UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

AMERICAN GREETINGS CORPORATION

Registrant’s telephone number, including area code (216) 252-7300

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Class B Common Shares, Par Value $1.00

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 [X]  NO [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]

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

YES [X]  NO [   ]

State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of the last business day of the Registrant’s most recently completed second fiscal quarter, August 31, 2003 - $1,200,757,689

Number of shares outstanding as of April 26, 2004:

CLASS A COMMON – 63,435,573
CLASS B COMMON – 4,727,939

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the American Greetings Corporation Definitive Proxy Statement for the Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days after the close of the registrant’s fiscal year (incorporated into Part III).

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AMERICAN GREETINGS CORPORATION
INDEX

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PART I

Item 1. Business

OVERVIEW

American Greetings Corporation and its subsidiaries (“the Corporation”) operate predominantly in a single industry: the design, manufacture and sale of everyday and seasonal greeting cards and other social expression products. Greeting cards, gift wrap, paper party goods, candles, balloons, stationery and giftware are manufactured and/or sold in the United States by American Greetings Corporation, Gibson Greetings, Inc., Plus Mark, Inc., and Carlton Cards Retail, Inc.; in Canada by Carlton Cards Limited; in the United Kingdom by Carlton Cards Limited (U.K.), Camden Graphics Group, UKG Specialty Products Ltd, Gibson Greetings International Limited, The Ink Group Publishers Ltd. (U.K.) and Carlton Cards Ltd. (Ireland); in Mexico by Carlton Mexico, S.A. de C.V. ; in Australia by John Sands (Australia) Ltd. and The Ink Group PTY Ltd.; in New Zealand by John Sands (N.Z.) Ltd. and The Ink Group NZ Ltd.; and in South Africa by S.A. Greetings Corporation (PTY) Ltd.; AmericanGreetings.com, Inc. (92% owned by the Corporation) markets e-mail greetings, personalized printable greeting cards and other social expression products through the Corporation’s Web sites www.americangreetings.com, www.bluemountain.com, www.egreetings.com and www.beatgreets.com; co-branded Web sites and on-line services. AmericanGreetings.com also provides design and verse content, which is included in various CD-ROM software products for use on personal computers. Magnivision, Inc. produces and sells non-prescription reading glasses and eyewear accessories, and Learning Horizons, Inc. distributes supplemental educational products. Design licensing and character licensing are done by A.G.C. Inc. and Those Characters From Cleveland, Inc., respectively. A.G. Industries, Inc. manufactures custom display fixtures for the Corporation’s products and products of others.

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 AmericanGreetings.com, Inc. subsidiary is consolidated on a two-month lag corresponding with its fiscal year-end of December 31.

BUSINESS STRATEGY

In 2004, American Greetings focused primarily on improving its core greeting card business by continuing its supply chain transformation, an initiative designed to improve the way it develops, manufactures, distributes and services its products. The Corporation anticipates that this initiative, which it introduced in February 2003, will result in substantial annual benefits by the end of 2005. This initiative was substantially on track to realize the anticipated benefits at the end of 2004.

In addition to the transformation of its supply chain, three other initiatives that the Corporation introduced one year ago – category innovation, strategic account management, human capital development – will continue to provide focus for the Corporation’s efforts throughout 2005. Category innovation will focus on driving improvements in the core greeting card business, extending the Corporation’s existing competencies and evolving the Corporation’s product line beyond the core greeting card business to create new opportunities. Strategic account management will continue to focus on the most efficient alignment of the Corporation’s resources with the differentiated needs of customer accounts and their consumers. Finally, human capital development will entail the continued training and development of associates in alignment with the Corporation’s operating objectives.

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PRODUCTS

The Corporation creates, manufactures and distributes social expression products including greeting cards, gift wrap, party goods, calendars, candles, balloons, and stationery as well as non-prescription reading glasses, educational products and custom display fixtures. The Corporation’s major domestic greeting card brands are American Greetings, Carlton Cards, and Gibson. Online greeting card offerings and other digital content are available through the Corporation’s subsidiary, AmericanGreetings.com. Information concerning sales by major product classifications is included in Part II, Item 7.

BUSINESS SEGMENTS

At February 29, 2004, the Corporation operated in four business segments: Social Expression Products, Retail Operations, AmericanGreetings.com and non-reportable operating segments. For information regarding the various business segments comprising the Corporation’s business, see the discussion in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the subheading “Segment Information,” and in Note 15 to the Consolidated Financial Statements included in Part II, Item 8.

CONCENTRATION OF CREDIT RISKS

Net sales to the Corporation’s five largest customers, which include mass merchandisers and major drug stores, accounted for approximately 31%, 30% and 37% of net sales in 2004, 2003 and 2002, respectively. The decline from 2002 to 2003 was due in part to a decline in sales to a major customer that operated in Chapter 11 protection throughout 2003. Net sales to Wal-Mart Stores, Inc. accounted for approximately 12%, 11% and 12% of net sales in 2004, 2003 and 2002, respectively. No other customer accounted for 10% or more of the Corporation’s net sales.

CONSUMERS

Women purchase 89% of all greeting cards sold. The median age of the Corporation’s consumers is 54. Women over the age of 35 account for more than 85% of all greeting cards sold. The average household income of greeting card buyers is about $35,000 per year. The average American household purchases about 16 greeting cards per year.

COMPETITION

The greeting card and gift wrap industry is intensely competitive. Competitive factors include quality, design, customer service and terms, which may include payments and other concessions to retail customers under long-term agreements. These agreements are discussed in greater detail below. There are an estimated 2,000 companies in this industry in the United States. The Corporation’s principal competitor is Hallmark Cards, Inc. Based upon its general familiarity with the greeting card and gift wrap industry and limited information as to its competitors, the Corporation believes that it is the second-largest company in the industry and the largest publicly owned greeting card company.

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PRODUCTION AND DISTRIBUTION

In 2004, the Corporation’s major channel of distribution continued to be mass retail, which is comprised of mass merchandisers, chain drug stores and supermarkets. Other major channels of distribution included card and gift shops, department stores, military post exchanges, variety stores and combo stores (stores combining food, general merchandise and drug items). The Corporation services more than 70,000 retail stores in the United States and more than 125,000 outlets worldwide.

Many of the Corporation’s products are manufactured at common production facilities and marketed by a common sales force. Marketing and manufacturing functions in the United States and Canada are combined; dual-priced cards are produced in the United States and distributed in both countries. Additionally, information by geographic area is included in Note 15 to the Consolidated Financial Statements included in Part II, Item 8.

Production of the Corporation’s products is generally on a level basis throughout the year. Everyday inventories remain relatively constant throughout the year, while seasonal inventories peak in advance of each major holiday season, including Christmas, Valentine’s Day, Easter, Mother’s Day, Father’s Day and Graduation. Payments for seasonal shipments are generally received during the month in which the major holiday occurs, or shortly thereafter. Extended payment terms may also be offered in response to competitive situations with individual customers. In 2003, two of the Corporation’s largest customers were converted to a scan-based trading model, and payments for both everyday and seasonal sales to those customers are received generally within 10 to 15 days of the product being sold by those customers at their retail locations. The Corporation and many of its competitors sell seasonal greeting cards with the right of return. Sales credits for non-seasonal product are issued at the Corporation’s sole discretion for damaged, obsolete and outdated products. Information regarding the return of product is included in Note 1 to the Consolidated Financial Statements included in Part II, Item 8.

During the year, the Corporation experienced no difficulty in obtaining raw materials from suppliers.

TRADEMARKS AND INTELLECTUAL PROPERTY RIGHTS

The Corporation has a number of copyrights, patents and registered trademarks, which are used in connection with its products. The Corporation’s designs and verses are protected by copyright. Although the licensing of copyrighted designs and trademarks produces additional revenue, in the opinion of the Corporation, the Corporation’s operations are not dependent upon any individual patent, trademark, copyright or intellectual property license. The collective value of the Corporation’s copyrights and trademarks is substantial and the Corporation follows an aggressive policy of protecting its patents, copyrights and trademarks.

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EMPLOYEES

At February 29, 2004, the Corporation employed approximately 9,800 full-time employees and approximately 21,000 part-time employees which, when jointly considered, equate to approximately 20,300 full-time equivalent employees. Approximately 3,200 of the Corporation’s hourly plant employees are unionized, of which approximately 2,300 are covered by the following collective bargaining agreements:

Other locations with unions are the United Kingdom, Mexico, Australia, New Zealand, and South Africa. The Corporation’s headquarters and other manufacturing locations are not unionized. Labor relations at each location have generally been satisfactory.

UNCERTAINTY OF FORWARD-LOOKING STATEMENTS

The statements contained in this report that are not historical facts are forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements. Forward-looking statements involve risks and uncertainties, including but not limited to: retail bankruptcies and consolidations, successful integration of acquisitions, successful transition of management, a weak retail environment, consumer acceptance of products as priced and marketed, the impact of technology on core product sales, competitive terms of sale offered to customers, successfully implementing supply chain improvements and achieving projected cost savings from those improvements, and the Corporation’s ability to comply with its debt covenants. Risks pertaining specifically to AmericanGreetings.com include the viability of online advertising and subscriptions as revenue generators and the public’s acceptance of online greetings and other social expression products.

SUPPLY AGREEMENTS

In the normal course of its business, the Corporation enters into agreements with certain customers for the supply of greeting cards and related products. The Corporation views the use of such agreements as advantageous in developing and maintaining business with its retail customers. 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 agreements are negotiated individually to meet competitive situations and, therefore, while some aspects of the agreements may be similar, important contractual terms vary. The agreements may or may not specify the Corporation as the sole supplier of social expression products to the customer. In the event an agreement is not completed, the Corporation has a claim for unearned advances under the agreement.

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Although risk is inherent in the granting of advances, the Corporation subjects such customers to its normal credit review. In circumstances where the Corporation is aware of a particular customer’s inability to meet its performance obligation, the Corporation records a specific reserve to reduce the deferred cost asset to the Corporation’s estimate of the value of future cash flows based upon expected performance. These agreements are accounted for as deferred costs. Losses attributed to these specific events have historically not been material. The balances and movement of the valuation reserve accounts are disclosed on Schedule II of this Annual Report on Form 10-K. See Note 9 to the Consolidated Financial Statements in Part II, Item 8, and the discussion under the “Deferred Costs” heading in the “Critical Accounting Policies” section of Item 7 for further information and discussion of deferred costs.

ENVIRONMENTAL REGULATIONS

The operations of the Corporation, like those of other companies in our industry, are subject to various federal, state and local environmental laws and regulations. These laws and regulations may give rise to claims, uncertainties or possible loss contingencies for future environmental remediation liabilities and costs. The Corporation has implemented various programs designed to protect the environment and comply with applicable environmental laws and regulations. The costs associated with these compliance and remediation efforts have not and are not expected to have a material adverse effect on the financial condition, cash flows, or operating results of the Corporation.

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Item 2. Properties

As of February 29, 2004, the Corporation owns or leases approximately 14.7 million square feet of plant, warehouse and office space, of which approximately 1.5 million square feet are leased. The Corporation believes its manufacturing and distribution facilities are well-maintained and are suitable and adequate, and have sufficient productive capacity, to meet its current needs.

The following table summarizes the principal plants and materially important physical properties of the Corporation:

*

- Indicates calendar year.

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10

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Item 3. Legal Proceedings

		The Corporation is involved in certain legal actions and claims arising in the ordinary course of business. The Corporation, however, does not believe that any of the litigation in which it is currently engaged, either individually or in the aggregate, will have a material adverse effect on its business, consolidated financial position or results of operations.
1.		Flavia Group Inc. et al. v. Kinko’s, Inc.      US District Court, Central District of California – Case No. 03-1796 RMT
		This matter was previously disclosed in the Form 10-Q for the period ending August 31, 2003. There are no new material developments. In March 2003, Flavia Group filed suit against Kinko’s alleging copyright infringement and other claims with respect to Kinko’s use of certain Flavia designs, and seeking damages and injunctive relief. Kinko’s has demanded indemnification from Gibson Greetings, Inc. (“Gibson”), a wholly-owned subsidiary of the Corporation, under a Gibson-Kinko’s Vendor Agreement that expired in 2001. Gibson has denied any obligation to indemnify Kinko’s and in August 2003, Gibson and the Corporation intervened in the suit and filed a separate complaint against Kinko’s alleging copyright infringement. Kinko’s has stipulated to a preliminary injunction against further use of the designs in issue. Discovery is proceeding. Trial is set for August 2004. At this time, it is too early to determine the total amount of the Corporation’s potential liability in this matter; however, its liability, if any, is not expected to be material to its consolidated financial position or results of operations.
2.		149 New Montgomery LLC v. Egreetings Network, Inc.      San Francisco Superior Court – Case No. CGC 03427518
		In December 2003, the landlord, 149 New Montgomery, filed suit against Egreetings, alleging breach of lease. Egreetings has filed an answer denying liability and asserting affirmative defenses. It is too early to determine what, if any, amount may be due, above the lease payments already due and the Corporation’s liability, if any, is not expected to be material to its consolidated financial position or results of operations. Egreetings intends to fully defend this claim.

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Item 4. Submission of Matters to Vote of Security Holders

None

Available Information

The Corporation makes available, free of charge, on or through its investor relations Web site, www.corporate.americangreetings.com, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). Copies of the Corporation’s filings with the SEC also can be obtained at the SEC’s Internet site, www.sec.gov.

On or before the Corporation’s 2004 Annual Meeting of Shareholders, the Corporation’s Corporate Governance Guidelines, Code of Business Conduct and Ethics, and the charters of the Board’s Audit, Compensation and Management Development Committee and Nominating and Corporate Governance Committees will be posted on the Company’s website. Requests should be directed to Investor Relations.

Executive Officers of the Registrant

The following is a list of the Corporation’s executive officers, their ages as of April 30, 2004, their positions and offices, and number of years in executive office:

Morry Weiss and Erwin Weiss are brothers. Jeffrey M. Weiss and Zev Weiss are the sons of Morry Weiss. The Board of Directors annually elects all executive officers; however, executive officers are subject to removal, with or without cause, at any time; provided, however, that the removal of William R. Mason or Erwin Weiss would be subject to the terms of their respective employment agreement.

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All of the executive officers listed above have served in the capacity shown or similar capacities with the Corporation (or major subsidiary) over the past five years, with the following exceptions:

•

Zev Weiss was Regional Sales Director for the Corporation’s Carlton Cards Retail, Inc. unit from July 1994 to May 1995; Regional Sales Manager for the Corporation’s U.S. Greeting Card Division from May 1995 to May 1997; Executive Director of National Accounts for the Corporation’s U.S. Greeting Card Division from May 1997 until March 2000; Vice President, Strategic Business Units from March 2000 until March 2001; Senior Vice President from March 2001 until December 2001; Executive Vice President from December 2001 until June 2003 when he was named Chief Executive Officer.

•

Jeffrey M. Weiss was Vice President, Materials Management of the Corporation’s U.S. Greeting Card Division from October 1996 until May 1997; Vice President, Product Management of the Corporation’s U.S. Greeting Card Division from May 1997 until January 1998; Senior Vice President from January 1998 until March 2000; and Executive Vice President, North American Greeting Card Division of the Company from March 2000 until June 2003 when he was named President and Chief Operating Officer.

•

David R. Beittel was Vice President, Creative Visual Design of the Corporation’s Carlton Cards Retail, Inc. unit from August 1993 until April 1995; Executive Director, Product Management of the Corporation from April 1995 until January 1997; and Vice President, Creative of the Corporation from January 1997 until becoming Senior Vice President in April 2001.

•

Mary Ann Corrigan-Davis was Vice President of Product Management from January 1988 until December 1991; President of Carlton Cards Retail from January 1992 until December 1995, and Senior Vice President of International Operations from May 1997 until becoming Senior Vice President of Business Innovation in October 2000.

•

Catherine M. Kilbane was a partner with Baker & Hostetler LLP. She became Senior Vice President, General Counsel and Secretary in October 2003.

•

Michael L. Goulder was a Vice President in the management consulting firm of Booz Allen Hamilton from October 1998 until September 2002. He became Senior Vice President, Executive Operations Officer of the Corporation in November 2002.

•

Pamela L. Linton was Senior Vice President, Global Human Resources of Amway Corporation from 1997 until 2000. She became Senior Vice President, Human Resources of the Corporation in June 2001.

•

William R. Mason was Senior Vice President, General Sales Manager from June 1991 until becoming Senior Vice President, Wal-Mart Team in September 2002.

•

Robert P. Ryder was Vice President and Chief Financial Officer of PepsiCo’s European Developing Markets, in London from 1995 to 1998 and Vice President and Controller for PepsiCo’s Frito-Lay North American division from 1998 to 2002. He became Senior Vice President and Chief Financial Officer of the Corporation in September 2002.

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•

Steven S. Willensky was President of Medex, a subsidiary of The Furon Company, from 1997 to 2000 and President and Chief Executive Officer of Westec Interactive from 2000 to 2002. He became Senior Vice President, Executive Sales and Marketing Officer of the Corporation in September 2002.

•

Joseph B. Cipollone was Director, Corporate Financial Planning of the Corporation from July 1994 until December 1997; and Executive Director, International Finance of the Corporation from December 1997 until becoming Vice President and Corporate Controller in April 2001.

•

Stephen J. Smith was Treasurer and Officer from 1998 to 1999 and Vice President, Treasurer and Assistant Secretary in 1999 of Insilco Holding Company. He was Vice President and Treasurer of General Cable Corporation from 1999 to 2002. He became Vice President and Treasurer of the Corporation in April 2003.

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PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

(a) Market Information

The Corporation’s Class A common stock is listed on the New York Stock Exchange under the symbol AM. The high and low stock prices, as reported in the New York Stock Exchange listing, for each quarter of the years ended February 29, 2004 and February 28, 2003, were:

National City Bank, Cleveland, Ohio, is the Corporation’s registrar and transfer agent. There is no public market for the Class B Common Shares of the Corporation. Pursuant to the Corporation’s Amended Articles of Incorporation, a holder of Class B Common Shares may not transfer such Class B Common Shares (except to permitted transferees, a group that generally includes members of the holder’s extended family, family trusts and charities) unless such holder first offers such shares to the Corporation for purchase at the most recent closing price for the Corporation’s Class A Common Shares. If the Corporation does not purchase such Class B Common Shares, the holder must convert such shares, on a share for share basis, into Class A Common Shares prior to any transfer.

The information regarding the Corporation’s equity compensations plan information required by Item 201(d) of Regulation S-K is set forth in Item 12 of this report.

(b) Shareholders

At February 29, 2004, there were approximately 45,600 holders of Class A Common Shares and 160 holders of Class B Common Shares of record and individual participants in security position listings.

(c) Cash Dividends

In April 2003, the Corporation amended its secured credit facility, which restricts the Corporation’s ability to incur additional indebtedness, to engage in acquisitions of other businesses and entities and to pay shareholder dividends. These restrictions are subject to customary baskets and financial covenant tests.

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Item 6. Selected Financial Data

Years ended February 28 or 29
Thousands of dollars except share and per share amounts

*

See quarterly results of operations for detailed table.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Years ended February 29, 2004, and February 28, 2003 and 2002

OVERVIEW

Founded in 1906, the Corporation is the world’s largest publicly owned creator, manufacturer and distributor of social expression products. Headquartered in Cleveland, Ohio, the Corporation employs over 20,000 associates around the world, is home to one of the world’s largest creative studios and services more than 70,000 retail stores in the United States and more than 125,000 outlets worldwide.

The Corporation’s major domestic greeting card brands are American Greetings, Carlton Cards and Gibson and other domestic products include DesignWare party goods and GuildHouse candles. Subsidiary products include Plus Mark gift wrap and boxed cards, Magnivision reading glasses, DateWorks calendars, Learning Horizons educational products and AGI Schutz display fixtures. The Internet business unit, AmericanGreetings.com, is a leading provider of electronic greetings and other content for the digital marketplace. The Retail segment owns and operates approximately 600 card and gift shops throughout North America.

The Corporation’s international operations include wholly owned subsidiaries in the United Kingdom, Canada, Australia, New Zealand, Mexico and South Africa as well as licensees in over 70 other countries.

The Corporation recognized net income of $104.7 million in 2004 compared to $121.6 million in 2003. The current year included costs of $18.4 million (pre-tax) associated with its early debt repayments. In the previous year, it recognized a $12.0 million gain from the sale of a marketable equity security. In the current year, results were positively impacted by foreign exchange rate fluctuations, the addition of approximately 1,400 stores of a major mass retailer, strong performance from its candle and party goods businesses and very strong results from its “Strawberry Shortcake” and “Care Bear” licensed properties. Offsetting these positive trends were disappointing results from its seasonal businesses, primarily cards and gift wrap. The Corporation’s retail segment experienced a difficult year due to reduced traffic and product mark-downs. In addition, the Corporation experienced high material, labor and other product costs due to product discontinuances, primarily in its display fixture business, additional product content in its greeting cards and a shift in mix to higher cost product.

The Corporation had a very strong cash flow year, which resulted in a much improved balance sheet. In 2004 cash flow from operating and investing activities was $258.8 million. This cash was used to pay down $181.6 million of debt, which improved the ratio of debt to total capital from 44.4% at February 28, 2003, to 34.4% at February 29, 2004.

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RESULTS OF OPERATIONS

The Corporation’s discussion and analysis of its financial condition and results of operations should be read in conjunction with the audited consolidated financial statements. This discussion and analysis contains forward-looking statements; see “Uncertainty of Forward-Looking Statements” and “Risk Factors” in Item 1 and “Factors That May Affect Future Results” at the end of the discussion and analysis for this Annual Report on Form 10-K for a discussion of the uncertainties, risk and assumptions associated with these statements.

Net income was $104.7 million, or $1.40 per diluted share, in 2004 compared to net income of $121.1 million, or $1.63 per diluted share, in 2003 and a net loss of $122.3 million, or $1.92 per diluted share in 2002.

The Corporation’s results for 2004, 2003 and 2002 are summarized below:

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Net Sales Overview

Consolidated net sales in 2004 were $2.0 billion, an increase of $13.1 million over the prior year. The year over year increase in net sales of 0.7% was primarily the result of foreign currency exchange fluctuations, which improved the sales comparisons by 2.5% while net sales from ongoing operations at constant exchange rates declined approximately 1.8%. The Corporation experienced strong sales growth in its UK business of 5.2% as well as in its domestic party goods and candle businesses of 63.2%. These gains were more than offset by downturns in the seasonal card and gift wrap offerings, the effects of increased customer incentives for greeting cards, and soft demand in its retail segment.

Consolidated net sales for 2003 were $2.0 billion, an increase of $68.5 million or 3.6% over 2002. The 2002 amount of $1.9 billion included reductions for credits issued in 2002 for the conversion of two of the Corporation’s largest customers to a scan-based trading business model, as well as for the elimination of the Forget Me Not (“FMN”) brand. The net sales effect of these two initiatives explains an increase from 2002 to 2003 of $102.3 million leaving a net sales decrease from 2002 to 2003 of $33.8 million or 1.7%. The majority of this shortfall, $22.0 million, is the result of the net sales impact of businesses divested throughout 2002 while the remaining shortfall of $11.8 million is the result of continuing operations. The net sales decrease from ongoing operations of $11.8 million from 2002 to 2003 was the result of several factors including the loss of certain store doors in the second half of the year, poor sell through of calendars, and a depressed market for advertising for the Corporation’s Internet business.

The contribution of each major product category as a percent of net sales for the past three fiscal years was:

* The “all other products” classification includes giftware, party goods, reading glasses, candles, balloons, calendars, custom display fixtures, educational products and stickers.

Unit and Pricing Analysis

During 2004, combined everyday and seasonal greeting card sales less returns fell by approximately 0.6% compared to 2003. Overall unit sales increased approximately 0.9% over last year, while average prices declined by approximately 1.4% for the same period. In 2003, total greeting card sales less returns were up 0.5% over 2002 but included the favorable impact of sales reductions in 2002 for scan-based trading buybacks, the elimination of the FMN line and the SKU reduction initiatives. Adjusting

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for these initiatives, combined everyday and seasonal greeting card sales less returns decreased approximately 2% in 2003. Virtually all of this decrease was reflected in lower average prices from the 2002 levels. Total unit sales of greeting cards remained flat from 2002 to 2003.

Unit and pricing comparatives for 2004 and 2003 are summarized below:

In 2004, the Corporation had an increase in everyday card sales of approximately 1.2% over 2003. Increased unit volume of approximately 1.5% was driven primarily by new business in the U.S. and U. K. markets, but was partially offset by a reduction in average selling prices of approximately 0.3%. The marginal reduction in average selling prices is indicative of a continuing shift in product mix to more value priced products.

In 2003, the Corporation had an increase in sales of everyday cards of approximately 3.5% over 2002, with approximately 5.6% of the increase attributable to higher unit volume, partially offset by a reduction in average selling prices of approximately 2.1%. Of the 5.6% increase in unit volume, approximately 4.0 percentage points is the result of scan-based trading buybacks and other initiatives in 2002. The remaining 1.6 percentage point increase in unit sales in 2003 is the result of strong acceptance of the Corporation’s value priced card products, partially offset by net store losses at two mass retail accounts and one supermarket chain. The reduction in average selling prices is primarily the result of a shift in product mix to more value priced products, which partially offset a 1.3% increase in the average price of cards at other price points.

In 2004, the Corporation’s seasonal card sales less returns declined approximately 4.2% from the prior year. On a consolidated basis, unit sales of seasonal greeting cards less returns were down approximately 0.7%. The unit volume decrease is due to a reduction in gross shipments in an effort to reduce return rates while the average selling price of seasonal cards declined approximately 3.5%, driven primarily by product mix.

In 2003, the Corporation had a decrease in seasonal card sales less returns, of 5.3% from 2002 levels. Unit sales of seasonal greeting cards in 2003, net of provisions for returns, were down approximately 2.5% on a consolidated basis compared to 2002. The unit volume decrease is primarily the result of net store losses in the U.S. market.

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In addition, the average selling prices for seasonal cards fell 2.8% in 2003 compared to 2002, primarily driven by mix shifts in the U.S. business.

Profit Margin Overview

In 2004, consolidated pretax margins fell 1.6 percentage points from 10.1% in 2003 to 8.5%. The Corporation completed the roll out of a major new account and experienced strong royalty streams leveraging its creative resources. This was more than offset by increased customer incentives, higher product costs, lower seasonal performance in card and gift wrap offerings, soft demand in the retail segment and higher interest expense as a result of debt retirement.

Conversely, in 2003, the consolidated pretax margin of 10.1% represented a significant improvement over the 2002 pretax margin loss of (10.2%). In 2002, the Corporation incurred reductions to net sales as well as expense charges for its various initiatives involving conversion of retailers to scan-based trading, SKU reductions, plant consolidations, elimination of non-value-added activities, contractual charges and impairment charges. These initiatives represented 16.0 percentage points of the 20.3% improvement in pretax margins. The remaining 4.3 percentage point net improvement in pretax margins is primarily the direct result of effective and sustainable cost reductions experienced throughout the entire organization during 2003.

Expense Overview

Material, labor and other production costs for 2004 were 46.7% of net sales, an increase from 44.2% in 2003. Of the 2.5% increase in costs, approximately 1.5% reflects the write-down of inventories related to seasonal performance and product discontinuances with the remaining 1.0% cost increase split approximately equally between higher spending on material and creative greeting card content and a shift in mix to relatively higher cost products, including party goods and candles. These expense increases were partially offset by sustainable cost improvements from the supply chain transformation which were mostly offset by implementation costs that occurred earlier in the year.

Material, labor and other production costs for 2003 were 44.2% of net sales, a decrease from 48.6% in 2002. Material, labor and other production costs in 2002 included the following:

w

A pretax charge of $49.1 million, net of LIFO valuation benefits, to reduce the value of inventory in the Corporation’s domestic operations to net realizable value associated with its brand rationalization and product line reduction.

w

A pretax reduction of $8.6 million related to certain customers’ conversion to scan-based trading.

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w

Other pretax costs of $19.6 million associated with the Corporation’s reorganization of its core business, including equipment moving expenses; fixture, displayer and signage costs; and production system enhancements.

These three items had the effect of increasing material, labor and other production costs by 5.4% (as a percentage of net sales) in 2002. The increase in this percentage in 2003 was due primarily to initial inefficiencies in the consolidation of domestic gift wrap and candle manufacturing operations. In addition, production volumes were down as the Corporation improved its net product sell through on seasonal products, resulting in higher overhead costs per unit.

Selling, distribution and marketing expenses were 32.3% of net sales for 2004 compared to 31.1% in 2003, a 1.2 percentage point increase. Virtually all of the increase resulted from higher field service costs associated with the new account rollout and broker commission payments related to “Care Bear” and “Strawberry Shortcake” licensing. Selling, distribution and marketing expenses were 31.1% of net sales in 2003 compared to 35.6% in 2002. Of the 4.5 percentage point improvement as a percent of net sales experienced in 2003, approximately 2.7 percentage points was the result of the Corporation’s previously discussed initiatives included in 2002 while the remaining improvement of 1.8 percentage points represents the substantial cost reductions realized through merchandising efficiencies, streamlined order filling costs, and reduced advertising expenditures.

Administrative and general expenses were $225.4 million in 2004, compared to $240.1 million in 2003 and $313.7 million in 2002. The $14.7 million decrease in expense in 2004 compared to 2003 is due primarily to lower employee-related costs, including executive compensation and profit sharing. The decline in expense between 2002 and 2003 is a result of lower bad debt expense, reduced costs associated with the COLI program and lower employee-related costs. The 2002 amount included the costs of the Corporation’s conversion to scan-based trading of $12.4 million and other charges for the Corporation’s reorganization efforts of $13.4 million. These two items impacted administrative and general expenses by 9.0%, amounting to a decrease of $47.7 million or 16.6% from 2002. In 2003, bad debt expense for the year was $7.2 million lower than the prior year. Additionally, the 2003 pretax cost of the COLI program was approximately $6 million lower than 2002, reflecting the wind-down of a portion of the program. Reduced costs for postretirement health care of approximately $6 million reflected changes in participant contributions and lower executive compensation costs contributed approximately $15 million to the reduction in administrative expenses from 2002 to 2003.

Interest expense was $85.8 million in 2004, compared to $79.1 million in 2003 and $78.6 million in 2002. The increase in interest expense from 2003 to 2004 was due to the accelerated write down of deferred financing costs and premium charges from the repurchase of $63.6 million of 11.75% senior subordinated notes and costs related to the early retirement of the term loan of $118.0 million. The increase in interest expense, however, was partially offset by the savings from the early retirement of the term loan in

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April 2003. In 2003, although debt levels were generally lower than in 2002, 2003 interest expense included the impact of the 11.75% senior subordinated notes and the 7.0% convertible subordinated notes for the entire year, while the 2002 amount included interest expense for those notes for only eight months of 2002. Those factors generally offset so that the 2003 interest expense was up only slightly from 2002.

Other (income) expense – net generated income of $60.3 million in 2004 compared to income of $26.9 million in 2003 and expense of $51.8 million in 2002. The 2004 results were due to income from licensing royalties of “Care Bear” and “Strawberry Shortcake” products of $44.9 million, interest income of $2.7 million and foreign exchange gain of $5.1 million. The 2003 results included a pretax gain of $12.0 million (total proceeds of $17.0 million) on the sale of a marketable security investment held by the Corporation’s United Kingdom subsidiary, royalty income of $6.7 million and interest income of $5.1 million. The 2002 results reflected:

•

$37.0 million in impairment charges to reflect the non-cash write-down of goodwill associated with the Corporation’s operations in Australasia as a result of restructuring the business as well as to address the general economic deterioration in the Pacific Rim;

•

$12.4 million in amortization expense related to goodwill;

•

$9.5 million in charges related to the divestiture of one of the Corporation’s operating units in the Pacific Rim region, writing down the associated carrying value to the unit’s estimated fair value.

The goodwill amortization reported in 2002 occurred prior to the Corporation’s adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” on March 1, 2002.

The effective tax rates for 2004, 2003 and 2002 were 38.7%, 39.7% and 37.7%, respectively. These rates reflect the United States statutory rate of 35% combined with the additional net impact of the various foreign, state and local income tax rates. In 2004, the reduction in the effective tax rate is the result of the utilization of net operating loss carryforwards and the settlement of the Corporation’s COLI obligations in 2003. See Note 16 to the Consolidated Financial Statements for details of the differences between taxes at the federal statutory rate and actual tax expense (benefit).

Impact of Initiatives – 2002

In its filing of its Form 10-K for the period ended February 28, 2002 and in its subsequent Form 10-Q filings, the Corporation had discussed the progress on the implementation of its restructuring and scan-based trading initiatives. Virtually all of those initiatives were substantially completed in 2002, and the Corporation incurred total pretax charges of $314.4 million.

The scan-based trading business model represented a significant change in the Corporation’s traditional business practices relative to two of its largest customers. The

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new relationship redefined risks and responsibilities for both parties while at the same time strengthening the reliance upon each other for a true partnering relationship.

The core of this business model rests with the Corporation providing product to the customer on a consignment basis with the Corporation recording sales at the time a product is electronically scanned through the retailer’s cash register. The need for enhanced controls on the part of both parties requires a high reliance on the compatibility and coordination of electronic data interchange. The advance costs of converting to this new business model were substantial for both parties and indicate the commitment to a true partnering relationship. For the Corporation, the single largest financial impact related to the reversal of previous sales transactions required to revert legal ownership of the inventory at the customer’s retail stores back to the Corporation. Following physical inventories conducted at each store location, the Corporation issued sales credits totaling $64.9 million to these two customers and all parties simultaneously modified their electronic inventory tracking systems accordingly. The Corporation incurred additional costs, net of inventory credits, of $23.7 million primarily for the initial inventory counting procedures, systems enhancements, outside consulting, recognition of shrink obligations, and other costs related to this fundamental change in the business relationship.

The Corporation also incurred additional pretax charges of $225.8 million associated with its restructure program. The primary objectives of the restructure program were to complete the integration of recent acquisitions, rationalize the product branding strategy, significantly reduce product line sizes, consolidate manufacturing operations, and reduce costs through the elimination of non-value-added activities. The Corporation established a Project Management Office to charter, scope, and track the progress of various restructuring initiatives to assure achievement of the objectives. By February 28, 2002, all projects had been completed or were substantially complete and the Corporation did not expect to incur any additional charges related to these projects going forward. The costs for these projects are summarized as follows:

w		A pretax restructuring charge of $56.7 million. This pretax charge included $39.0 million for the consolidation and rationalization of certain of the Corporation’s domestic and foreign manufacturing and distribution operations. These costs relate directly to employee severance and benefit termination costs, lease termination costs, and certain other costs required to exit certain facilities. In addition, the restructuring charge includes $17.7 million related to the completion of contractual changes with an online partner of the Corporation’s Internet unit.
w		A reduction in net sales of $16.2 million for the elimination of the FMN brand and other product line size reductions.
w		A pretax charge of $49.1 million to reduce the value of inventory in the Corporation’s domestic and Canadian operations to net realizable value associated with the brand rationalization and product line size reduction, highlighted by the elimination of the Corporation’s FMN product brand.

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w		A pretax charge of $46.5 million to reduce the carrying value of the net assets of two of the Corporation’s under-performing foreign operating units in the Pacific Rim.
w		A pretax charge of $57.3 million for other costs related to the restructure efforts, primarily involving field execution, program administration, moving and training costs, fixed asset eliminations, and similar costs incurred at certain of the foreign subsidiaries.

In a related phase of its restructuring efforts, the Corporation realigned its borrowing capabilities and increased its potential debt capacity to approximately $1.3 billion. The new facilities are comprised of a balanced mix of senior notes, convertible notes, term loans, secured credit facilities and revolving credit facilities, all with varying maturities and interest rates.

On June 22, 2001, the Corporation entered into agreements to sell $175 million of 7.00% convertible subordinated notes due in 2006 and $260 million of 11.75% senior subordinated notes due in 2008 to qualified institutional investors. The convertible notes outstanding could potentially result in the issuance of 12.6 million shares of the Corporation’s Class A Common Stock. The transactions, which closed on June 29, 2001, resulted in net proceeds to the Corporation of approximately $414.3 million, after deducting underwriting discounts and transactional expenses. The Corporation used the net proceeds from these offerings to repay indebtedness and to provide funds for other general corporate purposes. On August 28, 2001, the Corporation filed Form S-3 and Form S-4 with the Securities and Exchange Commission to register these debt offerings. During the third quarter of 2004, the Corporation repurchased $63.6 million of the 11.75% senior subordinated notes and recorded a charge of $13.8 million for the write-off of the related deferred financing costs and the premium associated with the note repurchase. In addition, on March 31, 2004, the Corporation announced its intent to make a cash tender offer for $196.4 million of outstanding 11.75% senior subordinated notes. See Liquidity and Capital Resources for additional discussion.

On August 9, 2001, the Corporation entered into a new $350 million senior secured credit facility that was reduced to $320 million on July 22, 2002. It consists of three traunches: a $75 million, 364-day revolving credit facility, a $120 million revolving credit facility maturing January 15, 2006, and a $125 million term loan maturing June 15, 2006 of which $118 million was outstanding at February 28, 2003. On April 7, 2003, the Corporation retired the entire $118 million outstanding amount of this term loan. On August 5, 2003, the Corporation exercised its option on the 364-day revolving facility for an additional 364 days. At the request of the Corporation, the facility was reduced from $105 million to $75 million. The credit facility contains various restrictive covenants, which require, among other things, that the Corporation meet specified periodic financial ratios, minimum net worth and earnings requirements. The credit facility provides for certain restrictions on the Corporation’s ability to incur additional indebtedness to acquire other businesses and entities, and to pay shareholder dividends. At February 29, 2004, the Corporation is in compliance with all of its debt covenants. Based on the

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strong improvement in its balance sheet, the Corporation has modified its debt covenants and expects to be in compliance throughout 2005. As a final piece of the debt realignment, the Corporation also entered into a three-year, $250 million credit facility secured by certain trade accounts receivable. At the request of the Corporation, on August 6, 2002, the agreement was amended reducing the available financing from $250 million to $200 million.

Restructuring Activities - 2002

During 2002, the Corporation recorded a $56.7 million restructure charge as discussed above. This restructure charge included $29.0 million for employee termination benefits, $2.1 million for facility rationalization costs, $1.5 million for lease exit costs, $17.7 million for a change in the contractual relationship with a partner of the Corporation’s Internet unit and $6.4 million of other costs. In total, approximately 1,600 positions were eliminated, comprised of approximately 1,200 hourly and 400 salaried positions. All activities were substantially completed by February 28, 2002.

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The following table summarizes the provisions and remaining reserve associated with the restructure charge at February 29, 2004:

(Thousands of dollars)

Included in accrued liabilities at February 29, 2004 is $1.5 million representing the portion of severance not yet expended. The payment of certain termination benefits will not be completed until 2007.

Segment Information

The Corporation is organized and managed according to a number of factors, including product categories, geographic locations and channels of distribution. The reportable segments include Social Expression Products, Retail Operations and AmericanGreetings.com.

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

The Corporation owns and operates approximately 600 card and gift retail stores in the United States and Canada through its Retail Operations segment. The stores are primarily located in malls and strip shopping centers and sell products purchased from the Social Expression Products segment and products purchased from other vendors.

AmericanGreetings.com, Inc. is an Internet-based provider of greetings and other social communication content to consumers and Internet-based businesses. In March 2001, AmericanGreetings.com, Inc. acquired Egreetings Network, Inc., a company that operated an online card and entertainment Internet site. In September 2001, AmericanGreetings.com, Inc. acquired the BlueMountain.com division of At Home Corporation. The BlueMountain.com division also operated an online card and entertainment Internet site.

The Corporation has disclosed the applicable segment measures in Note 15 to the consolidated financial statements. The Corporation reviews segment results using consistent exchange rates between years to eliminate the impact of foreign currency fluctuations.

Social Expression Products Segment

In 2004, the net sales excluding the impact of foreign exchange and intersegment items of the Social Expression Products segment decreased $31.6 million, or 2.0%, from 2003. Sales benefited in the Corporation’s U.S. market due to the addition of a major mass retailer and strong performance from its candle and party goods business. The U.K. business experienced increased sales due to market share gains. However, these increases were more than offset by weak seasonal performance, primarily in the domestic greeting card and gift wrap businesses, and increased customer incentives. Net sales excluding the impact of foreign exchange in 2003 were lower than 2002 results by $21.3 million, or 1.3%. The decrease reflected the weak market demand in Australia, poor sell through on calendar products in the United States and a reduction in seasonal card shipments in an effort to further reduce return rates in all of the greeting card markets. In the United States, the impact of net store losses at several retailers was primarily offset by increased acceptance of the Corporation’s entry price products.

In 2002, the effect of the conversion to scan-based trading for two major United States customers was to reverse sales and the related cost of sales of product that had previously been shipped to those customers. In addition, the elimination of the Corporation’s FMN brand and the associated product line size reduction resulted in credits being granted to customers for already-sold product that was eliminated from the ongoing product offerings. The Corporation also undertook a number of other restructuring and reorganization initiatives during the year. For management evaluation

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of its operating segments, the effects of these initiatives were excluded from the internal reporting and evaluation of the performance of the operating segments.

During 2004, combined everyday and seasonal greeting card sales less returns fell by approximately 0.6% compared to 2003. Overall unit sales increased approximately 0.9% over last year, while average prices declined by approximately 1.4% for the same period. In 2003, total greeting card sales less returns were up 0.5% over 2002 but included the favorable impact of sales reductions in 2002 for scan-based trading buybacks, the elimination of the FMN line and the SKU reduction initiatives. Adjusting for these initiatives, combined everyday and seasonal greeting card sales less returns decreased approximately 2% in 2003. Virtually all of this decrease was reflected in lower average prices from the 2002 levels. Total unit sales of greeting cards remained flat from 2002 to 2003.

In 2004, seasonal card sales less returns declined approximately 4.2% from the prior year. On a segment basis, unit sales of seasonal greeting cards less returns were down approximately 0.7% due to a reduction in gross shipments in an effort to reduce return rates while average selling prices of seasonal cards declined approximately 3.5% driven primarily by product mix.

Overall, unit sales of everyday greeting cards increased approximately 5.6% from 2002 to 2003, with higher unit volume in the United States and the United Kingdom more than offsetting decreases in the other international operations, including Australia. In the United States, approximately 4.0 percentage points of the increase is the result of prior year initiatives to convert to scan-based trading and eliminations of the FMN product line. Everyday card prices decreased approximately 2.1% in 2003 from 2002, particularly in the United States. Unit sales of seasonal greeting cards decreased approximately 2.5% from 2002 to 2003 while seasonal card prices declined approximately 2.8% in 2003 from 2002.

Segment earnings excluding the impact of foreign exchange decreased $2.7 million, or 0.9%, in 2004 compared to last year. Improved earnings in the United Kingdom and Australia were more than offset by declines in the United States. The overall decrease reflects lower net sales impacted by product mix, increases in customer incentives, a shift toward relatively higher-cost product and the write-down of inventory costs associated with product discontinuances. In addition, costs of the Corporation’s supply chain transformation initiative continued, but were offset by expense savings during the year. From 2002 to 2003, segment earnings excluding the impact of foreign exchange increased $52.7 million, or 20.7%. Improved earnings in the United States and the United Kingdom more than offset declines in Australia. The increase reflected operating expense reductions as a result of the restructuring activities in 2002, particularly for order filling, field sales, merchandiser and administration expenses.

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Retail Operations

Net sales excluding the impact of foreign exchange in the Retail Operations segment decreased $4.0 million, or 1.5%, in 2004 from 2003, as sales of both everyday and seasonal cards were lower. The average number of transactions per store was down from the prior year by approximately 4%, reflecting reduced overall mall consumer traffic. Net sales at stores open one year or more were down approximately 4% in 2004 from 2003.

In 2003, net sales excluding the impact of foreign exchange in the Retail Operations segment decreased $3.4 million, or 1.3%, from 2002. Net sales at stores open one year or more increased slightly in 2003 from 2002.

Segment earnings excluding the impact of foreign exchange were $2.8 million in 2004, a decrease of $14.8 million, or 84.2%, from the prior year. The decrease reflected increased promotional pricing and reduced sales as a result of reduced mall traffic levels. In 2003, segment earnings excluding the impact of foreign exchange increased $0.2 million, or 1.3%, compared to 2002, reflecting expense reductions that more than offset the lower sales level and the continued emphasis on improving the overall portfolio of stores by closing poor performing locations.

AmericanGreetings.com, Inc. Segment

Net sales of AmericanGreetings.com, Inc. increased $1.8 million, or 5.2%, in 2004 over 2003, reflecting an increase in advertising revenues and an approximate 10% rise in subscription membership. At the end of 2004, the Corporation had approximately 2.1 million in paid subscribers versus 1.9 million in 2003. In 2003, net sales decreased $5.1 million, or 12.9%, from 2002, reflecting a $16.1 million decrease in advertising revenue that was only partially offset by an increase in the subscription-fee-based business that began in December 2001.

In 2004, earnings increased to $4.5 million from $0.5 million in 2003, reflecting the increase in membership revenues as well as cost reductions implemented by the segment during the year. In 2002, AmericanGreetings.com, Inc. spent considerable effort to transition to a subscription-fee-based business model. Change-over costs resulted in a segment loss of $2.1 million in 2002. Further, 2002 results excluded a $17.7 million unallocated item related to the completion of contractual changes with an online strategic partner.

Unallocated Items

Centrally incurred and managed costs and charges for the previously identified business initiatives are not allocated back to the operating segments. The unallocated items include interest expense of $85.8 million and $79.1 million in 2004 and 2003, respectively, for centrally incurred debt and domestic profit-sharing expense of $7.1

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million and $13.6 million in 2004 and 2003, respectively. In addition, unallocated items include costs associated with corporate operations including the senior management staff, corporate finance, legal, and human resource functions, as well as insurance programs and other strategic costs. These costs totaled $67.4 million and $53.7 million in 2004 and 2003, respectively.

Liquidity and Capital Resources

One of the Corporation’s major initiatives in 2004 has been to continue to enhance its financial position. As a result of this initiative, the Corporation reduced debt by $181.6 million improving its debt to total capital ratio by 10 percentage points from 44.4% in 2003 to 34.4% in 2004, and finished the year with $285.5 million in cash, a result of concentrated cash collection efforts, reduced customer payments and strict controls on capital spending throughout the year. With the additional cash on hand, the Corporation announced its intention to initiate a tender offer on March 31, 2004 to repurchase its remaining $196.4 million senior subordinated notes, which it is currently actively engaged in.

During the year, cash flow from operating activities provided cash of $291.9 million compared to $77.0 million in 2003, an improvement of $214.9 million over 2003. The overall increase reflects concentrated cash collection efforts on trade accounts receivable and reduced tax payments driven by the settlement of the Corporation’s COLI obligations in 2003, partially offset by reductions in trade and other payables. Cash flow from operating activities for 2003 compared to 2002 resulted in an improvement of $40.7 million from $36.4 million in 2002. This increase reflects improved net income, a significant shift in deferred costs-net amounts as amortization exceeded payments and continued improvements in working capital, offset in part by payments related to the COLI tax settlement made in 2003 as well as the Corporation’s discretionary funding in 2003 of the Gibson Retirement Income Plan, a defined benefit plan.

Accounts receivable, net of the effect of acquisitions and divestitures, provided a source of cash of $69.3 million in 2004, compared to a use of cash of $15.6 million in 2003 and a generation of cash of $94.9 million in 2002. The improvement of $84.9 million in 2004 over 2003 reflected a concentrated effort on cash collections during the year. The 2002 cash generation also reflected strong cash collections during the year, aided in part by the conversion to scan-based trading for two major customers. Upon conversion to scan-based trading, customer payment terms improved and leveled seasonal peaks in their accounts receivable.

Inventories, net of the effects of acquisitions and divestitures, decreased $42.5 million in 2004, compared to decreases of $18.3 million and $63.9 million in 2003 and 2002, respectively. The decreases in 2004 reflect the write-down of approximately $28 million in inventory for excess seasonal product and product discontinuances, of which approximately $20 million was recorded in the fourth quarter. The 2003 results reflect the favorable impacts of plant consolidations and SKU reductions undertaken in the

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prior year as well as reduced seasonal card production as gross outbound shipments were reduced in an effort to control return rates. The decrease in 2002 included inventory write downs of $49.1 million, net of LIFO valuation benefits, recorded during the year, combined with the eliminations of the FMN product line, but partially offset by a $17.0 million increase related to the Corporation’s conversion to scan-based trading.

Deferred costs – net during 2004 and 2003 resulted in amortization exceeding payments by $34.4 million and $39.7 million, respectively; in 2002, payments exceeded amortization by $124.8 million. The 2002 amount reflected the Corporation’s significant expansion of its agreements with three major customers while the 2004 and 2003 amounts reflect lower additions for new or amended contracts. None of the Corporation’s major customer agreements are set to expire in fiscal 2005.

Accounts payable and other liabilities decreased $107.2 million in 2004 compared to decreases of $106.1 million in 2003 and $37.2 million in 2002. The decrease in 2004 was due to reduced trade payables, continued reduction of acquisition liabilities and lower severance, profit sharing and executive compensation liabilities in the current year. The decrease in 2003 was due primarily to payments to settle the income tax liability associated with the Corporation’s COLI program. The decrease in 2002 was due to decreases in income taxes payable and dividends payable, offset partially by the liabilities established in connection with the 2002 restructure charge, primarily for employee severance payment obligations. The decrease in income taxes payable reflected the tax benefits of the loss incurred by the Corporation in 2002, and the decrease in dividends payable reflected the elimination of quarterly shareholder dividend payments.

Cash flow from investing activities generated uses of cash of $33.1 million and $71.5 million in 2004 and 2002, respectively and a source of cash of $13.3 million in 2003. Over the past three years, capital spending has been a primary use of cash for investing activities. In 2004, the Corporation’s capital expenditures totaled $35.8 million, up from $31.3 million in 2003 and $29.0 million in 2002. The Corporation continues to limit capital expenditures to only projects with high internal rates of return or critical operating necessities. Another important driver over the three years presented is the impact of the Corporation’s COLI program. In 2003 and 2004, the Corporation took steps to wind down the program, which generated cash inflows of $10.0 million in 2003 and $7.8 million in 2004. In 2002, this program was fully in force, requiring a cash outlay of $8.9 million.

In addition to capital spending and COLI, the Corporation sold a marketable security in 2003 and was involved in business acquisitions and divestiture activities in 2002. The sale of the marketable security generated cash of $17.0 million while the Corporation used net cash funds of $22.5 million to acquire BlueMountain.com for $35.0 million offset by $12.5 million, the cash portion of proceeds received as a result of the divestiture of M & D Balloons.

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In 2004, the Corporation used $192.0 million for financing activities and generated sources of cash of $13.3 million and $86.1 million in 2003 and 2002, respectively. Over the past three years, the Corporation has made significant changes to its capital structure most recently with the retirement of its $118.0 million term note and the repurchase of $63.6 million of its senior subordinated notes in 2004. In 2002, the Corporation realigned its borrowing facilities, as reflected in the increase in long-term debt of $473.3 million and the reduction of short-term debt. Some of the Corporation’s short-term debt was replaced by $260 million of 11.75% senior subordinated notes, $175 million of 7.00% convertible subordinated notes, and the borrowings made under the $320 million senior secured credit facility. These notes and the credit facility are discussed in more detail in Note 10 to the Consolidated Financial Statements.

Stock option activity has been a source of cash for the Corporation over the past two years generating cash of $18.5 million and $21.5 million in 2004 and 2003, respectively. Stock options exercised under employee benefit plans have occurred during a period of favorable stock prices. However, in 2002, such activity was negligible due to lower market prices for the Corporation’s stock.

The Corporation paid dividends in 2002 totaling $26.6 million; after September 2001, quarterly dividend payments were suspended.

The Corporation’s future operating cash flow and existing credit facilities are expected to meet currently anticipated funding requirements. The seasonal nature of the business results in peak working capital requirements that may be financed through short-term borrowings. In an effort to further reduce future interest expense, the Corporation announced on March 31, 2004 its intent to make a cash tender offer for $196.4 million of outstanding 11.75% senior subordinated notes due July 15, 2008 and a consent solicitation to amend the related note indenture. The commencement date of the offer was April 14, 2004, the consent payment deadline was April 27, 2004 and the expected expiration date is May 12, 2004. While the Corporation’s board of directors has approved the tender offer, the offer is subject to an amendment of the credit agreement for the Corporation’s revolving credit facility. The Corporation received this amendment on April 27, 2004.

Market Risk

The Corporation’s market risk is impacted by changes in interest rates and foreign currency exchange rates. The Corporation manages interest rate exposure through a mix of fixed and floating rate debt. A significant portion of the Corporation’s debt has fixed rates, limiting its exposure to fluctuations in interest rates. To date, risks associated with interest rate movements have not been significant and are not expected to be so in the near term.

Approximately 21%, 18% and 18% of the Corporation’s 2004, 2003 and 2002 net sales, respectively, were generated from operations outside the United States. Operations in Australasia, Canada, Mexico, South Africa and the United Kingdom are denominated in

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currencies other than United States dollars. Each of these operations conducts substantially all of its business in its local currency and is not subject to material operational risks associated with fluctuations in exchange rates. In 2004, the Corporation’s net income was impacted by the translation of the foreign operations’ functional currencies into United States dollars. In previous years, exposure to exchange rate fluctuations had not been significant; however, no assurance can be given that future results will not be affected by significant changes in foreign currency exchange rates.

Contractual Obligations

The following chart reflects the Corporation’s contractual obligations as of February 29, 2004:

(Thousands of Dollars)

Excluded from the foregoing table are open purchase orders at February 29, 2004 for raw materials and supplies used in the normal course of business.

Critical Accounting Policies

The consolidated financial statements of the Corporation are prepared in accordance with accounting principles generally accepted in the United States, which requires the Corporation to make estimates and assumptions (see Note 1 to the Consolidated Financial Statements).

The Corporation exercises considerable judgment in establishing estimates for certain critical accounting policies, which could have a material impact in the preparation of its consolidated financial statements:

Allowance for Doubtful Accounts

The Corporation evaluates the collectibility of its accounts receivable based on a combination of factors. In circumstances where the Corporation is aware of a customer’s inability to meet its financial obligations (e.g., bankruptcy filings), a

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specific reserve for bad debts against amounts due is recorded to reduce the receivable to the amount the Corporation reasonably expects will be collected. In addition, the Corporation recognizes reserves for bad debts based on estimates developed by using standard quantitative measures incorporating historical write-offs and current economic conditions. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Although the Corporation considers these balances adequate and proper, changes in economic conditions in the retail markets in which the Corporation operates could have a material effect on the required reserve balances.

Goodwill

Goodwill represents the excess of purchase price over the estimated fair value of net assets acquired in business combinations accounted for by the purchase method. On March 1, 2002, the Corporation adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS 142 presumes that goodwill and certain intangible assets have indefinite useful lives. Accordingly, goodwill and certain intangibles are not amortized, but subject to at least an annual review for impairment. Upon adoption, the Corporation ceased amortization of goodwill and performs an impairment test annually. To test for goodwill impairment, the Corporation is required to estimate the fair market value of each of its reporting units. The Corporation estimates future cash flows and allocations of certain assets using estimates for future growth rates and management’s judgment regarding the applicable discount rates. Changes to management’s judgments and estimates could result in a significantly different estimate of the fair market value of the reporting units, which could result in an impairment of goodwill. The annual review for goodwill impairment was completed in the fourth quarter of 2004 and resulted in no impairment.

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. The Corporation views such agreements as advantageous in developing and maintaining business with its retail customers. The customer typically receives a combination of cash payments, credits, discounts, allowances and other incentive considerations to be earned as product is purchased from the Corporation over the stated time period of the agreement to meet a minimum purchase volume commitment. These agreements are negotiated individually to meet competitive situations and therefore, while some aspects of the agreements may be similar, important contractual terms may vary. In addition, the agreements may or may not specify the Corporation as the sole supplier of social expression products to the customer.

Although risk is inherent in the granting of advances, the Corporation subjects such customers to its normal credit review. In instances where the Corporation is aware of a particular customer’s inability to meet its performance obligation, the Corporation records a specific reserve to reduce the deferred cost asset to an estimate of the value

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of future cash flows based upon expected performance. The Corporation maintains reserves for deferred costs related to these agreements of $40.1 million and $36.1 million at February 29, 2004 and February 28, 2003, respectively. Losses attributed to these specific events have historically not been material.

For contractual arrangements that are based upon a minimum purchase volume commitment, the Corporation periodically reviews the progress toward the volume commitment and estimates future sales expectations for each customer. Factors that can affect the Corporation’s estimate include store door openings and closings, retail industry consolidation, amendments to the agreements, consumer shopping trends, addition or deletion of participating products, and product productivity. Based upon its review, the Corporation may modify the remaining amortization periods of individual agreements to reflect the changes in the estimates for the attainment of the minimum volume commitment in order to align amortization expense with the periods benefited. The Corporation does not make retroactive expense adjustments to prior fiscal years. The aggregate average remaining life of the Corporation’s contract base is 5.9 years.

The accuracy of the Corporation’s assessments of the performance-related value of a deferred cost asset related to a particular agreement and of the estimated time period of the completion of a volume commitment is based upon management’s ability to accurately predict certain key variables such as product demand at retail, product pricing, customer viability and other economic factors. Predicting these key variables involves uncertainty about future events; however, the assumptions used are consistent with the Corporation’s internal planning. If the deferred cost assets are assessed to be recoverable, they are amortized over the periods benefited. If the carrying value of these assets is considered to be not recoverable through performance, such assets are written down as appropriate.

Deferred Income Taxes

Deferred income taxes are recognized at currently enacted tax rates for temporary differences between the financial reporting and income tax basis of assets and liabilities and operating loss and tax credit carryforwards. As of February 29, 2004, the Corporation has approximately $150.4 million of deferred tax assets related to deductible temporary differences and tax loss and credit carryforwards, which will reduce taxable income in future years.

In assessing the realizability of deferred tax assets, the Corporation assesses whether it is more likely than not that a portion or all of the deferred tax assets will not be realized. The Corporation considers the scheduled reversal of deferred tax liabilities, tax planning strategies, and projected future taxable income in making this assessment. At February 29, 2004, a valuation allowance of $51.8 million has been recorded against these deferred tax assets based on this assessment and is primarily against certain foreign net operating loss carryforwards. The Corporation believes it is more likely than not that the tax benefit of the remaining net deferred tax assets will be realized. The amount of net deferred tax assets considered realizable could be increased or reduced in the

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future if the Corporation’s assessment of future taxable income or tax planning strategies changes.

Sales Returns

The Corporation provides for estimated returns of seasonal cards in the same period as the related revenues are recorded. These estimates are based upon historical sales returns, the amount of current year seasonal sales and other known factors. Estimated return rates utilized for establishing estimated returns reserves have approximated actual returns experience. However, actual returns may differ significantly, either favorably or unfavorably, from these estimates if factors such as the historical data the Corporation used to calculate these estimates do not properly reflect future returns or as a result of changes in economic conditions of the customer and/or its market. The Corporation regularly monitors its actual performance to estimate rates and the losses attributable to any changes have historically not been material.

New Accounting Pronouncements

In October 2001, SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” was issued. This Statement, which supersedes SFAS No. 121 (“SFAS 121”), “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” provides a single accounting model for the disposal of long-lived assets. Although retaining many of the fundamental recognition and measurement provisions of SFAS 121, the Statement significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Assets held-for-sale are stated at the lower of their fair values or carrying amounts and depreciation is no longer recognized. The Corporation adopted this statement effective March 1, 2002.

In June 2002, SFAS No. 146 (“SFAS 146”), “Accounting for Exit or Disposal Activities,” was issued relating to disposal activities initiated after December 31, 2002. SFAS 146 requires that liabilities for one-time termination benefits incurred over future service periods should be measured at the fair value as of the termination date and recognized over any future service period. Changes resulting from revisions to either the timing or amount of estimated cash flows, discounted at the original credit-adjusted risk-free rate require subsequent adjustment. Interest on the liability would be accreted and charged to expense as an operating item. In the normal course of business, in the fourth quarter of 2003, the Corporation undertook numerous individual and independent cost reduction programs that included charges for employee severance costs. Although none of the independent programs were material individually, aggregate severance costs of $8.9 million for approximately 500 positions were recorded at the end of 2003. All affected employees were notified of termination prior to February 28, 2003 and were terminated in early 2004. All severance is expected to be paid by the end of 2007.

In January 2003, Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities” was issued. 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

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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 Board’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 Corporation does not believe that the Interpretation or Revised Interpretation will have a material impact on the financial statements of the Corporation.

On January 12, 2004, the FASB issued FASB Staff Position (“FSP”) No. FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” This FSP allows companies to make a one-time election to defer the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) that was signed into law on December 8, 2003.

SFAS No. 106 (“SFAS 106”), “Employers’ Accounting for Postretirement Benefits Other than Pensions,” requires presently enacted changes in relevant laws to be considered in current period measurements of accumulated postretirement benefit obligation (“APBO”) and the net postretirement benefit costs. The FSP addresses the fact that certain accounting issues raised by the Act are not explicitly addressed in SFAS 106 and significant uncertainties may exist as to the direct effects of the Act, as well as the ancillary effects on plan participants’ behavior and health care costs. Therefore, a plan sponsor and its advisors may not have (1) sufficiently reliable information available to measure the effects of the Act, (2) sufficient time before issuance of the financial statements for fiscal years that include the Act’s enactment to prepare actuarial valuations that reflect the effects of the Act, or (3) sufficient guidance to ensure that the sponsor’s accounting for the effects of the Act is consistent with accounting principles generally accepted in the United States. As a result, a plan sponsor may elect to defer recognizing the effects of the Act in accounting for its plan under SFAS 106 and in providing disclosures related to the plan required by Revised SFAS No. 132, “Employers’ Disclosures about Pension and Other Postretirement Benefits,” until authoritative guidance on accounting for certain components of the Act is issued, or until certain other events occur. The Company has elected to defer accounting for the Act until further authoritative guidance is issued.

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Factors That May Affect Future Results

The Corporation believes that the restructuring and reorganization activities it completed in 2002 will strengthen its position in the social expression industry. However, other potential challenges in the economic environment in which it operates may have negative consequences to the Corporation and its operating results in the future. These challenges include a potential decrease or deterioration of the sales levels of greeting cards, both in price and volume, purchased by the ultimate consumer at the Corporations’ customers’ retail locations.

The Corporation has maintained a strong customer base in a wide variety of distribution channels through its investment in deferred costs related to agreements with certain retailers and other competitive arrangements. The agreements have lessened the impact to the Corporation from loss of business due to retailer consolidations in recent years. These agreements have been a strategic element of the Corporation’s growth and the financial condition of the retail customers is continually monitored and evaluated to reduce risk.

The statements contained in this document that are not historical facts are forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements. These forward-looking statements involve risks and uncertainties, including but not limited to retail bankruptcies and consolidations, successful integration of acquisitions, a weak retail environment, consumer acceptance of products as priced and marketed, the impact of technology on core product sales and competitive terms of sale offered to customers. Risks pertaining specifically to the Corporation’s electronic marketing business include the viability of Internet advertising as a generator of revenue and the public’s continued acceptance of paid Internet greetings and other social expression products.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Derivative Financial Instruments – The Corporation does not hold or issue derivative financial instruments for trading purposes.

Interest Rate Exposure – The majority of the Corporation’s debt is carried at fixed interest rates. Therefore, the Corporation’s overall interest rate exposure risk is minimal. Based on the Corporation’s interest rate exposure on its non-fixed rate debt as of and during the year ended February 29, 2004, a hypothetical 10% movement in interest rates would not have had a material impact on interest expense.

Foreign Currency Exposure – The Corporation’s international operations expose it to translation risk when the local currency financial statements are translated into U.S. dollars. As currency exchange rates fluctuate, translation of the statements of operations of international subsidiaries to U.S. dollars could affect comparability of results between years. The impact of foreign currency exchange rates changes from 2003 to 2004 was to increase the net income of the Corporation by approximately $9.8 million in 2004. The net income of the Corporation was not materially affected by exchange rate fluctuations for the years ended February 28, 2003, or 2002.

At February 29, 2004, a hypothetical 10% movement in the weighted-average foreign exchange rates for the entire 2004 fiscal year would have had an approximate $10.1 million effect on income.

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for a discussion of the Corporation’s exposure to market risk.

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Item 8. Financial Statements and Supplementary Data

CONSOLIDATED STATEMENT OF OPERATIONS
Years ended February 29, 2004 and February 28, 2003 and 2002

Thousands of dollars except share and per share amounts

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENT OF FINANCIAL POSITION
February 29, 2004 and February 28, 2003

Thousands of dollars except share and per share amounts

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See notes to consolidated financial statements.

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CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended February 29, 2004 and February 28, 2003 and 2002

Thousands of dollars

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
Years ended February 29, 2004 and February 28, 2003 and 2002
Thousands of dollars except per share amounts

[Continued from above table, first column(s) repeated]