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 nine months ended November 23, 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 expect to acquire 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 contracts and negotiations, as of November 23, 2012, we have completed 185 lease assignments. Assuming that the remaining landlords consent to terms proposed by us and we are able to successfully complete assignments for all of the approximately 400 stores, as of November 23, 2012, we anticipate the estimated future minimum rental payments for noncancelable operating leases related to acquired stores will be approximately $367 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 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 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 $6.3 million of transaction costs related to the Clinton Cards acquisition. There were no significant items related to the Clinton Cards transaction recorded during the three months ended November 23, 2012.

The table below summarizes the charges described above and their impact on our Consolidated Statement of Operations during the nine months ended November 23, 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              6.3               -         23.5
Other non-operating (income) expense              -               -                -              10.0        10.0

                                        $        4.0      $     17.2      $       6.3      $      10.0      $ 37.5

In addition to the charges summarized in the table above, our results were also affected by the operating results of our new Retail Operations segment and the intersegment sales elimination and intercompany profit adjustments 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 five months of activity in the current nine-month period. The impact of the acquisition of the retail stores on consolidated revenue for the three months ended November 23, 2012 was a net increase of approximately $42 million. The net increase was comprised of approximately $68 million of net sales from the new Retail Operations segment, reduced by approximately $26 million for the elimination of intersegment sales from the International Social Expression Products segment to the Retail Operations segment. The impact of the acquisition of the retail stores on consolidated revenue for the nine months ended November 23, 2012 was a net increase of approximately $69 million, including approximately $108 million of net sales from the new Retail Operations segment, reduced by approximately $39 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 third quarter, the Clinton Cards acquisition adversely impacted pre-tax income by approximately $15.6 million, including the operating loss in the Retail Operations segment of $11.5 million and the impact of adjustments to intersegment profit associated with intercompany sales from the International Social Expression Products segment to the Retail Operations segment of $4.1 million. For the nine-month period, the Clinton Cards acquisition adversely impacted our pre-tax income by approximately $65.6 million, including the $37.5 million summarized in the table above and the $28.1 million of combined operating loss resulting from the Retail Operations segment and intersegment profit adjustment.

Third Quarter Results

Total revenue in the third quarter increased approximately $42 million, or 9% compared to the prior year period. As discussed above, the net impact of the Clinton Cards acquisition added approximately $42 million in total revenue. In addition, the combined effects of scan-based trading ("SBT") implementations and foreign currency translation favorably impacted total revenue by approximately $2 million. Partially offsetting these increases were lower greeting card sales through our wholesale divisions of approximately $3 million compared to the prior year second quarter.

Third quarter operating income was $0.4 million compared to operating income of $33.2 million in the prior year, a decrease of $32.8 million. Beyond the impact of the Clinton Cards acquisition, which negatively impacted operating income by $15.6 million, compared to the prior period third quarter the current quarter operating income performance was impacted by additional legal expense, costs related to strategic actions with our International Social Expression Products segment, higher product content costs, unfavorable product mix, costs and fees associated with the Going Private Proposal and slightly more marketing expense.

During the current quarter, on September 26, 2012, we announced that our Board of Directors received a non-binding proposal from members of the Weiss family and related entities to acquire the Corporation (the "Going Private Proposal"). For further information, see Note 17, "Non-Binding Proposal by Members of the Weiss Family and Related Entities to Acquire the Corporation," to the Consolidated Financial Statements.

Results of Operations

Three months ended November 23, 2012 and November 25, 2011

Net loss was $0.8 million, or $0.03 per share, in the third quarter compared to net income of $20.2 million, or $0.50 per share, in the prior year third quarter (all per-share amounts assume dilution).

Our results for the three months ended November 23, 2012 and November 25, 2011 are summarized below:

                                                               % Total                         % Total
(Dollars in thousands)                           2012          Revenue           2011          Revenue
Net sales                                      $ 499,368           98.5 %      $ 458,535           98.6 %
Other revenue                                      7,446            1.5 %          6,472            1.4 %

Total revenue                                    506,814          100.0 %        465,007          100.0 %

Material, labor and other production costs       244,071           48.2 %        230,572           49.6 %
Selling, distribution and marketing
expenses                                         190,041           37.5 %        141,501           30.4 %
Administrative and general expenses               74,483           14.7 %         60,510           13.0 %
Other operating income - net                      (2,217 )         (0.4 %)          (813 )         (0.2 %)

Operating income                                     436            0.1 %         33,237            7.1 %

Interest expense                                   4,504            0.9 %          5,821            1.3 %
Interest income                                      (65 )         (0.0 %)          (207 )         (0.0 %)
Other non-operating income - net                  (1,904 )         (0.4 %)        (2,077 )         (0.4 %)

(Loss) income before income tax (benefit)
expense                                           (2,099 )         (0.4 %)        29,700            6.4 %
Income tax (benefit) expense                      (1,290 )         (0.3 %)         9,454            2.0 %

Net (loss) income                              $    (809 )         (0.2 %)     $  20,246            4.4 %

For the three months ended November 23, 2012, consolidated net sales were $499.4 million, an increase of $40.8 million, or 8.9%, from $458.5 million in the prior year third quarter. The increase was primarily related to the purchase of retail stores from Clinton Cards, which caused an increase in net sales of approximately $42 million during the current quarter compared to the prior year period. The increase was comprised of approximately $68 million of net sales from the new Retail Operations segment, reduced by approximately $26 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 to Clinton Cards stores that were not owned by us at that time. In addition, seasonal greeting card sales through our wholesale divisions declined approximately $3 million. These decreases were offset by the favorable impact of SBT implementations and foreign currency translation of approximately $1 million each.

Other revenue, primarily royalty revenue from our Strawberry Shortcake and Care Bears properties, increased $1.0 million during the three months ended November 23, 2012.

Wholesale Unit and Pricing Analysis for Greeting Cards

Unit and pricing comparatives (on a sales less returns basis) for the three
months ended November 23, 2012 and November 25, 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                               (0.7 %)       7.7 %       (4.1 %)      (9.8 %)          (1.4 %)         3.6 %
Selling prices                             1.6 %       (2.0 %)      (1.4 %)       8.7 %            0.8 %          0.1 %
Overall increase / (decrease)              0.9 %        5.5 %       (5.5 %)      (2.0 %)          (0.7 %)         3.7 %

During the third quarter, combined everyday and seasonal greeting card sales less returns decreased 0.7% compared to the prior year quarter, including an increase in selling prices of 0.8% which was more than offset by a decrease in unit volume of 1.4%. The overall decrease was driven by unit decline of everyday greeting cards within our North American Social Expression Products segment and unit decline of seasonal greeting cards within both our North American Social Expression Products and our International Social Expression Products segments.

Everyday card sales less returns for the third quarter increased 0.9% with improvements in selling prices of 1.6% more than offsetting a decline in unit volume of 0.7%. The unit volume decline was driven by our North American Social Expression Products segment. The selling price improvement was driven by both our North American Social Expression Products and our International Social Expression Products segments. The continued shift in mix to a higher proportion of value cards, which was less dramatic than in the prior year quarter, was more than offset by general price increases.

Seasonal card sales less returns declined 5.5% during the third quarter, including a 4.1% decline in unit volume and a 1.4% decline in selling prices. The decrease in unit volume during the current year quarter was primarily driven by our Christmas programs in both our North American Social Expression Products and our International Social Expression Products segments. The decrease in selling prices was driven by our Fall holiday program in our North American Social Expression Products segment and 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 November 23, 2012 were $244.1 million, compared to $230.6 million in the prior year three months, an increase of $13.5 million. The new retail operations we purchased from Clinton Cards caused a net increase in MLOPC of approximately $3 million during the current quarter compared to the prior year third quarter. This net increase was comprised of approximately $25 million for cost of goods sold through the new Retail Operations segment, reduced by approximately $22 million for the adjustment to cost of goods related to intersegment sales from the International Social Expression Products segment to the Retail Operations segment. In addition, MLOPC increased approximately $8 million due to the result of unfavorable mix and higher product content costs. The current quarter included approximately $2 million higher scrap expense than the prior year period. We also incurred approximately $1 million of expense related to strategic actions in the International Social Expression Products segment, including the sale of a small non-card product line and the closure of a small giftwrap manufacturing facility in Italy.

Selling, distribution and marketing ("SDM") expenses for the three months ended November 23, 2012 were $190.0 million compared to $141.5 million in the prior year third quarter, an increase of $48.5 million. The increase was driven by approximately $49 million of expenses within our new Retail Operations segment. In addition, higher marketing expenses and unfavorable foreign currency translation of approximately $1 million each were offset by lower supply chain costs, primarily field sales, merchandiser and distribution expenses, of approximately $2 million.

Administrative and general expenses were $74.5 million for the three months ended November 23, 2012, an increase of approximately $14 million from $60.5 million for the three months ended November 25, 2011. This increase was

due to expenses within our new Retail Operations segment and higher legal expense of approximately $6 million each. The remaining approximately $2 million increase was related to costs and fees associated with the Going Private Proposal.

Other non-operating income - net was $1.9 million for the three months ended November 23, 2012 compared to $2.1 million for the three months ended November 25, 2011. The current year included a gain of $1.1 million associated with the sale of a portion of our investment in Party City. See Note 1, "Basis of Presentation," to the Consolidated Financial Statements for further information.

The Corporation's effective tax rate was 61.5% and 31.8% for the three months ended November 23, 2012 and November 25, 2011, respectively. The higher than statutory rate in the current quarter was due primarily to the low pretax loss, which magnified the impact that discrete items had on the effective tax rate.

Results of Operations

Nine months ended November 23, 2012 and November 25, 2011

Net income was $2.2 million, or $0.06 per share, in the nine months ended November 23, 2012 compared to $67.3 million, or $1.63 per share, in the prior year nine months.

Our results for the nine months ended November 23, 2012 and November 25, 2011 are summarized below:

                                                                % Total                         % Total
(Dollars in thousands)                            2012          Revenue           2011          Revenue
Net sales                                      $ 1,275,139          98.6 %     $ 1,217,800          98.3 %
Other revenue                                       18,617           1.4 %          21,097           1.7 %

Total revenue                                    1,293,756         100.0 %       1,238,897         100.0 %

Material, labor and other production costs         584,667          45.2 %         546,699          44.1 %
Selling, distribution and marketing expenses       466,199          36.0 %         392,630          31.7 %
Administrative and general expenses                225,521          17.4 %         186,734          15.1 %
Other operating income - net                        (1,421 )        (0.1 %)         (6,858 )        (0.6 %)

Operating income                                    18,790           1.5 %         119,692           9.7 %

Interest expense                                    13,314           1.0 %          17,708           1.4 %
Interest income                                       (297 )        (0.0 %)           (838 )        (0.1 %)
Other non-operating expense (income) - net           3,523           0.3 %          (2,621 )        (0.2 %)

Income before income tax expense                     2,250           0.2 %         105,443           8.5 %
Income tax expense                                      63           0.0 %          38,128           3.1 %

Net income                                     $     2,187           0.2 %     $    67,315           5.4 %

For the nine months ended November 23, 2012, consolidated net sales were $1.28 billion, up from $1.22 billion in the prior year nine months. This 4.7% increase, or approximately $57 million, was primarily related to the purchase of retail stores from Clinton Cards which caused an increase in net sales of approximately $69 million during the current nine months compared to the prior year period. The increase was comprised of approximately $108 million of net sales from the new Retail Operations segment, reduced by approximately $39 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 to Clinton Cards stores that were not owned by us at that time. In addition, greeting card sales through our wholesale divisions improved approximately $8 million. Partially offsetting these increases were reduced gift packaging, party goods and other ancillary product sales of approximately $5 million, lower net sales in our fixtures business of approximately $4 million and a $4 million impairment of deferred costs related to the supply agreement associated with Clinton Cards' Birthdays stores that were closed as part of the Clinton Cards bankruptcy administration process. Foreign currency translation and SBT implementations unfavorably impacted net sales by approximately $5 million and $1 million, respectively.

Other revenue, primarily royalty revenue from our Strawberry Shortcake and Care Bears properties, decreased $2.5 million in the nine months ended November 23, 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 nine
months ended November 23, 2012 and November 25, 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                                 0.1 %       6.8 %         3.5 %       1.0 %          0.9 %           5.3 %
Selling prices                              0.1 %      (1.9 %)       (0.9 %)      1.2 %         (0.1 %)         (1.1 %)
Overall increase / (decrease)               0.1 %       4.7 %         2.5 %       2.3 %          0.8 %           4.1 %

During the nine months ended November 23, 2012, combined everyday and seasonal greeting card sales less returns increased 0.8% compared to the prior year nine months, driven primarily by an increase in unit volume from our seasonal cards of 3.5%.

Everyday card sales less returns were up 0.1%, essentially flat compared to the prior year nine months.

Seasonal card sales less returns increased 2.5%, with unit volume improving 3.5% and selling prices declining 0.9%. The increase in unit volume compared to the prior year nine months was primarily driven by our Mother's Day, Father's Day and Graduation Day 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 nine months ended November 23, 2012 were $584.7 million, an increase of $38.0 million from $546.7 million for the comparable period in the prior year. The new retail operations we purchased from Clinton Cards caused a net increase in MLOPC of approximately $13 million during the current year compared to the prior year nine months. This net increase was comprised of approximately $40 million for cost of goods sold through the new Retail Operations segment, reduced by approximately $27 million for the adjustment to cost of goods related to intersegment sales from the International Social Expression Products segment to the Retail Operations segment. Approximately $22 million of the remaining increase to MLOPC was attributable primarily to a combination of higher product content costs and an unfavorable change in sales mix, including the shift toward a higher proportion of value cards while maintaining a relatively consistent net sales level. Also contributing to the increase was approximately $3 million related to higher product display material costs and approximately $3 million of higher scrap expense. We also incurred approximately $1 million of expense related to strategic actions in the International Social Expression Products segment, including the sale of a small non-card product line and the closure of a small giftwrap manufacturing facility in Italy. These increases were partially offset by a decrease of approximately $2 million attributable primarily to lower sales volume in the wholesale businesses. In addition, foreign currency translation favorably impacted MLOPC by approximately $2 million during the current year nine months.

SDM expenses for the nine months ended November 23, 2012 were $466.2 million, increasing from $392.6 million for the comparable period in the prior year. The increase of $73.6 was driven by approximately $74 million of expenses within our new Retail Operations segment. Higher marketing expenses of approximately $8 million were offset by favorable foreign currency translation of approximately $2 million and lower costs in our field service and merchandiser organization of approximately $6 million, primarily related to prior year store setup activities for the value channel, which did not recur in the current period.

Administrative and general expenses were $225.5 million for the nine months ended November 23, 2012, increasing from $186.7 million for the nine months ended November 25, 2011. The increase of $38.8 million was driven

partially by higher bad debt expense related to approximately $17 million recorded in the UK relating to increased unsecured accounts receivable exposure as a result of Clinton Cards being placed into administration during the current year. Transaction costs related to the purchase of the senior secured debt and the retail store acquisition of Clinton Cards of approximately $6 million were . . .