This management's discussion and analysis of financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 27, 2009. Reference to a year relates to the fiscal year, ended in February of the year indicated, rather than the calendar year, unless indicated by a specific date. Additionally, Q1, Q2, Q3 and Q4 reference the

first, second, third and fourth quarter, respectively, of the fiscal year indicated. All amounts are in millions, except share and per share data, data presented as a percentage or as otherwise indicated.

Certain amounts in the prior years' financial statements have been reclassified to conform to the current year's presentation. During 2009, we completed a review of certain indirect manufacturing costs to determine the consistency of classification of these costs across our business units and reportable segments. Based on our analysis, we adjusted our Q1 2009 results to increase cost of sales and decrease operating expenses by the following amounts:

                                                               Three Months Ended
Reclassification from Operating Expenses to Cost of Sales         May 30, 2008
North America                                                 $                5.4
International                                                                  0.2
Other                                                                          0.7

                                                              $                6.3

Financial Summary


Results of Operations



                                                                        Three Months Ended
                                                                May 29,                    May 30,
                Income Statement Data                             2009                       2008
Revenue                                                   $ 545.6        100.0 %     $ 815.7        100.0 %
Cost of sales                                               387.0         70.9         551.0         67.5
Restructuring costs                                           3.1          0.6           4.8          0.6

Gross profit                                                155.5         28.5         259.9         31.9
Operating expenses                                          161.0         29.6         220.7         27.1
Restructuring costs                                          (0.3 )       (0.1 )         2.4          0.3

Operating income (loss)                                      (5.2 )       (1.0 )        36.8          4.5
Interest expense and other income, net                       (2.7 )       (0.5 )        (2.8 )       (0.3 )

Income (loss) before income tax expense (benefit)            (7.9 )       (1.5 )        34.0          4.2
Income tax expense (benefit)                                 (7.9 )       (1.5 )        11.9          1.5

Net income                                                $    -            -        $  22.1          2.7 %

Overview

We recorded net income of $0 in Q1 2010 compared to net income of $22.1 in Q1 2009. The 2010 deterioration was primarily driven by lower volume, which was partially offset by benefits from prior restructuring activities and other cost reduction efforts, lower variable compensation expense, and a significant increase in cash surrender value of our company-owned life insurance policies ("COLI"), which largely contributed to a 100% effective tax rate in the quarter.

Our revenue decreased $270.1 or 33.1% in Q1 2010 compared to the same period last year. Q1 2010 revenue was negatively impacted by approximately $39 from currency translation effects compared to Q1 2009 and was also negatively impacted by $12 of sales related to divestitures. The global economic slowdown and other factors contributing to the turmoil in the capital markets influenced the decreased demand for office furniture. Revenue declines were broad-based, significantly affecting most of our segments, geographies, vertical markets and product categories. We expect the effects of the global economic slowdown to significantly decrease the demand for office furniture across all of our segments through the remainder of 2010.

Cost of sales increased to 70.9% of revenue in Q1 2010, a 340 basis point deterioration compared to Q1 2009. We estimate that the majority of the deterioration was due to lower fixed cost absorption related to lower volume, which had the effect of increasing cost of sales as a percent of revenue compared to the prior year. The deterioration in cost of sales was partially mitigated by benefits from prior restructuring activities and other cost reduction efforts, an increase in cash surrender value of COLI of $9, a reduction of $6 in variable compensation expense, lower commodity costs of approximately $6, and temporary reductions in employee salaries and retirement benefits of $5.

Operating expenses decreased by $59.7 in Q1 2010 compared to the same period last year. The decrease was primarily due to benefits from prior restructuring activities and other cost reduction efforts, a reduction of $14 in variable compensation expense, favorable currency translation effects of approximately $9, an increase in cash surrender value of COLI of $6, and temporary reductions in employee salaries and retirement benefits of $5. Operating expenses increased as a percent of revenue due to reduced volume leverage.

We recorded restructuring costs of $2.8 in Q1 2010, compared to $7.2 in Q1 2009. The 2010 charges primarily related to the consolidation of a manufacturing facility in the North America segment and employee termination costs related to the reduction of our global white-collar workforce. Over the past 15 months we have launched various restructuring actions that we estimate resulted in $15 to $20 of cost savings in Q1 2010 compared to Q1 2009. See Note 12 to the condensed consolidated financial statements for additional information.

The income tax benefit recorded in Q1 2010 approximated the loss before income taxes. The resulting effective tax rate of 100% was driven in large part by significant non-taxable income from COLI.

Interest Expense and Other Income, Net


                                                             Three Months Ended
                                                          May 29,           May 30,
        Interest Expense and Other Income, Net             2009              2008
   Interest expense                                      $    (4.4 )       $    (4.3 )

   Other income, net:
   Interest income                                             0.7               2.2
   Equity in income of unconsolidated joint ventures           0.2               1.1
   Miscellaneous, net                                          0.8              (1.8 )

   Total other income, net                                     1.7               1.5

   Total interest expense and other income, net          $    (2.7 )       $    (2.8 )

Interest income in Q1 2010 was lower than the prior year due to lower average cash and investment balances and lower interest rates. Within Miscellaneous, net, Q1 2010 included $2.4 of net gains related to various non-operating investments offset by a $2.5 charge recorded in connection with the liquidation of an unconsolidated joint venture. See Note 3 to the condensed consolidated financial statements for additional information.

Business Segment Review

See additional information regarding our business segments in Note 11 to the condensed consolidated financial statements.

North America


                                                           Three Months Ended
                                                    May 29,                   May 30,
    Income Statement Data - North America            2009                      2008
    Revenue                                   $ 293.9       100.0 %     $ 430.7       100.0 %
    Cost of sales                               207.5        70.6         293.7        68.2
    Restructuring costs                           2.6         0.9           2.8         0.6

    Gross profit                                 83.8        28.5         134.2        31.2
    Operating expenses                           72.2        24.6          99.0        23.0
    Restructuring costs                          (1.1 )      (0.4 )         0.9         0.2

    Operating income                          $  12.7         4.3 %     $  34.3         8.0 %

Operating income in the North America segment was 4.3% of revenue in Q1 2010 compared to 8.0% of revenue in the same period last year. The deterioration was driven by lower fixed cost absorption related to lower volume, partially offset by benefits from prior restructuring activities and other cost reduction efforts, lower variable compensation expense, an increase in cash surrender value of COLI, lower commodity costs, and improved price yield from customers continuing to migrate from old price lists.

North America revenue, which accounted for 53.9% of consolidated revenue in Q1 2010, decreased by $136.8 or 31.8% from the same period last year. A divestiture in Q2 2009 had the effect of decreasing revenue by $8.6 in the current quarter as compared to the prior year. Current quarter revenue was also negatively impacted by approximately $7 from currency translation effects related to our subsidiary in Canada. The remaining decrease in revenue was primarily due to decreased volume across most of our vertical markets (except for the U.S. Federal government), geographic regions and product categories. The revenue declines within state and local government, healthcare and higher education were much less than the declines experienced in other vertical markets. In addition, we experienced deeper declines in day-to-day business compared to project-related revenue.

Cost of sales as a percent of revenue increased 240 basis points compared to the same period last year. We estimate the majority of the deterioration was the result of lower fixed cost absorption related to lower volume. The deterioration in cost of sales was partially offset by benefits from prior restructuring activities and other cost reduction efforts, an increase in cash surrender value of COLI of $8.6, variable compensation expense which was $5 lower than in Q1 2009, lower commodity costs of approximately $5, improved price yields from customers continuing to migrate from old price lists, and temporary reductions in employee salaries and retirement benefits of $4.

Operating expenses were 24.6% of revenue in Q1 2010, compared to 23.0% of revenue in Q1 2009. Operating expenses decreased in absolute dollars compared to 2009 primarily due to variable compensation expense which was $8 lower than in Q1 2009, a $6.0 impact from the increase in cash surrender value of COLI, benefits from prior restructuring activities and other cost reduction efforts, and temporary reductions in employee salaries and retirement benefits of $4.

Restructuring costs of $2.6 incurred in Q1 2010 gross profit primarily consisted of move and severance costs associated with the closure of a manufacturing facility, which is now complete. Restructuring credits of $1.1 associated with operating expenses primarily consisted of changes in employee termination cost estimates related to the reduction of our white-collar workforce. See Note 12 to the condensed consolidated financial statements for additional information.

International


                                                            Three Months Ended
                                                    May 29,                    May 30,
    Income Statement Data - International            2009                       2008
    Revenue                                   $ 152.1       100.0 %      $ 252.8       100.0 %
    Cost of sales                               108.1        71.1          170.5        67.5
    Restructuring costs                           0.2         0.1           (0.4 )      (0.2 )

    Gross profit                                 43.8        28.8           82.7        32.7
    Operating expenses                           49.9        32.8           69.6        27.5
    Restructuring costs                           0.2         0.1            0.7         0.3

    Operating income (loss)                   $  (6.3 )      (4.1 )%     $  12.4         4.9 %

International reported an operating loss of $6.3 in Q1 2010 compared to operating income of $12.4 in the same period last year. The deterioration was primarily driven by a significant decline in revenue.

Revenue decreased $100.7 or 39.8% compared to the same period last year and represented 27.9% of consolidated revenue in Q1 2010. Current year revenue was negatively impacted by approximately $33 from currency translation effects and $2.9 of sales related to divestitures as compared to the same period last year. The decrease in revenue was primarily due to the impact of the global economic slowdown on the demand for office furniture across all International markets.

Cost of sales as a percentage of revenue increased by 360 basis points in Q1 2010 compared to Q1 2009. The deterioration was almost entirely due to lower fixed cost absorption related to lower volume.

Operating expenses decreased by $19.7 in Q1 2010 compared to the same period last year. The decrease was driven by approximately $9 related to favorable currency translation effects and $1 related to divestitures completed during the last four quarters. Benefits from prior restructuring activities and other cost reduction efforts and a $3 reduction in variable compensation expense also contributed to the decrease in operating expenses. Operating expenses increased as a percent of revenue due to reduced volume leverage.

Other


                                                       Three Months Ended
                                               May 29,                    May 30,
        Income Statement Data - Other            2009                      2008
        Revenue                           $ 99.6       100.0 %      $ 132.2       100.0 %
        Cost of sales                       71.4        71.7           86.8        65.7
        Restructuring costs                  0.3         0.3            2.4         1.8

        Gross profit                        27.9        28.0           43.0        32.5
        Operating expenses                  34.2        34.3           46.4        35.1
        Restructuring costs                  0.6         0.6            0.8         0.6

        Operating income (loss)           $ (6.9 )      (6.9 )%     $  (4.2 )      (3.2 )%

Our Other category includes the Coalesse Group, PolyVision and IDEO. The Other category reported an operating loss of $6.9 in Q1 2010 compared to $4.2 in Q1 2009. The decline was primarily the result of lower fixed cost absorption related to lower revenue, partially offset by lower restructuring costs, lower variable compensation expense and benefits from prior restructuring activities and other cost reduction efforts.

Q1 2010 revenue decreased by $32.6 or 24.7% compared to the same period last year. The decrease in revenue was due to lower volume across all business units, with the highest decline in the Coalesse Group. The decrease includes the effects of our decision earlier in 2009 to exit a portion of the PolyVision public bid contractor whiteboard fabrication business, as well as the transfer of corporate whiteboard and certain other corporate technology products to the Steelcase brand in the North America segment during the first six months of 2009.

Cost of sales as a percent of revenue increased by 600 basis points in Q1 2010 compared to the same period last year primarily as a result of lower fixed cost absorption related to lower volume. In addition, we continue to experience disruption costs associated with the consolidation of manufacturing activities within the Coalesse Group.

Operating expenses were 34.3% of revenue in Q1 2010 compared to 35.1% of revenue in Q1 2009. Operating expenses decreased in absolute dollars compared to the same period last year primarily due to benefits from prior restructuring activities and other cost reduction efforts, reductions in variable compensation expense and temporary reductions in employee salaries and retirement benefits.

Corporate


                                                     Three Months Ended
                                                 May 29,            May 30,
           Income Statement Data - Corporate       2009              2008
           Operating expenses                    $    4.7          $     5.7

Approximately 85% of corporate expenses are charged to the operating segments as part of a corporate allocation. Unallocated portions of these expenses are considered general corporate costs and are reported as Corporate. Corporate costs include executive and portions of shared service functions such as information technology, human resources, finance, legal, research and development and corporate facilities. The decrease in corporate expenses was driven by benefits from prior restructuring activities and other cost reduction efforts, as well as lower variable compensation expense.

Liquidity and Capital Resources

As a result of a decline in the level of business activity, we believe we currently need approximately $40 to $50 of cash to fund the day-to-day operations of our business. Our current target is to maintain a minimum of $100 of additional cash and short-term investments as available liquidity for funding investments in growth initiatives and as a cushion against volatility in the economy. Our actual cash and short-term investment balances will fluctuate from quarter to quarter as we plan for and manage certain seasonal disbursements, particularly the annual payment of accrued variable compensation and retirement plan contributions in Q1 of each fiscal year. These are general guidelines; we may modify our approach in response to changing market conditions or opportunities. As of May 29, 2009, we held a total of $118.5 in cash and cash equivalents and short-term investments.

The following table summarizes our statements of cash flows for the three months ended May 29, 2009 and May 30, 2008: