million facility. With the repayment of the term loan on April 7, 2003, the facility had a borrowing capacity of $195 million. At that date, the Corporation recorded a charge of $4.6 million for the write-off of the related deferred financing costs and a premium payment associated with the repayment of the term loan. The amended and restated senior secured credit facility consists of a $200 million revolving facility maturing on May 10, 2008. There were no outstanding balances under this facility at November 30, 2004, February 29, 2004 or November 30, 2003.

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The amended facility is secured by the domestic assets of the Corporation and a 65% interest in the common stock of its foreign subsidiaries. The facility contains various restrictive covenants. Some of these restrictions require that the Corporation meet specified periodic financial ratios, minimum net worth, maximum leverage, and interest coverage. The credit facility places certain restrictions on the Corporation’s ability to incur additional indebtedness, to engage in acquisitions of other businesses, to repurchase its own capital stock and allows payments of shareholder dividends up to a maximum of $20 million per year. These covenants are less restrictive than the covenants previously in place.

The Corporation is also party to a three-year accounts receivable securitization financing agreement that provides for up to $200 million of financing and is secured by certain trade accounts receivable. 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. On August 2, 2004, the agreement was amended to extend the maturity date to August 1, 2007. There were no outstanding balances under this agreement at November 30, 2004, February 29, 2004 or November 30, 2003.

During the three months ended May 31, 2004, the Corporation commenced a cash tender offer for all of its outstanding 11.75% senior subordinated notes due July 15, 2008. As a result of this tender offer, a total of $186.2 million of these senior subordinated notes were repurchased and the Corporation recorded a charge of $39.1 million, included in “Interest expense” on the Condensed Consolidated Statement of Operations, for the payment of the premium and other fees associated with the notes repurchased as well as for the write-off of related deferred financing costs. At November 30, 2004, approximately $10 million of these notes remained outstanding. As part of this transaction, substantially all restrictive covenants were eliminated from the remaining outstanding notes.

At November 30, 2004, the Corporation was in compliance with its financial covenants.

At November 30, 2004, February 29, 2004 and November 30, 2003, debt due within one year consisted of the following:

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At November 30, 2004, February 29, 2004 and November 30, 2003, long-term debt consisted of the following:

The 7.00% convertible subordinated notes are convertible at the option of the holders into shares of the Corporation’s class A common stock at any time before the close of business on July 15, 2006, at a conversion rate of 71.9466 common shares per $1 thousand principal amount of notes.

Note 11 – Retirement Benefits

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

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The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law on December 8, 2003. The Act will provide plan sponsors a federal subsidy for certain qualifying prescription drug benefits covered under the sponsor’s postretirement health care plans. Under FSP 106-1 issued on January 12, 2004, the Corporation elected to defer accounting for the effects of the Act until further authoritative guidance was issued. On May 19, 2004, the FASB issued FSP 106-2. FSP 106-2, which requires measures of the APBO and net periodic postretirement benefit cost to reflect the effects of the Act, supersedes FSP 106-1. FSP 106-2 is effective for the first interim or annual period beginning after June 15, 2004.

The guidance in FSP 106-2 applies only to the sponsor of a single-employer defined benefit postretirement health plan for which the employer has concluded that prescription drug benefits under the plan are actuarially equivalent and thus qualify for the subsidy under the Act and the expected subsidy will offset or reduce the employer’s share of the costs of postretirement prescription drug coverage provided by the plan. The Corporation determined that the prescription drug benefits under its plan were actuarially equivalent and elected to adopt the provisions of FSP 106-2 at September 1, 2004. As a result, the Corporation’s APBO was reduced by approximately $6 million, the effects of which are being accounted for prospectively beginning September 1, 2004. The effect of the adoption of FSP 106-2 on the periodic postretirement benefit cost for the three and nine months ended November 30, 2004 was a reduction of $0.2 million. The total reduction of periodic postretirement benefit cost for the year ending February 28, 2005 is expected to be $0.4 million.

The Corporation has a non-contributory profit-sharing plan with a contributory 401(k) provision covering most of its United States employees. The profit-sharing plan expense for the nine months ended November 30, 2004 was $2.5 million, compared to $3.4 million in the prior year period. The profit-sharing plan expense for the nine 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 nine month periods ended November 30, 2004 were $1.2 million and $3.5 million ($1.3 million and $3.9 million for the three and nine month periods ended November 30, 2003), respectively.

Note 12 – Stock-Based Compensation

The Corporation has elected to continue to follow APB Opinion No. 25 and related Interpretations in accounting for its stock options granted to employees and directors. Because the exercise price of the Corporation’s stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Corporation has 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.” Refer to Note 3 for information regarding recent changes to the accounting guidance for stock-based compensation.

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The following illustrates the pro forma effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of SFAS 123:

During the first quarter of fiscal 2005, shares held in trust related to a deferred compensation plan were withdrawn from the trust. This transaction had no impact on the Corporation’s results of operations during the nine months ended November 30, 2004.

Note 13 – Business Segment Information

The Social Expression Products segment primarily designs, manufactures and sells greeting cards and other related products through various channels of distribution, with mass retailers as the primary channel, and is managed by geographic location.

The Corporation owns and operates 583 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 Social Expression Products segment and products purchased from other vendors.

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

Non-reportable operating segments include the design, manufacture and sale of display fixtures.

Segment results are reported and evaluated at consistent exchange rates between years to isolate 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 constant exchange rates used for segment reporting and evaluation and the actual exchange rates for the periods presented.

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Centrally-incurred and managed costs are not allocated to the operating segments. The unallocated items include interest expense on centrally-incurred debt and domestic profit-sharing 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.

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During the second quarter of 2005, the AG Interactive segment acquired 100% of the equity interests of MIDIRingTones, LLC and K-MOBILE S.A. The financial results of these two acquisitions are included in the Corporation’s consolidated results from their respective dates of acquisition. The pro forma results of operations have not been presented because the effects of these acquisitions were not deemed material.

MIDIRingTones is a mobile entertainment company that creates, licenses and sells mobile content for cellular phones including polyphonic ringtones and color graphics. AG Interactive acquired the net assets of MIDIRingTones valued at approximately $1 million and recorded goodwill of approximately $3 million. The purchase agreement also provides for an “Earn-Out Payment,” a contingent payment based on MIDIRingTones’ operating results for calendar year 2005. No liability for this contingent payment is included in the Corporation’s condensed consolidated financial statements. The Earn-Out Payment to be paid to the selling stockholders, which is estimated to be $0 to $10 million, will be treated as additional purchase price and recorded as goodwill.

K-MOBILE is an established European mobile content provider. AG Interactive issued shares to acquire the net assets of K-MOBILE valued at approximately $2 million and recorded goodwill of approximately $17 million. As the K-MOBILE acquisition was a non-cash transaction, it is not reflected in the Condensed Consolidated Statement of Cash Flows. As a result of AG Interactive’s acquisition of K-MOBILE, the Corporation’s ownership interest in AG Interactive decreased from 92% to 83%.

Note 14 – Discontinued Operations

On July 30, 2004, the Corporation announced it had signed a letter of agreement to sell its Magnivision nonprescription reading glasses business to AAiFosterGrant, a unit of sunglasses maker Foster Grant. The sale reflects the Corporation’s strategy to focus its resources on business units closely related to its core social expression business. The sale closed in the third quarter of fiscal 2005 although an additional amount may be recorded during the next six months based on closing balance sheet adjustments. This adjustment is not expected to exceed ten percent of the cash proceeds. During the third quarter, the Corporation received cash proceeds of $77.0 million and recorded a gain of $35.5 million for the sale of Magnivision.

Magnivision 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 Magnivision as a discontinued operation for all periods presented. Magnivision was previously included within the Corporation’s “non-reportable segments.”

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The following summarizes the results of discontinued operations for the periods presented:

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

Note 15 – Termination Benefits

During the quarter ended November 30, 2004, the Corporation recorded a severance accrual of $18.5 million related to the overhead reduction program and the Franklin, Tennessee plant closure. Virtually all of the associates receiving payments will separate from the Corporation during the quarter ending February 28, 2005. Approximately 70% of the severance will be paid during the next 15 months with the remaining payments extending out an additional 21 months.

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

Overview

During the three months ended November 30, 2004, the Corporation recognized net income of $62.8 million compared to $46.4 million in the prior year quarter. During the quarter, the Corporation incurred certain charges and recognized certain gains that do not have comparative charges and gains in the prior year period. First, net sales were reduced approximately $13 million to recognize the implementation of a new merchandising strategy for seasonal space management. In the past, the Corporation sold everyday card products on an outright basis to fill seasonal space during off-season periods. Going forward, the Corporation will improve the overall productivity of its display space and merchandising workforce by supplying a combination of various card and non-card programs, all sold with the right of return. The estimated returns will be recorded in conjunction with the sales recognition, consistent with the Corporation’s policy on seasonal sales with full return privileges. The current period net sales reduction represents the estimated expense for product currently in stores that may now be returned to the Corporation.

Second, the Corporation continued its ongoing efforts to reduce overhead costs and drive efficiencies with the elimination of approximately 300 positions throughout the business. As a result of this action, the Corporation recorded a charge of $16.6 million, primarily for severance costs.

Third, to leverage the fixed costs of seasonal gift wrap production, the Corporation is consolidating seasonal gift wrap production into one plant and eliminating approximately 250 full-time equivalent positions with the closure of the Corporation’s Franklin, Tennessee manufacturing facility. A charge of $8.2 million was recorded for severance pay, asset disposals and other costs associated with this action. The Corporation expects an additional $7 million in charges during the fourth quarter, primarily for the cost to move equipment.

The Condensed Consolidated Statement of Operations reflects the above items as follows:

Included in the above charges is $18.5 million of severance costs, of which approximately 70% will be paid during the next fifteen months with the remaining payments extending out an additional 21 months.

The prior year quarter included a charge in interest expense of $13.8 million for costs associated with the repurchase of $63.3 million of 11.75% senior subordinated notes.

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During the third quarter, the Corporation sold its Magnivision nonprescription reading glasses business and recorded a pre-tax gain of $35.5 million. This transaction reflects the Corporation’s strategy to focus on resources closely related to its core social expression business. Accordingly, the results of Magnivision are presented as a discontinued operation for all periods presented in the Corporation’s condensed consolidated financial statements. For further information on the discontinued operations, refer to the notes to the condensed consolidated financial statements No.14, Discontinued Operations.

Cash flow generation remained strong during the third quarter with operating and investing activities providing $58.6 million. During the nine months ended November 30, 2004, cash flow provided by operating and investing activities was $138.4 million compared to a usage of $59.1 million in the prior year nine month period.

Results of Operations

Three months ended November 30, 2004 and 2003

Net income was $62.8 million, or $0.78 per share, in the quarter compared to $46.4 million, or $0.60 per share, in the prior year third quarter (all per-share amounts assume dilution).

The Corporation’s results for the three months ended November 30, 2004 and 2003 are summarized below:

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For the three months ended November 30, 2004, consolidated net sales were $586.2 million, down from $603.8 million in the prior year third quarter. This 2.9% decrease was the result of a 4.6% decline in net sales from ongoing operations partially offset by foreign currency exchange fluctuations, which improved sales comparisons by 1.7%. The 4.6% decrease was due to the charge related to the implementation of a new merchandising strategy for seasonal space management, the continued downward trend in the retail business due to fewer stores and reduced comparative store sales and reduced sales in the seasonal gift wrap business due to lower Christmas reorder rates. These decreases were partially offset by growth in the AG Interactive business, formerly AmericanGreetings.com, due to the two acquisitions in the second quarter.

Unit and Pricing Analysis

Unit and pricing comparatives for the three months ended November 30, 2004 and 2003 are summarized below:

The significant decrease in everyday card unit volume in the current year quarter is primarily due to the reduction of net sales related to the implementation of a new merchandising strategy, which resulted in the return of everyday product to the Corporation as well as overlapping the initial load of a new major account in the prior year period. The variances in seasonal card unit volume and selling prices reflect the impact of general timing differences and varying customer delivery date requests. As noted in the Corporation’s second quarter Form 10-Q, the increase in unit volume and the decrease in selling prices reflect the reversal of the second quarter timing variances for seasonal product.

Expense Overview

Material, labor and other production costs for the three months ended November 30, 2004 were $292.7 million, an increase from $290.4 million for the same period in the prior year. As a percentage of net sales, these costs were 50.0% in the current period compared to 48.1% for the three months ended November 30, 2003. The 190 basis point increase from the prior year is due to an approximate 240 basis point increase in costs, primarily related to plant closing and severance costs as previously discussed as well as creative content costs. A favorable business mix partially offset these increased costs by approximately 50 basis points due primarily to lower sales in the gift wrap and fixtures businesses and higher sales in the AG Interactive business.

Selling, distribution and marketing costs for the three months ended November 30, 2004 were $173.7 million, increasing from the $167.4 million for the same period in the prior year. As a

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percentage of net sales, these costs increased from 27.7% for the three months ended November 30, 2003 to 29.6% for the three months ended November 30, 2004. Of the 190 basis point increase, approximately 230 basis points related to severance costs, increased costs due to the AG Interactive acquisitions and higher licensing fees (as a result of higher licensing revenue). These increases were partially offset by an approximately 40 basis point improvement due to reduced costs in the retail segment stores arising from fewer stores and reduced product merchandising costs.

Administrative and general expenses were $64.5 million for the three months ended November 30, 2004, an increase from $55.6 million for the same period in the prior year. The $8.9 million increase is due to $8.8 million of severance costs primarily related to the overhead reduction program that eliminated approximately 300 positions.

Interest expense decreased by $21.9 million to $8.7 million for the three months ended November 30, 2004 from $30.6 million for the same period in the prior year. This decrease is due to the interest savings from the repurchase of $186.2 million of the Corporation’s 11.75% senior subordinated notes during the quarter ended May 31, 2004 and the repurchase of $63.6 million of 11.75% senior subordinated notes during the quarter ended November 30, 2003. In addition, interest expense in the prior year quarter included $13.8 million for a premium payment and the write-off of deferred financing costs associated with the $63.6 million repurchase.

Other income – net increased to $19.3 million for the three months ended November 30, 2004, from $13.5 million in the same period in the prior year. The $5.8 million improvement included $3.9 million of incremental royalty revenue and a $3.3 million increase in foreign exchange gains.

The effective tax rates for the three months ended November 30, 2004 and 2003 were 38.7% and 38.5%, respectively. The prior year amount reflected a reduction in the effective tax rate, from 39.7% in the first six months, as a result of the utilization of net operating loss carryforwards and the settlement of the Corporation’s corporate-owned life insurance (COLI) obligations in the second half of fiscal 2004.

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Nine months ended November 30, 2004 and 2003

Net income was $73.9 million, or $0.97 per share, in the nine months ended November 30, 2004, compared to net income of $56.4 million, or $0.78 per share, in the prior year period.

The Corporation’s results for the nine months ended November 30, 2004 and 2003 are summarized below:

For the nine months ended November 30, 2004, consolidated net sales were $1,412 million, down from $1,436 million in the same period in the prior year. This 1.7% decrease was the result of a 3.7% decline in net sales from ongoing operations offset by foreign currency exchange fluctuations, which improved sales comparisons by 2.1%. The 3.7% decrease was due to the reduction in net sales related to the implementation of a new merchandising strategy for seasonal space management, the continued downward trend in the retail business due to fewer stores and reduced comparative store sales, reduced order sales in the seasonal gift wrap business due to lower Christmas order rates, the decline in the display fixtures business due to lower sales to unrelated customers and decreased sales of everyday cards primarily due to the overlap of the gains from a new major customer acquired in the prior year third quarter. Sales in the AG Interactive segment increased due to the two acquisitions in the second quarter.

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Unit and Pricing Analysis

Unit and pricing comparatives for the nine months ended November 30, 2004 and 2003 are summarized below: