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).

4

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:

	(1)	Deferral of the effective date;
	(2)	Provisions for additional scope exceptions for certain other variable interests; and
	(3)	Clarification of the impact of troubled debt restructurings on the requirement with respect to VIEs.

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.