Introduction

In Management's Discussion and Analysis of Financial Condition and Results of Operations (the "MD&A"), we explain the general financial condition and the results of operations for STERIS including:

• what factors affect our business;

• what our earnings and costs were in each period presented;

• why those earnings and costs were different from prior periods;

• where our earnings came from;

• how this affects our overall financial condition;

• what our expenditures for capital projects were; and

• where cash will come from to fund future growth outside of core operations, pay cash dividends and fund future working capital needs.

As you read the MD&A, it may be helpful to refer to information in our consolidated financial statements, which present the results of our operations for the first quarter of fiscal 2010 and fiscal 2009. It may also be helpful to read the MD&A in our Annual Report on Form 10-K for the year ended March 31, 2009, filed with the SEC on May 29, 2009. In the MD&A, we analyze and explain the period-over-period changes in the specific line items in the Consolidated Statements of Income. Our analysis may be important to you in making decisions about your investments in STERIS.

Financial Measures

In the following sections of the MD&A, we may, at times, refer to financial measures that are not required to be presented in the consolidated financial statements under U.S. GAAP. We have used the following financial measures in the context of this report: backlog; debt-to-total capital; net debt-to-total capital; and days sales outstanding. We define these financial measures as follows:

• Backlog - We define backlog as the amount of unfilled capital equipment purchase orders at a point in time. We use this figure as a measure to assist in the projection of short-term financial results and inventory requirements.

• Debt-to-total capital - We define debt-to-total capital as total debt divided by the sum of total debt and shareholders' equity. We use this figure as a financial liquidity measure to gauge our ability to borrow, fund growth, and measure the risk of our financial structure.

• Net debt-to-total capital - We define net debt-to-total capital as total debt less cash ("net debt") divided by the sum of net debt and shareholders' equity. We also use this figure as a financial liquidity measure and to measure the risk of our financial structure.

• Days sales outstanding ("DSO") - We define DSO as the average collection period for accounts receivable. It is calculated as net accounts receivable divided by the trailing four quarters' revenues, multiplied by 365 days. We use this figure to help gauge the quality of accounts receivable and expected time to collect.

In the following sections of the MD&A, we may, at times, also refer to financial measures which are considered to be "non-GAAP financial measures" under the rules of the SEC. Non-GAAP financial measures we may use are as follows:

• Free cash flow - We define free cash flow as net cash flows provided by operating activities as presented in the Consolidated Statements of Cash Flows less purchases of property, plant, equipment, and intangibles, net, plus proceeds from the sale of property, plant, equipment, and intangibles, which

                                                                  Three Months Ended
                                                                       June 30,
(dollars in thousands)                                          2009             2008
Net cash flows provided by operating activities               $ 32,620         $  28,727
Purchases of property, plant, equipment and
intangibles, net                                                (8,355 )         (10,615 )
Proceeds from the sale of property, plant, equipment
and intangibles                                                    175                 7

Free cash flow                                                $ 24,440         $  18,119

We may, at times, refer to our results of operations excluding certain transactions or amounts that are non-recurring or are not indicative of future results, in order to provide meaningful comparative analysis between the periods presented. For example, when discussing changes in revenues, we may, at times, exclude the impact of recently completed acquisitions and dispositions.

We present these financial measures because we believe that understanding these additional factors underlying our performance provides meaningful analysis of our financial performance. These financial measures should not be considered alternatives to measures required by U.S. GAAP. Our calculations of these measures may be different from calculations of similar measures used by other companies and you should be careful when comparing these financial measures to those of other companies.

Revenues - Defined

As required by Regulation S-X under the Securities Exchange Act of 1934 ("Regulation S-X"), we separately present revenues generated as either product revenues or service revenues on our Consolidated Statements of Income for each period presented. When we discuss revenues, we may, at times, refer to revenues summarized differently than the Regulation S-X requirements. The terminology, definitions, and applications of terms that we use to describe revenues may be different from terms used by other companies. We use the following terms to describe revenues:

• Revenues - We present revenues net of sales returns and allowances.

• Product Revenues - We define product revenues as revenues generated from sales of capital equipment, which includes steam and low temperature liquid sterilizers, washing systems, VHP® technology, water stills, and pure steam generators; integrated OR; surgical lights and tables; and the consumable family of products, which includes STERIS SYSTEM 1® consumables, sterility assurance products, skin care products, and cleaning consumables.

• Service Revenues - We define service revenues as revenues generated from parts and labor associated with the maintenance, repair, and installation of our capital equipment, as well as revenues generated from contract sterilization offered through our Isomedix segment.

• Capital Revenues - We define capital revenues, a subset of product revenues, as revenues generated from sales of capital equipment, which includes steam and low temperature liquid sterilizers, washing systems, VHP® technology, water stills, and pure steam generators; surgical lights and tables; and integrated OR.

• Consumable Revenues - We define consumable revenues, a subset of product revenues, as revenues generated from sales of the consumable family of products, which includes STERIS SYSTEM 1® consumables, sterility assurance products, skin care products, and cleaning consumables.

• Recurring Revenues - We define recurring revenues as consumable revenues and service revenues.

General Company Overview and Executive Summary

Our mission is to provide a healthier today and safer tomorrow through knowledgeable people and innovative infection prevention, decontamination and health science technologies, products, and services. Our dedicated employees around the world work together to supply a broad range of solutions by offering a combination of equipment, consumables, and services to healthcare, pharmaceutical, industrial, and governmental Customers.

The bulk of our revenues are derived from the healthcare and pharmaceutical industries. Much of the growth in these industries is driven by the aging of the population throughout the world, as an increasing number of individuals are entering their prime healthcare consumption years, and is dependent upon advancement in healthcare delivery, acceptance of new technologies, government policies, and general economic conditions. In addition, each of our core industries also benefits from specific trends that contribute toward demand. Within healthcare, there is increased concern regarding the level of hospital-acquired infections around the world. The pharmaceutical industry has been impacted by increased regulatory scrutiny of cleaning and validation processes, mandating that manufacturers improve their processes. In the contract sterilization industry, where our Isomedix segment competes, the aging population increases the demand for medical procedures, which increases the consumption of single use medical devices and surgical kits.

Fiscal 2010 first quarter revenues were $283.5 million compared to $311.6 million in the first quarter of fiscal 2009, representing a decrease of $28.0 million, or 9.0%, driven by declines in both the Healthcare and Life Sciences business segments. Our gross margin percentage for the first quarter of fiscal 2010 was 44.0% compared to 41.9% in the first quarter of fiscal 2009, or an increase of 210 basis points, reflecting the impact of changes in foreign exchange rates, price increases and lower raw material cost, which were partially offset by lower volume and declines in productivity.

Free cash flow was $24.4 million in the first quarter of fiscal 2010 compared to $18.1 million in the prior year first quarter due to a lower net use of cash to fund changes in operating assets and liabilities and lower purchases of property, plant and equipment. Our debt-to-total capital ratio was 21.6% at June 30, 2009 and 22.6% at March 31, 2009. During the first quarter of fiscal 2010, we declared and paid quarterly cash dividends of $0.11 per common share.

Additional information regarding our fiscal 2010 first quarter financial performance is included in the subsection below titled "Results of Operations."

Matters Affecting Comparability

Restructuring. During the first quarter of fiscal 2010, we did not incur any significant additional expenses related to previously announced restructuring actions.

Additional information regarding our restructuring actions is included in our Annual Report on Form 10-K for the year ended March 31, 2009, filed with the SEC on May 29, 2009.

International Operations. Since we conduct operations outside of the United States using various foreign currencies, our operating results are impacted by foreign currency movements relative to the U.S. dollar. During the first quarter of fiscal 2010, our revenues were unfavorably impacted by $6.6 million, or 2.3%, and income before taxes was favorably impacted by $3.2 million, or 8.9%, as a result of foreign currency movements relative to the U.S. dollar.

Results of Operations

In the following subsections, we discuss our earnings and the factors affecting them for the first quarter of fiscal 2010 compared with the first quarter of fiscal 2009. We begin with a general overview of our operating results and then separately discuss earnings for our operating segments.

Revenues. The following table compares our revenues for the three months ended June 30, 2009 to the three months ended June 30, 2008:

                                       Three Months Ended                                   Percent of Total
                                            June 30,                         Percent            Revenues
(dollars in thousands)                  2009        2008       Change        Change         2009         2008
Capital Revenues                     $   92,703   $ 120,117   $ (27,414 )      (22.8 )%       32.7 %      38.6 %
Consumable Revenues                      80,797      75,465       5,332          7.1 %        28.5 %      24.2 %

Product Revenues                        173,500     195,582     (22,082 )      (11.3 )%       61.2 %      62.8 %
Service Revenues                        110,043     115,983      (5,940 )       (5.1 )%       38.8 %      37.2 %

Total Revenues                       $  283,543   $ 311,565   $ (28,022 )       (9.0 )%      100.0 %     100.0 %

Service Revenues                     $  110,043   $ 115,983   $  (5,940 )       (5.1 )%       38.8 %      37.2 %
Consumable Revenues                      80,797      75,465       5,332          7.1 %        28.5 %      24.2 %

Recurring Revenues                      190,840     191,448        (608 )       (0.3 )%       67.3 %      61.4 %
Capital Revenues                         92,703     120,117     (27,414 )      (22.8 )%       32.7 %      38.6 %

Total Revenues                       $  283,543   $ 311,565   $ (28,022 )       (9.0 )%      100.0 %     100.0 %

United States                        $  223,806   $ 241,219   $ (17,413 )       (7.2 )%       78.9 %      77.4 %
International                            59,737      70,346     (10,609 )      (15.1 )%       21.1 %      22.6 %

Total Revenues                       $  283,543   $ 311,565   $ (28,022 )       (9.0 )%      100.0 %     100.0 %

Revenues decreased $28.0 million, or 9.0%, to $283.5 million for the quarter ended June 30, 2009, as compared to $311.6 million for the same prior year quarter, as a result of declines in all business segments. Capital revenues declined $27.4 million in the first quarter of fiscal 2010, primarily driven by lower demand in the United States from hospitals and the timing of shipments within the Healthcare segment. Service revenues decreased $5.9 million in the first quarter of fiscal 2010 primarily due to decreases in Healthcare Service revenues within the United States, although all three reportable business segments contributed to the decline. Consumable revenues increased $5.3 million for the quarter ended June 30, 2009, primarily driven by growth in the Healthcare segment.

International revenues decreased $10.6 million, or 15.1%, to $59.7 million for the quarter ended June 30, 2009, as compared to $70.3 million for the same prior year quarter. International revenues were negatively affected by declines in capital equipment revenues, which decreased 22.3% primarily due to decreases within Europe for both our Healthcare and Life Sciences segments. International recurring revenues also fell during the first quarter of fiscal 2010 by 7.8%, with decreases of 8.4% and 7.2% in consumable and service revenues, respectively. The decline in international consumable revenues occurred primarily in the European region, while the decline in international service revenues was primarily the result of a decrease in Canada.

United States revenues decreased $17.4 million, or 7.2%, to $223.8 million for the quarter ended June 30, 2009, as compared to $241.2 million for the same prior year quarter. The decrease in United States revenues was primarily driven by our Healthcare segment with a 26.4% decrease in capital equipment revenues. United States recurring revenues increased 1.4% for the first quarter of fiscal 2010, and reflect an increase of 12.2% in consumable revenues partially offset by a decrease of 4.8% in service revenues. The decline in United States service revenues reflects decreases in all three reportable business segments, while the growth in consumable revenues was primarily driven by our Healthcare segment.

Revenues by segment are further discussed in the section of MD&A titled, "Business Segment Results of Operations."

Gross Profit. The following table compares our gross profit for the three months ended June 30, 2009 to the three months ended June 30, 2008:

                                       Three Months Ended
                                            June 30,                            Percent
    (dollars in thousands)            2009           2008          Change       Change
    Gross Profit:
    Product                         $  79,223      $  82,715      $ (3,492 )       (4.2 )%
    Service                            45,613         47,786        (2,173 )       (4.5 )%

    Total Gross Profit              $ 124,836      $ 130,501      $ (5,665 )       (4.3 )%


    Gross Profit Percentage:
    Product                              45.7 %         42.3 %
    Service                              41.5 %         41.2 %

    Total Gross Profit Percentage        44.0 %         41.9 %

Our gross profit (margin) is affected by the volume, pricing, and mix of sales of our products and services, as well as the costs associated with the products and services that are sold. Our total gross margin increased 210 basis points from the first quarter of fiscal 2009, reflecting the impact of changes in foreign exchange rates, price increases and lower raw material costs, which were partially offset by lower volume and declines in productivity.

Operating Expenses. The following table compares our operating expenses for the three months ended June 30, 2009 to the three months ended June 30, 2008:

                                               June 30,                            Percent
                                          2009          2008         Change        Change
 Operating Expenses:
 Selling, General, and Administrative   $ 74,605      $ 87,348      $ (12,743 )      (14.6 )%
 Research and Development                  7,580         8,279           (699 )       (8.4 )%
 Restructuring Expenses                     (211 )        (166 )          (45 )         NM

 Total Operating Expenses               $ 81,974      $ 95,461      $ (13,487 )      (14.1 )%

NM - Not meaningful.

Significant components of total selling, general, and administrative expenses ("SG&A") are compensation and benefit costs, fees for professional services, travel and entertainment, facilities costs, and other general and administrative expenses. As a percentage of total revenue, SG&A decreased 170 basis points to 26.3% for the first quarter of fiscal 2010 as compared to 28.0% in the first quarter of fiscal 2009. The decrease in SG&A expense as a percentage of total revenue in the first quarter of fiscal 2010 reflects the benefit of cost reduction actions previously implemented as well as continued financial discipline efforts.

As a percentage of total revenues, research and development expenses were 2.7% in both the three-month periods ended June 30, 2009 and 2008. Research and development expenses are influenced by the number and timing of in-process projects and labor hours and other costs associated with these projects. Our research and development initiatives continually emphasize new product development, product improvements, and the development of new technological platform innovations. During the first quarter of fiscal 2010, our investments in research and development continued to be focused on, but were not limited to, enhancing capabilities of sterile processing combination technologies, surgical tables and accessories, and the areas of emerging infectious agents such as Prions and Nanobacteria.

In the first quarters of 2010 and 2009, we did not incur any significant additional expenses related to our previously announced restructuring plans, and we settled certain obligations for less than originally expected. The following tables summarize our total pre-tax restructuring expenses for the first quarter of fiscal 2010 and fiscal 2009:

                                                          Fiscal 2009
                                                         Restructuring
          Three Months Ended June 30, 2009                 Plan (1)
          Severance, payroll, and other related costs   $           (46 )
          Product rationalization                                  (233 )
          Other                                                      13

          Total restructuring charges                   $          (266 )

(1) Includes $(55) in charges recorded in cost of revenues on Consolidated Statements of Income.