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

Acquisition

Our operating results for the three and six months ended August 24, 2012 were significantly affected by certain activities and transactions related to Clinton Cards PLC ("Clinton Cards"). Clinton Cards, one of the largest specialty retailers of greeting cards in the United Kingdom (also referred to herein as "UK"), had been an important customer to our international business for approximately forty years and was one of our largest customers. The Clinton Cards business had been struggling and in an effort to protect our interests and work more closely with all involved parties, on May 9, 2012, we acquired all of Clinton Cards' outstanding senior secured debt for $56.6 million. Clinton Cards was subsequently placed into administration, a procedure similar to Chapter 11 bankruptcy in the United States. As part of the administration process, an auction of the assets of the Clinton Cards business was conducted. We participated in the auction process and bid $37.2 million for certain of the assets. The bid took the form of a "credit bid," where we used a portion of the outstanding senior secured debt owed to us by Clinton Cards to pay the purchase price for the assets.

Our bid was accepted on June 6, 2012, and we acquired approximately 400 stores, together with the related inventory and overhead, as well as the Clinton Cards and related brands. We anticipate operating the acquired stores under the "Clintons" brand. The final number of stores acquired will depend on negotiations with landlords at each respective location, who must generally consent to the assignment of the leases for such stores on terms that are acceptable to us. If we cannot negotiate acceptable lease assignments or if the applicable landlord withholds consent to the assignment of its store lease, then we may close the store and the store lease will be placed back into the administration process. Based on current negotiations, assuming that the remaining landlords consent to terms proposed by us, as of August 24, 2012, we anticipate the estimated future minimum rental payments for noncancelable operating leases related to acquired stores will be approximately $360 million. It is anticipated that the remaining assets not purchased by us will be liquidated and proceeds will be used to repay the creditors of Clinton Cards, including us as both the only senior secured lender and the largest unsecured lender. We will seek to recover our $19.4 million remaining senior secured debt claim through the liquidation process. However, based on the estimated recovery information provided by the administrators, we recorded an aggregate charge of $10.0 million in the first half of fiscal 2013, including $2.2 million in the second quarter, relating to the senior secured debt we acquired in the first quarter. Both the liquidation process and the negotiations with landlords are expected to take approximately six to twelve months from the closing of the transaction, June 6, 2012.

Separate from the acquired senior secured debt, prior to the acquisition, we had unsecured accounts receivable exposure to Clinton Cards. Based on the expected recovery shortfall on the senior secured debt noted above, a majority of the unsecured accounts receivable is not expected to be collected. Accordingly, we recorded bad debt expense of $17.2 million relating to the unsecured accounts receivable in the first quarter. In addition, with the May 2012 announcement by the administrators that all of Clinton Cards' Birthdays branded retail stores would be liquidated during the first quarter of fiscal 2013, we recorded an impairment charge of approximately $4.0 million for the deferred costs related to our supply agreement associated with the Birthdays stores. We have also incurred approximately $6.0 million of transaction costs related to the Clinton Cards acquisition, of which approximately $4.0 million was incurred during the second quarter.

The table below summarizes the charges described above and their impact on our Consolidated Statement of Operations during the quarter ended August 24, 2012:

                                           Contract                           Legal and         Impairment
                                            asset            Bad debt         advisory           of debt
(In millions)                             impairment         expense            fees            purchased         Total
Net sales                                $         -        $       -        $        -        $         -        $   -
Administrative and general expenses                -                -                4.0                 -           4.0
Other non-operating (income) expense               -                -                 -                 2.2          2.2

                                         $         -        $       -        $       4.0       $        2.2       $  6.2

The table below summarizes the charges described above and their impact on our Consolidated Statement of Operations during the six months ended August 24, 2012:

                                          Contract                         Legal and       Impairment
                                           asset           Bad debt        advisory          of debt
(In millions)                            impairment        expense           fees           purchased       Total
Net sales                               $        4.0      $       -       $        -       $        -       $  4.0
Administrative and general expenses               -             17.2              6.0               -         23.2
Other non-operating (income) expense              -               -                -              10.0        10.0

                                        $        4.0      $     17.2      $       6.0      $      10.0      $ 37.2

In addition to the charges summarized in the tables above, our results were also affected by the operating results of our new Retail Operations segment and the intersegment sales eliminations between the International Social Expression Products segment and the Retail Operations segment. Since the Retail Operations segment is consolidated on a one-month lag corresponding with its fiscal year-end of February 2 for 2013, the operating results of this segment include only two months of activity in the current quarter. The impact of the acquisition of the retail stores on consolidated revenue was a net increase of approximately $26 million. The net increase was comprised of approximately $40 million of net sales from the new Retail Operations segment, reduced by approximately $14 million for the elimination of intersegment sales from the International Social Expression Products segment to the Retail Operations segment. For comparison purposes, the sales being eliminated in the current period would have been third-party sales in the prior year.

For the second quarter, in addition to the $6.2 million of charges discussed above, the Clinton Cards acquisition adversely impacted pre-tax income by an additional $12.5 million, including the operating loss in the Retail Operations segment of $5.1 million and the impact of eliminating intersegment profit associated with the elimination of sales from the International Social Expression Products segment to the Retail Operations segment of $7.4 million. Therefore, the Clinton Cards acquisition adversely impacted our second quarter pre-tax income by approximately $18.7 million. For the six-month period, the Clinton Cards acquisition adversely impacted our pre-tax income by approximately $49.7 million, including the $37.2 million in the table above and the $12.5 million of operating loss resulting from the Retail Operations segment and intersegment profit on sales elimination.

Second Quarter Results

Total revenue in the second quarter increased approximately $24 million, or 6.4% compared to the prior year period. As discussed above, the net impact of the Clinton Cards acquisition added approximately $26 million in total revenue. In addition, greeting card sales through our wholesale divisions improved approximately $8 million compared to the prior year second quarter. Partially offsetting these increases were the unfavorable effects of scan-based trading ("SBT") implementations, unfavorable foreign currency translation, and lower sales of gift packaging products and fixtures.

The second quarter operating loss was $2.0 million compared to operating income of $29.7 million in the prior year, a decrease of $31.7 million. Beyond the impact of the Clinton Cards acquisition, which negatively impacted operating income by $16.5 million, the current quarter operating income performance was impacted by additional marketing expenses incurred to support our product leadership initiative, increased expenses related to our systems refresh project, the unfavorable impact of SBT implementations and lower earnings within our fixtures and our licensing businesses. In addition, the prior year quarter included a gain of approximately $5 million from the sale of certain minor character properties.

Below operating income, pre-tax income during the quarter also includes a gain of $3.2 million associated with the sale of a portion of our small investment in the common stock of Party City Holdings Inc. ("Party City"). This gain was partially offset by a $2.2 million impairment charge related to the senior secured debt of Clinton Cards that was acquired during the first quarter.

Results of Operations

Three months ended August 24, 2012 and August 26, 2011

Net loss was $4.3 million, or $0.13 per share, in the second quarter compared to net income of $14.5 million, or $0.35 per share, in the prior year second quarter (all per-share amounts assume dilution).

Our results for the three months ended August 24, 2012 and August 26, 2011 are summarized below:

                                                               % Total                         % Total
(Dollars in thousands)                           2012          Revenue           2011          Revenue
Net sales                                      $ 386,518           98.1 %      $ 361,141           97.6 %
Other revenue                                      7,318            1.9 %          9,053            2.4 %

Total revenue                                    393,836          100.0 %        370,194          100.0 %
Material, labor and other production costs       176,732           44.9 %        158,198           42.7 %
Selling, distribution and marketing
expenses                                         148,995           37.8 %        126,489           34.2 %
Administrative and general expenses               70,870           18.0 %         60,926           16.5 %
Other operating income - net                        (778 )         (0.2 %)        (5,122 )         (1.4 %)

Operating (loss) income                           (1,983 )         (0.5 %)        29,703            8.0 %
Interest expense                                   4,434            1.1 %          5,763            1.6 %
Interest income                                      (94 )         (0.0 %)          (310 )         (0.1 %)
Other non-operating income - net                    (252 )         (0.1 %)          (703 )         (0.2 %)

(Loss) income before income tax (benefit)
expense                                           (6,071 )         (1.5 %)        24,953            6.7 %
Income tax (benefit) expense                      (1,817 )         (0.5 %)        10,477            2.8 %

Net (loss) income                              $  (4,254 )         (1.0 %)     $  14,476            3.9 %

For the three months ended August 24, 2012, consolidated net sales were $386.5 million, an increase of $25.4 million, or 7.0%, from $361.1 million in the prior year second quarter. The increase was primarily related to the purchase of retail stores from Clinton Cards, which caused a net increase in net sales of approximately $26 million during the current quarter compared to the prior year period. The net increase was comprised of approximately $40 million of net sales from the new Retail Operations segment, reduced by approximately $14 million of intersegment sales eliminated from the International Social Expression Products segment to the Retail Operations segment. For comparison purposes, the sales being eliminated in the current period would have been third-party sales in the same period in the prior year. In addition, greeting card sales through our wholesale divisions improved approximately $8 million. These increases were partially offset by the unfavorable impact of SBT implementations and foreign currency translation of approximately $4 million each. Also, sales in our fixtures business and sales of gift packaging products each decreased by approximately $1 million compared to the prior year second quarter.

Other revenue, primarily royalty revenue from our Strawberry Shortcake and Care Bears properties, decreased $1.7 million during the three months ended August 24, 2012.

Wholesale Unit and Pricing Analysis for Greeting Cards

Unit and pricing comparatives (on a sales less returns basis) for the three
months ended August 24, 2012 and August 26, 2011 are summarized below:



                                                          Increase (Decrease) From the Prior Year
                                        Everyday Cards              Seasonal Cards              Total Greeting Cards
                                      2012          2011          2012          2011            2012              2011
Unit volume                              0.6 %       10.1 %        17.6 %         24.6 %            3.5 %          12.7 %
Selling prices                           0.9 %       (3.0 %)       (9.4 %)       (10.4 %)          (1.0 %)         (4.5 %)
Overall increase / (decrease)            1.5 %        6.8 %         6.5 %         11.6 %            2.4 %           7.7 %

During the second quarter, combined everyday and seasonal greeting card sales less returns increased 2.4% compared to the prior year quarter, including an increase in unit volume of 3.5% which was partially offset by a decrease in selling prices of 1.0%. The overall increase was driven by unit growth from both our everyday and seasonal greeting cards in our International Social Expression Products segment and unit improvement from seasonal greeting cards in our North American Social Expression Products segment.

Everyday card sales less returns for the second quarter increased 1.5% with improvements in unit volume and selling prices of 0.6% and 0.9%, respectively. The unit volume improved as a result of additional distribution to existing customers within our International Social Expression Products segment. The selling price improvement was driven by our North American Social Expression Products segment.

Seasonal card sales less returns improved 6.5% during the second quarter, including 17.6% unit growth partially offset by a 9.4% decline in selling prices. Since the second quarter has the fewest holidays, the change in unit volume during the quarter appears large on a percentage basis. The increase in unit volume during the current year quarter was primarily driven by our Father's Day and Graduation programs in our North American Social Expression Products segment and our Father's Day program in our International Social Expression Products segment. The decrease in selling prices was driven by the continued shift in mix to a higher proportion of value cards in the period.

Expense Overview

Material, labor and other production costs ("MLOPC") for the three months ended August 24, 2012 were $176.7 million, compared to $158.2 million in the prior year three months, an increase of $18.5 million. About half of the increase is directly related to the new retail operations we purchased from Clinton Cards, causing a net increase in MLOPC of approximately $9 million during the current quarter compared to the prior year second quarter. This net increase was comprised of approximately $15 million for cost of goods sold through the new Retail Operations segment, reduced by approximately $6 million for the cost of goods related to the elimination of intersegment sales from the International Social Expression Products segment to the Retail Operations segment. The remaining increase was primarily the result of a combination of higher product costs and a change in sales mix, shifting toward a higher proportion of value cards while maintaining relative sales levels. Also contributing to the higher expense was approximately $1 million related to higher product display materials.

Selling, distribution and marketing ("SDM") expenses for the three months ended August 24, 2012 were $149.0 million, increasing approximately $23 million from the prior year second quarter. The increase was driven by approximately $25 million of expenses within our new Retail Operations segment. In addition, marketing expenses primarily related to Cardstore.com increased approximately $4 million. Partially offsetting these increases were lower supply chain costs of approximately $4 million, specifically field service, merchandiser and distribution costs, primarily related to prior year store setup activities for the value channel, which did not recur in the current period. In addition, product management expenses decreased approximately $2 million during the current year three months.

Administrative and general expenses were $70.9 million for the three months ended August 24, 2012, an increase of approximately $10 million from $60.9 million for the three months ended August 26, 2011. Approximately $4 million of the increase was due to expenses within our new Retail Operations segment. Transaction costs related to the retail store acquisition of Clinton Cards of approximately $4 million were also incurred during the current year. In addition, costs incurred in connection with our information technology systems refresh project increased by approximately $3 million. The favorable impact from reduced bad debt expense within our North American Social Expression Products segment was offset by increased legal related expenses.

Other operating income - net was $0.8 million for the three months ended August 24, 2012 compared to $5.1 million for the prior year second quarter. The prior year included a gain of $4.5 million on the sale of certain minor characters in our intellectual property portfolio.

Other non-operating income - net was $0.3 million for the current year three months ended August 24, 2012 compared to $0.7 million for the three months ended August 26, 2011. The current year three months ended August 24, 2012 included a $3.2 million gain associated with the sale of a portion of our investment in Party City. This gain was partially offset by a $2.2 million impairment charge related to the senior secured debt of Clinton Cards that was acquired during the first quarter.

The Corporation's effective tax rate was 29.9% and 42.0% for the three months ended August 24, 2012 and August 26, 2011, respectively. The higher than statutory tax rate in the prior period was due to an increase in estimated accruals and settlements associated with anticipated settlements related to open years that were currently under examination by the Internal Revenue Service.

Results of Operations

Six months ended August 24, 2012 and August 26, 2011

Net income was $3.0 million, or $0.08 per share, in the six months ended August 24, 2012 compared to $47.1 million, or $1.12 per share, in the prior year six months.

Our results for the six months ended August 24, 2012 and August 26, 2011 are summarized below:

                                                                % Total                         % Total
(Dollars in thousands)                            2012          Revenue           2011          Revenue
Net sales                                       $ 775,771           98.6 %      $ 759,265           98.1 %
Other revenue                                      11,171            1.4 %         14,625            1.9 %

Total revenue                                     786,942          100.0 %        773,890          100.0 %
Material, labor and other production costs        340,596           43.3 %        316,127           40.8 %
Selling, distribution and marketing expenses      276,158           35.1 %        251,129           32.5 %
Administrative and general expenses               151,038           19.2 %        126,224           16.3 %
Other operating expense (income) - net                796            0.1 %         (6,045 )         (0.8 %)

Operating income                                   18,354            2.3 %         86,455           11.2 %
Interest expense                                    8,810            1.1 %         11,887            1.5 %
Interest income                                      (232 )         (0.0 %)          (631 )         (0.1 %)
Other non-operating expense (income) - net          5,427            0.7 %           (544 )         (0.0 %)

Income before income tax expense                    4,349            0.5 %         75,743            9.8 %
Income tax expense                                  1,353            0.1 %         28,674            3.7 %

Net income                                      $   2,996            0.4 %      $  47,069            6.1 %

For the six months ended August 24, 2012, consolidated net sales were $775.8 million, up from $759.3 million in the prior year six months. This 2.2%, or $16.5 million, increase was primarily related to the purchase of retail stores from Clinton Cards which caused a net increase in net sales of approximately $26 million during the current six

months compared to the prior year period. The net increase was comprised of approximately $40 million of net sales from the new Retail Operations segment, reduced by approximately $14 million for the elimination of intersegment sales from the International Social Expression Products segment to the Retail Operations segment. For comparison purposes, the sales being eliminated in the current period would have been third-party sales in the prior year. In addition, greeting card sales through our wholesale divisions improved approximately $12 million. Partially offsetting these increases were lower net sales in our fixtures business of approximately $5 million and a $4 million impairment of deferred costs related to the supply agreement associated with Clinton Cards' Birthdays stores. Foreign currency translation and SBT implementations unfavorably impacted net sales by approximately $6 million and $3 million, respectively. The current year also included reduced gift packaging and other ancillary product sales of approximately $4 million.

Other revenue, primarily royalty revenue from our Strawberry Shortcake and Care Bears properties, decreased $3.5 million in the six months ended August 24, 2012 compared to the same period in the prior year.

Wholesale Unit and Pricing Analysis for Greeting Cards

Unit and pricing comparatives (on a sales less returns basis) for the six months
ended August 24, 2012 and August 26, 2011 are summarized below:



                                                           Increase (Decrease) From the Prior Year
                                         Everyday Cards              Seasonal Cards             Total Greeting Cards
                                       2012          2011          2012          2011           2012              2011
Unit volume                              1.5 %         6.4 %         6.5 %         5.2 %            2.8 %           6.1 %
Selling prices                          (1.0 %)       (1.9 %)       (0.6 %)       (1.3 %)          (0.8 %)         (1.7 %)
Overall increase / (decrease)            0.4 %         4.4 %         5.9 %         3.8 %            2.0 %           4.2 %

During the six months ended August 24, 2012, combined everyday and seasonal greeting card sales less returns increased 2.0% compared to the prior year six months, driven by an increase in unit volume from both our everyday and seasonal cards of 2.8%.

Everyday card sales less returns were up 0.4% compared to the prior year six months, as a result of improved unit volume of 1.5% partially offset by a decline in selling prices of 1.0%. The unit volume improved as a result of additional distribution to existing customers. The selling price decline is a result of the continued shift in mix to a higher proportion of our value line cards.

Seasonal card sales less returns increased 5.9%, with unit volume improving 6.5% and selling prices declining 0.6%. The increase in unit volume compared to the prior year six months was primarily driven by our Mother's Day, Father's Day and Graduation programs in our North American Social Expression Products segment and our Father's Day program in our International Social Expression Products segment. The decrease in selling prices was driven by the continued shift in mix to a higher proportion of value line cards.

Expense Overview

MLOPC for the six months ended August 24, 2012 were $340.6 million, an increase of $24.5 million from $316.1 million for the comparable period in the prior year. The increase is directly related to the new retail operations purchased from Clinton Cards, which caused a net increase in MLOPC of approximately $9 million compared to the prior year period. This net increase was comprised of approximately $15 million for cost of goods sold through the new Retail Operations segment, reduced by approximately $6 million for the cost of goods related to the elimination of intersegment sales from the International Social Expression Products segment to the Retail Operations segment. Approximately $15 million of the remaining increase was attributable primarily to a combination of higher product costs and a change in sales mix, shifting toward a higher proportion of value cards while maintaining relative sales levels. Also contributing to the increase was approximately $3 million related to higher product display material costs and approximately $1 million of higher scrap expense. Partially offsetting these increases was the impact of cost savings initiatives and favorable foreign currency translation of approximately $2 million each.

SDM expenses for the six months ended August 24, 2012 were $276.2 million, . . .