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 description 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

As noted in our fiscal year 2009 Annual Report on Form 10-K, during the first quarter we took the next steps in our multi-year strategy of focusing on growing our core greeting card business and divesting of non-core businesses. To that end, in the first quarter of fiscal 2010, we acquired the Papyrus trademark and wholesale business division of Schurman Fine Papers ("Schurman") and divested our retail stores. The wholesale business division of Schurman supplies Papyrus brand greeting cards to specialty, mass, grocery and drug store channels. The acquisition of the Papyrus brand in combination with our recent acquisition of Recycled Paper Greetings ("RPG") allows us to focus our efforts on providing relevant and compelling products to consumers and enhances our mix of product offerings. We will be working to integrate the supply chain, manufacturing, distribution and administrative functions of these acquisitions into our existing structure during the next few quarters.

For the quarter, revenues were lower and operating income was flat compared to the prior year period. The lower revenues were primarily the result of unfavorable foreign currency translation. The revenue additions related to the RPG and Papyrus acquisitions were essentially offset by lower revenues in the Retail Operations segment as a result of the divestiture of this segment. Revenue improvement in the North American Social Expression Products segment was due to net sales growth in the card products line, slightly offset by lower revenue in non-card products, primarily gift packaging and party goods products.

Operating income in the current year first quarter included a preliminary loss on the disposition of our retail stores of approximately $28 million. Operating income in the prior year period included a $10 million unfavorable impact related to revenue reductions and additional costs associated with the rollout of a new product line in Canada. Net of the above two items, current year operating income improved significantly, driven by improvement in the North American Social Expression Products segment. This improvement was due to a favorable shift in product mix, to a higher mix of card versus non-card product, the realization of cost reduction actions taken in the prior year fourth quarter and an improved balance of card unit shipments compared to card unit net sales that reduced supply chain, scrap and distribution costs during the quarter compared to the prior year period.

In our International Social Expression Products segment, first quarter revenue and earnings were both down compared to the prior year quarter. These results are the consequence of the continued difficult economic environment, particularly in the United Kingdom ("U.K."), which is driving down everyday card sales and increasing bad debt expense. We expect that the general economic conditions in the U.K. will continue to put downward pressure on our international revenues and earnings the remainder of the fiscal year.

Results of Operations

Three months ended May 29, 2009 and May 30, 2008

Net income was $10.0 million, or $0.25 per share, in the first quarter compared to $13.3 million, or $0.27 per share, in the prior year first quarter (all per-share amounts assume dilution).

Our results for the three months ended May 29, 2009 and May 30, 2008 are summarized below:

                                                                % Total                        % Total
(Dollars in thousands)                            2009          Revenue          2008          Revenue
Net sales                                       $ 409,277          99.1 %      $ 425,463          99.3 %
Other revenue                                       3,645           0.9 %          2,837           0.7 %

Total revenue                                     412,922         100.0 %        428,300         100.0 %

Material, labor and other production costs        167,169          40.5 %        193,342          45.1 %
Selling, distribution and marketing expenses      132,217          32.0 %        150,875          35.2 %
Administrative and general expenses                63,151          15.3 %         62,561          14.6 %
Other operating expense (income) - net             27,773           6.7 %           (727 )        (0.1 )%


Operating income                                   22,612           5.5 %         22,249           5.2 %

Interest expense                                    6,987           1.7 %          4,905           1.1 %
Interest income                                      (276 )        (0.1 )%          (990 )        (0.2 )%
Other non-operating income - net                   (1,042 )        (0.2 )%          (901 )        (0.2 )%


Income before income tax expense                   16,943           4.1 %         19,235           4.5 %
Income tax expense                                  6,982           1.7 %          5,902           1.4 %


Net income                                      $   9,961           2.4 %      $  13,333           3.1 %

For the three months ended May 29, 2009, consolidated net sales decreased 3.8%, or approximately $16 million, from $425.5 million in the prior year first quarter to $409.3 million in the current three months. Unfavorable foreign currency translation reduced net sales in the current period by approximately $24 million. Net of this impact, net sales increased approximately $8 million. Net sales in our North American Social Expression Products segment increased approximately $34 million, but were partially offset by lower sales in our Retail Operations segment of approximately $27 million.

Net sales of our North American Social Expression Products segment increased approximately $34 million. This increase was primarily driven by RPG and Papyrus sales of approximately $29 million, both of which were acquired in the last six months. The remaining $5 million was the result of improved card sales partially offset by lower sales from our gift-packaging and party goods product lines.

Net sales of our Retail Operations segment decreased approximately $27 million during the first quarter. Net sales were only approximately $12 million for the three months ended May 29, 2009, compared to approximately $38 million in the prior year first quarter. This decrease is primarily the result of the sale of our retail stores in April 2009.

Other revenue, primarily royalty revenue from our Strawberry Shortcake and Care Bears properties, increased $0.8 million during the three months ended May 29, 2009. As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended February 28, 2009, we have entered into an agreement to sell our Strawberry Shortcake and Care Bears properties. See Part II, Item 1, "Legal Proceedings," for further information.

Wholesale Unit and Pricing Analysis for Greeting Cards

Unit and pricing comparatives (on a sales less returns basis) for the three
months ended May 29, 2009 and May 30, 2008 are summarized below:



                                                        Increase (Decrease) From the Prior Year
                                        Everyday Cards          Seasonal Cards           Total Greeting Cards
                                        2009        2008        2009        2008         2009             2008
Unit volume                               4.6 %     11.2 %        3.1 %      7.1 %          4.0 %            9.7 %
Selling prices                            2.2 %     (4.6 )%       1.7 %     (5.8 )%         2.0 %           (5.2 )%
Overall increase / (decrease)             6.9 %      6.0 %        4.9 %      0.9 %          6.1 %            4.0 %

During the first quarter, combined everyday and seasonal greeting card sales less returns improved 6.1% compared to the prior year quarter, including 4.0% unit growth and 2.0% selling price improvement. These increases were primarily driven by the RPG and Papyrus acquisitions. Net of the impact of these acquisitions, combined everyday and seasonal greeting card sales less returns were down 0.6%, with decreased unit volume of 2.3% partially offset by higher selling prices of 1.8%. Selling price improvement, for both everyday and seasonal cards, was a result of the growth in higher priced technology cards as well as an increase in general price levels throughout the card product lines. These improvements in selling prices more than offset the continued shift to a higher mix of the value line cards.

Everyday card sales less returns for the first quarter were up 6.9% with improvements in both unit volume and selling prices of 4.6% and 2.2%, respectively, compared to the prior quarter. Net of the impact of the Papyrus and RPG acquisitions, overall sales less returns were down 0.2%, with a 2.2% decline in unit volume more than offsetting an increase of 2.0% in selling prices. While unit volume in our North American Social Expression Products segment remained essentially flat during the quarter, the overall decline in unit volume was driven by our International Social Expression Products segment, which continues to experience difficult economic conditions.

Seasonal card sales less returns for the three months ended May 29, 2009 were up 4.9% with improvements in both unit volume and selling prices of 3.1% and 1.7%, respectively. Net of the impact of the acquisitions, overall seasonal card sales less returns declined 1.1%, with a 2.4% decline in seasonal card unit volume that more than offset an increase in selling prices of 1.4%. The decrease in unit volume was driven primarily by the Mother's Day program.

Expense Overview

During the current quarter, we experienced decreased costs as a result of a favorable shift in product mix, the realization of cost reduction actions taken in the fourth quarter of 2009 as well as favorable foreign currency translation impacts.

Material, labor and other production costs for the three months ended May 29, 2009 were $167.2 million, approximately $26 million less than the prior year three months. As a percentage of total revenue, these costs were 40.5% in the current period compared to 45.1% for the three months ended May 30, 2008. The $26 million decrease was due to favorable spending and product mix of approximately $12 million and $5 million, respectively, and foreign currency translation impacts of approximately $11 million. The lower spending is a result of reduced scrap as well as lower costs related to the rollout of the new Canadian line of cards, which unfavorably impacted prior year results. The favorable product mix is primarily due to a shift to higher margin card products versus non-card products. These decreases were partially offset by unfavorable volume variances of approximately $2 million due to the increased sales volume.

Selling, distribution and marketing ("SDM") expenses for the three months ended May 29, 2009 were $132.2 million, decreasing from $150.9 million for the comparable period in the prior year. The decrease is due to lower spending of approximately $9 million and favorable foreign currency translation of approximately $10 million. Due to the sale of our retail stores in the current quarter, SDM expenses in our Retail Operations segment decreased

approximately $14 million compared to the prior three months. This decrease was partially offset by higher costs in our North American Social Expression Products segment as SDM expenses associated with our recent acquisitions more than offset the reduced distribution costs attributable to the improved balance of card unit shipments compared to card unit net sales in our legacy card business and the realization of cost reduction activities in the last quarter of 2009.

Administrative and general expenses were $63.2 million for the three months ended May 29, 2009, an increase of $0.6 million compared to the prior year period. Increased spending of approximately $3 million was only partially offset by favorable foreign currency translation impacts of approximately $2 million. The increased spending is primarily related to increased domestic profit-sharing plan expense and higher bad debt expense, primarily in the U.K. where we continue to experience a difficult economic environment.

Other operating expense (income) - net was expense of $27.8 million for the three months ended May 29, 2009 compared to income of $0.7 million in the prior period. The current quarter includes a preliminary loss of approximately $28 million on the sale of our retail stores to Schurman.

Interest expense for the three months ended May 29, 2009 was $7.0 million, up from $4.9 million for the prior year quarter. The increase of $2.1 million is primarily attributable to increased borrowings as a result of the draw down of the $100 million term loan facility and the issuance of additional 7.375% notes during the fourth quarter of 2009.

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 Statement of Financial Accounting Standards 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. AG Interactive distributes social expression products, including electronic greetings, personalized printable greeting cards and a broad range of graphics and digital services and products, through a variety of electronic channels, including Web sites, Internet portals, instant messaging services and electronic mobile devices. AG Interactive also offers online photo sharing space and a platform to provide consumers the ability to use their own photos to create unique, high quality physical products, including greeting cards, calendars, photo albums and photo books.

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

North American Social Expression Products Segment



                                        Three Months Ended
         (Dollars in thousands)    May 29, 2009     May 30, 2008    % Change
         Total revenue            $      318,780   $      284,871       11.9 %
         Segment earnings                 74,366           42,006       77.0 %

Total revenue of our North American Social Expression Products segment for the quarter ended May 29, 2009, excluding the impact of foreign exchange and intersegment items, increased $33.9 million, or 11.9%, from the prior year period. The increase was primarily driven by the acquisitions of RPG and Papyrus, which together contributed approximately $29 million in revenues during the first quarter. The remaining $5 million was the result of improved card net sales partially offset by lower sales from our gift-packaging and party goods product lines.

Segment earnings, excluding the impact of foreign exchange and intersegment items, increased $32.4 million in the current three months compared to the three months ended May 30, 2008. The increase was driven by the improved

product mix due to a shift to higher margin card products versus non-card products, the realization of the cost reduction initiatives put in place near the end of last year and an improved balance of card unit shipments compared to card unit net sales that reduced supply chain, scrap and distribution costs during the quarter compared to the prior year period. In addition, the prior year period included an unfavorable impact of approximately $10 million related to revenue reductions and additional costs associated with the rollout of the new Canadian card line.

International Social Expression Products Segment



                                        Three Months Ended
         (Dollars in thousands)    May 29, 2009     May 30, 2008    % Change
         Total revenue            $       47,006   $       47,914       (1.9 )%
         Segment earnings                    333            1,773      (81.2 )%

Total revenue of our International Social Expression Products segment, excluding the impact of foreign exchange, decreased $0.9 million, or 1.9% for the three months ended May 29, 2009, compared to the respective period in the prior year. The decrease in revenue for the current year three months was primarily due to the bankruptcy of a major customer in the second half of 2009 as well as the continued difficult economic environment in the U.K., which is driving down everyday card sales.

Segment earnings, excluding the impact of foreign exchange, decreased $1.4 million in the three months ended May 29, 2009 compared to the prior year three months. The earnings decrease is principally driven by the lower revenues described above as well as increased bad debt expense particularly in the U.K. as a result of the current economic conditions.

Retail Operations Segment



                                        Three Months Ended
       (Dollars in thousands)    May 29, 2009        May 30, 2008       % Change
       Total revenue            $       11,727      $       38,477         (69.5 )%
       Segment loss                    (34,830 )            (3,351 )          -

In April 2009, we sold our retail stores to Schurman. As a result, the three months ended May 29, 2009 included operating results for the portion of the quarter that we owned the stores as well as the loss on disposition of the stores.

Total revenue, excluding the impact of foreign exchange, in our Retail Operations segment decreased $26.8 million for the three months ended May 29, 2009, compared to the prior year period due primarily to the sale of our retail stores to Schurman discussed above.

Segment earnings, excluding the impact of foreign exchange, was a loss of $34.8 million in the three months ended May 29, 2009, compared to a loss of $3.4 million during the three months ended May 30, 2008. The segment loss for the current quarter included a $28 million preliminary loss on the sale of our retail stores. The current three months also included approximately $2 million of severance expense as a result of the sale.

AG Interactive Segment



                                       Three Months Ended
       (Dollars in thousands)     May 29, 2009     May 30, 2008       % Change
       Total revenue             $       18,634   $       19,899          (6.4 )%
       Segment earnings (loss)            1,652           (1,335 )       223.8 %

Total revenue of AG Interactive for the three months ended May 29, 2009, excluding the impact of foreign exchange, was $18.6 million compared to $19.9 million in the prior year first quarter. This $1.3 million decrease in revenue is primarily the result of lower advertising revenue in our online product group as a result of the current market conditions. At the end of the first quarter of 2010, AG Interactive had approximately 4.0 million paid subscriptions versus 3.9 million at the prior year quarter end.

Segment earnings, excluding the impact of foreign exchange, increased from a loss of $1.3 million during the quarter ended May 30, 2008 to income of $1.7 million for the quarter ended May 29, 2009. The increase of $3.0 million is primarily attributable to less amortization expense during the first quarter as a result of the intangible asset impairments, which were recorded in the second half of 2009. The remaining increase is related to the cost reduction efforts taken during the prior year.

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 Consolidated Statement of Financial Position as of May 30, 2008 has been included.

Operating Activities

Operating activities provided $8.7 million of cash during the three months ended May 29, 2009, compared to a use of cash of $11.9 million in the prior year period.

Accounts receivable used $43.8 million of cash during the three months ended May 29, 2009, compared to providing $5.2 million of cash during the prior year period. The year-over-year change was attributable to reduced scan-based trading implementation activity of approximately $17 million, the increased accounts receivable associated with acquired companies of approximately $10 million and differences in the timing of cash collections and incentive credits issued to customers.

Inventory provided $12.4 million of cash during the three months ended May 29, 2009, compared to providing $6.5 million of cash during the prior year first quarter. The increased cash flow is primarily due to improved management of everyday cards in the North American Social Expression Products segment during the current year first quarter compared to the prior year period.

Other current assets provided $11.9 million of cash from February 28, 2009, compared to $1.3 million in the prior year three months. The increase is due to an income tax refund received during the current year first quarter.

Deferred costs - net generally represents payments under agreements with retailers net of the related amortization of those payments. During the three months ended May 29, 2009, payments exceeded amortization by $2.8 million; in the three months ended May 30, 2008, amortization exceeded payments by $1.3 million.

Accounts payable and other liabilities used $43.5 million of cash during the three months ended May 29, 2009, compared to $57.6 million in the prior year period. The change was attributable primarily to lower variable compensation payments during the current quarter compared to the prior year first quarter due to our unfavorable financial results in fiscal 2009 compared to fiscal 2008.

Investing Activities

Investing activities used $25.1 million of cash during the three months ended May 29, 2009, compared to $25.4 million in the prior year period. The use of cash in the current period is related to cash payments for business acquisitions as well as capital expenditures of $8.9 million. During fiscal 2010, we acquired the Papyrus brand and its related wholesale business division from Schurman. At the same time, we sold our retail stores to Schurman and acquired an equity interest in Schurman. Cash paid, net of cash acquired, was $14.0 million. Also, in fiscal 2010, we paid $2.3 million of acquisition costs related to RPG, which we acquired in the fourth quarter of 2009.

The use of cash in the prior quarter is related to cash payments for business acquisitions as well as capital expenditures of $10.1 million. During the first quarter of fiscal 2009, we purchased a card publisher and franchised distributor of greeting cards in the U.K. for $15.6 million.

Financing Activities

Financing activities provided $35.4 million of cash during the three months ended May 29, 2009, compared to $22.5 million during the three months ended May 30, 2008. The sources of cash in both periods relate primarily to long- and short-term debt borrowings of $46.1 million in the current year quarter compared to $28.0 million in the prior year three months. The borrowings in both periods were under our credit facility and accounts receivable securitization program. Partially offsetting the source of cash from the current year borrowings are the share repurchases and cash paid for dividends. During the three months ended May 29, 2009, $5.9 million was paid to repurchase approximately 1.5 million shares under our repurchase program and $4.9 million was paid for our dividend that was previously declared in February 2009. During the three months ended May 30, 2008, we paid cash dividends of $5.9 million. Also, in the quarter ended May 30, 2008, our receipt of the exercise price on stock options provided $0.4 million of cash.

Credit Sources

Substantial credit sources are available to us. In total, we had available sources of approximately $540 million at May 29, 2009. This included our $450 million senior secured credit facility and our $90 million accounts receivable securitization facility. Borrowings under the accounts receivable securitization facility are limited based on our eligible receivables outstanding. We had $100.0 million outstanding under the term loan facility, $81.4 million outstanding under the revolving credit facility and $26.3 million outstanding under the accounts receivable securitization facility at May 29, 2009. In addition to these borrowings, we have, in the aggregate, $48.5 million outstanding under letters of credit, which reduces the total credit availability thereunder.

Please refer to the discussion of our borrowing arrangements as disclosed in the "Credit Sources" section of our Annual Report on Form 10-K for the year ended February 28, 2009 for further information.

Throughout fiscal 2010, we will continue to consider all options for capital deployment including growth options, capital expenditures, the opportunity to repurchase our own shares, or by reducing debt. To this end, in January 2009, we announced that our Board of Directors authorized the repurchase of up to $75 million of Class A common shares, that may be made through open market purchases or privately negotiated transactions as market conditions warrant, at prices the Corporation deems appropriate, and subject to applicable legal requirements and other factors. There is no set expiration date for this program. We also may from time to time seek to retire or purchase our debt outstanding through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions or otherwise, including strategically repurchasing our 7.375% senior unsecured notes due in 2016 at a discount to par. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity . . .