The following review of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes to the consolidated financial statements included within this Form 10-K.

Financial Summary

Results of Operations

Restatement of Financial Statements

      The Company has completed a review of its lease accounting policies and is correcting its method of accounting for certain leases by restating financial statements for 2004 and 2003. The restatement increased net loss by $0.6 and $0.7 in 2004 and 2003, respectively, and reduced retained earnings by $2.1 at February 22, 2002 from $1,320.6 to $1,318.5. The restatement had no impact on revenue or operating cash flows and, due to rounding, had no impact on earnings per share. The Company considers these restatement adjustments to be immaterial.

      The Company initiated its review of its lease accounting in response to a public letter published by the Chief Accountant of the SEC on February 7, 2005. The correction involves recording expense for leases with escalating rents on a straight-line basis over the lease term, rather than as payable. The Company’s Audit Committee, meeting on March 24, 2005, concurred with management’s recommendation that the Company should restate the financial statements.

      In addition, the Company’s investments in auction rate securities of $80.0 have been reclassified in the Company’s Consolidated Balance Sheet as short-term investments for 2004. Previously, these investments were classified as cash and cash equivalents. This reclassification also resulted in changes to the Company’s 2004 and 2003 Consolidated Statements of Cash Flows.

      See Note 3 to the Consolidated Financial Statements for a summary of the effects of these changes on our Consolidated Balance Sheets as of February 27, 2004, as well as on our Consolidated Statements of Operations and Cash Flows for 2004 and 2003.

Overview

      Steelcase returned to profitability in 2005.

      After experiencing a three-year sales decline in the global office furniture industry, the industry has begun to show signs of sustained recovery in the past year. In calendar year 2004, the industry grew by approximately 5% in the United States according to the Business and Institutional Furniture Manufacturer’s Association International.

      Our revenue increased 11.4% in 2005 compared to 2004 following a decline of 7.3% from 2003 to 2004. As compared to 2004, revenue benefited by $80.1 from dealers consolidated in 2005 and $41.3 from favorable currency translation effects in our International segment.

      Operating income improved $92.6 in 2005 primarily due to lower restructuring charges, the benefits realized from lean initiatives and prior restructuring activities. These improvements were partially offset by increases in commodity prices, increases in variable compensation expense, and disruptions from current year plant consolidations.

      Other income (expense), net, improved $5.3 in 2005 primarily due to interest income, gains on dealer transitions, and joint venture income. See further detail of the items in Other income (expense), net, in Note 12.

      We recorded net pre-tax operating charges for restructuring items totaling $13.4 in 2005, as compared to $53.5 in 2004, and $61.2 in 2003. The net charges in 2005 consisted of severance and asset impairment costs associated with consolidation of our North America wood plants and process outsourcing activities in International. See further discussion and detail of all these items in the Segment Disclosure analysis below and in Notes 15 and 17 to the consolidated financial statements.

      During Q2 2004, we sold substantially all of the net assets of our marine hardware and accessories business with the operating results of this business segregated as discontinued operations for all periods presented. See further discussion and detail in Note 16 to the consolidated financial statements.

      The cumulative effect of accounting change in 2004 represents the net after-tax charge related to our adoption of FIN 46(R), Consolidation of Variable Interest Entities . See further discussion and

detail in Note 2 to the consolidated financial statements. The cumulative effect of accounting change in 2003 represents the net after-tax charge related to our adoption of SFAS No. 142, Goodwill and Other Intangible Assets . See Note 7 to the consolidated financial statements for more information regarding goodwill and other intangible assets.

      As mentioned in Note 2 to the consolidated financial statements, the consolidation of two North America dealers and nine International dealers had no material effect on our 2005 net income.

Interest Expense; Other Income (Expense), Net; and Income Taxes

      The majority of the Company’s debt over the past several years related to term notes with fixed interest rates. Interest expense increased in 2005 primarily due to $2.9 in additional interest expense from the consolidation of debt from variable interest entities. Interest on our term notes has been stable since 2003 because the interest rates are fixed.

      Interest income increased in 2005 primarily due to higher cash and investment balances and higher interest rates.

      In 2005, we recorded a gain on dealer transitions which represented an equity return related to a previous International dealer transition and a recovery on dealer transition financing that was previously reserved. Losses on dealer transitions in prior years relate to uncollectible funds loaned to or invested in dealers to finance ownership changes. The majority of the loss recorded in 2004 related to an International dealer transition investment originally made in 1999. We took over full ownership of this dealer during 2004 and reduced the carrying value of the investment to the net book value of the underlying tangible assets, which approximated its fair value. During 2003, we recognized losses on dealer transitions primarily related to two International dealers that were significantly affected by the office furniture recession in their markets. Losses on dealer transitions do not include write-offs of receivables that have arisen as a result of product sales. Charges for write-offs associated with trade receivables from these affiliates are recorded as operating expenses.

      We carefully monitor the financial condition of dealers in ownership transition. Most of the dealers that have transition financing from Steelcase have successfully reduced costs and taken other steps to manage through the downturn. However, we have established reserves for certain dealers facing difficult financial challenges. We believe our reserves adequately reflect the credit risk associated with these dealers. If these dealers experience additional financial challenges, the likelihood of losses would increase and we would record additional charges or reserves, as necessary.

      During 2004, we recorded a gain on disposal of property and equipment primarily related to property sold in the United Kingdom for net cash proceeds of $11.5 and a pre-tax non-operating gain of $7.0. This facility was idle for about three years as a result of prior restructuring activities. The gain

in 2003 was primarily related to the sale of our Tustin, California manufacturing facility following the relocation of the operations to a smaller, more efficient facility. We received net cash proceeds of $35.7 and recorded a gain of $15.1 on the Tustin facility sale.

      Miscellaneous, net includes items such as gains and losses on foreign exchange and gains and losses on the sale of venture investments.

      In 2005, we recorded an $8.2 reduction in a specific tax reserve. The tax reserve was originally recorded in response to a fiscal 1997 tax calculation that was later rejected by the IRS. At the time of the rejection, we recorded a reserve for the total amount of the deduction while we challenged the IRS’s decision. During Q3 2005, the Tax Court ruled favorably on a similar case related to another company. Because we believed this precedent supported our position, we reduced the original reserve by $6.5. During Q4 2005, the IRS agreed to settle the claim and the tax reserve was adjusted by an additional $1.7.

      We calculated our tax expense for 2005 using a 30% rate and then adjusted it for the $8.2 favorable reserve reduction. We expect our long-term effective tax rate to remain between 37% and 38%.

Segment Disclosure

      See more information regarding segments in Part I Item 1 and Note 15 of the consolidated financial statements included with this Report.

North America

      North America was profitable in 2005 on higher revenue and improved gross profit margins. Performance improved due to lower restructuring charges in the period and benefits realized from prior restructuring actions.

      Revenue increased 12.4% in 2005 following a decline in 2004 of 14.5%. 2005 revenue growth was primarily supported by sales to large customers which grew in excess of 25% from 2004. Additionally, Turnstone brand sales of moderately priced products increased over 35% in 2005. Revenue also included $57.0 from the dealers newly consolidated in 2005.

      Cost of sales as a percentage of revenue improved 1.1 percentage points in 2005. Improved overhead absorption, continued implementation of lean manufacturing principles, along with other operational improvements more than offset the negative impacts of rising commodity prices, increased variable compensation and other expenses. Disruption caused by the rationalization of two manufacturing plants also negatively impacted gross profit throughout much of 2005, particularly in the second half of the year.

      In the first quarter of fiscal 2005, we implemented a steel surcharge in North America to cover the rising price of steel. The impact of the increased steel costs, net of increased revenue, reduced gross margins by 1.1% of sales.

      Restructuring costs reported separately from cost of sales in 2005 related to the consolidation of our furniture manufacturing facilities. These costs included $6.3 in severance costs for workforce reductions and $4.0 for asset impairments partially offset by a curtailment gain of $2.5 for post-retirement medical benefits. Restructuring items included within 2004 and 2003 cost of sales primarily consisted of severance costs for workforce reductions and asset impairment charges.

      In 2006, we expect to continue to reduce excess capacity resulting from the implementation of lean manufacturing principles and other operational improvements. We announced additional restructuring activities in March 2005. The estimated net pre-tax restructuring charges of $25 to $30 over the next two years related to these activities consist of net costs of employee terminations, the impairment of certain fixed assets and the cost of relocating production lines. As part of these consolidation efforts, we expect to reduce excess manufacturing space by approximately 2.6 million square feet over the next two years. Once this two-year project is complete, we expect annual pretax savings of approximately $35 to $45.

      The improvement in operating expenses as a percentage of revenue in 2005 compared to 2004 was primarily a result of continued cost control and higher volume. The improvement was partially offset by an increase in variable compensation expense of $33.0 and $17.4 from the dealers newly consolidated in 2005.

      Restructuring charges that are separate components of operating expenses in 2005, 2004, and 2003 represented severance costs for workforce reductions, net of curtailment gains.

      We maintain loss reserves related to dealer trade receivables, and we closely monitor the financial condition of our dealers. We have processes that allow us to monitor and react quickly to changes in the credit quality of our dealers. We believe our reserves adequately reflect the credit risks associated with the dealer trade receivables. However, if our dealers are not able to reduce costs and take other necessary steps during an industry downturn, the likelihood of losses would increase and additional charges or reserves would be necessary.

Steelcase Design Partnership

      SDP improved profitability significantly in 2005. Revenue for the SDP segment increased 16.9% in 2005 following a decline of 5.4% in 2004. Each of the brands within SDP reported significant sales growth for the year, and growth was strong across most different product categories.

      SDP has the highest margins among all of our segments. Gross margins as a percent of revenue improved to 38.0% in 2005 compared to 37.2% in 2004 primarily due to the spread of fixed costs over a higher volume of sales and favorable product mix. Margins were also improved due to continued cost containment efforts, partially offset by higher commodity costs.

      Operating expenses as a percent of revenue decreased during 2005 primarily due to higher volume and continued cost control partially offset by higher variable compensation expenses and increased product development and showroom spending. Restructuring costs related to operating

expenses in 2004 included $0.7 for lease impairments and $0.2 of severance charges for workforce reductions.

International

      International operating results significantly improved in 2005 with a $22.1 reduction in operating loss. The improved results were driven by lower restructuring costs and improved cost of goods sold.

      Revenue increased 9.5% in 2005 due to $41.3 from favorable currency translation effects and $23.1 from dealers consolidated in 2005. In 2004, revenue increased 11.0% due to the benefit of $77.1 from favorable currency translation effects. International revenue is closely linked to economic conditions in France, Germany, Spain and the United Kingdom and to a lesser extent, other Western European countries. The International segment saw shipment declines in many of these markets in the current year. Fourth quarter revenues and order patterns seem to suggest that the economic environment is stabilizing in these markets as we enter 2006. Eastern and Central European, Latin American and Asia Pacific export markets posted modest growth in 2005 compared to varied results in 2004.

      Gross margins as a percent of revenue improved to 30.4% in 2005 from 25.1% in 2004 primarily due to lower restructuring costs and benefits from prior restructuring activities. The 2004 restructuring costs primarily related to the closure or consolidation of manufacturing facilities, including workforce reductions. Restructuring costs in 2003 primarily related to charges for workforce reductions and business exit costs.

      Operating expenses in absolute terms increased in 2005, primarily due to $12.6 of currency translation effects and $11.6 related to dealer consolidations. Restructuring costs related to operating expenses in 2005, 2004 and 2003 primarily consisted of charges related to workforce reductions and business exit costs.

      Economic conditions in certain countries continue to put profitability pressure on some of our dealers. We continue to monitor the financial condition of dealers for changes in credit quality but we believe our reserves adequately reflect these credit risks. However, if dealers experience a deeper reduction in revenues, the likelihood of losses would increase and additional charges or reserves would be necessary.

Other

      Our Other category includes our PolyVision, IDEO, and Financial Services subsidiaries, and unallocated corporate expenses. The reduction in operating loss in 2005 was due to several factors including:

      Approximately 85% of corporate expenses representing shared services are charged to the operating segments as part of a corporate allocation. The unallocated portion of these expenses is considered general corporate costs and is reported within the Other category. Revenue and costs of exploring new business opportunities within new market niches or areas related to, but not part of, our core business activities are considered ventures, and are reported in the Other category.

      Restructuring costs included in 2005 operating results included a PolyVision lease impairment and workforce reductions. Restructuring costs in 2004 and 2003 primarily related to workforce reductions.

      Over the past two years, our Financial Services subsidiary has implemented a new strategy in which we originate leases for customers and earn an origination fee on that service. We use a third party to provide lease funding. As a result, we no longer have credit or residual risk related to those leases. Additionally, we sold a substantial portion of our old leasing portfolio during 2003 and 2004. As a result, our overall credit exposure to our underlying net investment in these older leases has decreased. We have processes that allow us to monitor and react quickly to changes in the credit quality of our lease customers. The overall credit quality of our portfolio improved during 2005 and our risk of exposure decreased as customers became more financially stable and as balances declined with normal lease payments. We reduced some previously established credit reserves by $4.7 in 2005 due to the improved performance on specific leases. We closely monitor our receivable exposure and the overall financial condition of the dealers in North America to whom we extend working capital financing. Although we believe reserves are adequate in total, deterioration in the financial stability of larger customers and dealers would likely require us to record additional charges and reserves.

Liquidity and Capital Resources

      During 2005, we increased cash and cash equivalents by $34.4 to a balance of $216.6 as of February 25, 2005, our highest level of cash since 1998. These funds and our short-term investments, in addition to cash generated from future operations and available credit facilities, are expected to be sufficient to finance our known or foreseeable liquidity and capital needs. The increase in cash and cash equivalents was due to a number of factors. Operating activities generated cash from net income plus depreciation and amortization which is added back to net income. Depreciation and amortization continue to be much higher than current levels of capital expenditures. Financing activities used cash to pay down debt and to pay dividends.

      Cash and cash equivalents include $24.4 invested in a money market fund, the use of which is restricted as collateral primarily for our accrued liability related to our workers’ compensation program. If this restricted cash is needed for liquidity purposes, we can replace the collateral for our workers’ compensation program with a letter of credit and have full access to the proceeds of the money market fund.

      During 2005, we reclassified our investments in auction rate securities from cash and cash equivalents to short-term investments. Auction rate securities classified as short-term investments were $131.4 and $80.0 as of February 25, 2005 and February 27, 2004, respectively. These investments are typically held for approximately 30 days, and all investments held at year-end were converted to cash by March 29, 2005. Because auction rate securities are no longer classified as cash, acquisitions of investments in these securities are a use of cash from investing activities and liquidations of these securities are a source of cash from investing activities. Notes 2 and 3 to the Consolidated Financial Statements provide more information regarding this reclassification.

      We look at various scenarios for cash planning purposes. In one possible scenario—a substantial and rapid increase in revenue in a short period of time—we anticipate we would likely experience a corresponding rapid increase in accounts receivables and inventories. This rapid increase in required working capital would represent a significant use of cash. We retain sufficient cash balances to respond to working capital needs driven by a rapid increase in revenue.

      Significant uses of cash in Q1 2006 include approximately $51.0 in debt repayments and an annual payment of $36.3 related to 2005 variable compensation.

Cash provided by operating activities

      Cash flow provided by operating activities was sufficient to fund our capital expenditure needs for 2005 and we expect this trend to continue.

      The year-to-year change in cash generated from operating activities was primarily due to improvements in year-over-year income from continuing operations. Additionally, Other, net, decreased primarily due to current year restructuring payments, lower charges related to dealer transitions and fixed asset impairments and disposals.

      Most of the change in cash generated from operating activities from 2003 to 2004 was due to a reduction in net loss, a gain on sale of net assets of discontinued operations in 2004, a cumulative effect of accounting change in 2003, and changes in operating assets and liabilities. The changes in operating assets and liabilities were primarily driven by lower revenue, lower manufacturing volume, and implementation of lean manufacturing principles.

Cash provided by (used in) investing activities

      We used cash in investing activities in 2005 primarily for the net acquisition of short-term investments in auction rate securities (see Note 2) and capital expenditures. We continue to closely scrutinize capital spending to ensure we are making the right investments to sustain the business and to preserve our ability to introduce innovative, new products. In 2005, capital expenditures were less than half of depreciation, which represented a source of cash.

      In 2004 and 2003, we generated cash from investing activities primarily from the sale of leased and fixed assets and the sale of our Attwood facility in 2004. The sale of leased assets was primarily due to the new lease funding strategy implemented by our Financial Services subsidiary in 2004. In preparation for its new strategy, Financial Services sold a large portion of its lease portfolio in 2003 and continued to sell a portion of the remaining leased assets during 2004 and 2005. Under its new strategy, Financial Services continues to originate leases for customers, but uses a third party to provide lease funding. A significant amount of the cash generated from these activities was used to increase our short-term investment portfolio.

      Proceeds from the disposal of fixed assets in 2005 and 2004 were primarily from the sale of domestic and international manufacturing facilities and related equipment.

      We have significantly reduced our capital expenditures in the past three years to limit new projects to those that meet key economic metrics and deliver short payback cost savings or support critical strategic initiatives such as product development. At the end of 2005, our committed capital expenditures totaled $19.5 and related primarily to the purchase of a new corporate aircraft which will replace a corporate aircraft that we currently own in Q1 2006. In 2006, we expect to receive proceeds of approximately $15 from the sale of the corporate aircraft that we currently own.

Cash used in financing activities

      We used cash in financing activities in 2005 primarily to pay down debt and to pay common stock dividends to our shareholders. We paid common stock dividends of $0.24 per share in 2005, 2004 and 2003. The dividend declared by the Board of Directors was $0.06 per share in each quarter of 2005, 2004, and 2003.

      We issued common stock in 2005 for proceeds of $4.1 related to the exercise of employee stock options. See Note 11 of the consolidated financial statements for further discussion regarding the Company’s stock-based incentive plans.

      The Board of Directors has authorized share repurchases of up to 11 million shares. We did not repurchase any common shares during 2005, 2004 or 2003. Approximately 3.8 million shares remain available for repurchase under the program and we have no outstanding share repurchase commitments. Since the inception of our repurchase program, 7.2 million shares have been repurchased for $112.7 million.

Capital Resources

Off-Balance Sheet Arrangements

      We are contingently liable under loan guarantees for certain Steelcase dealers and joint ventures in the event of default or non-performance of the financial repayment of the liability. Due to the contingent nature of guarantees, the full value of the guarantees are not recorded on our consolidated balance sheets; however, we have reserves recorded to cover potential losses. See Note 14 to the consolidated financial statements for more information regarding financial instruments, concentrations of credit risk, commitments, guarantees and contingencies.

Contractual Obligations

      Our contractual obligations as of February 25, 2005 are as follows:

      Total consolidated debt as of February 25, 2005 was $325.7. The $28.3 decrease in total debt from 2004 was driven by debt repayments. Our debt to capital ratio was 21.4% at year-end. Of our total debt, $249.5 is in the form of term notes due November 2006. We are currently considering various options regarding the maturity of the term notes, one of which is to have a replacement facility in place before the senior notes expire. Additionally, we have notes payable due at various times through 2007. We expect to pay the amounts due on the notes as they expire.

      Of the $67.6 of debt payments due in 2005 (as presented in the contractual obligations table above), $9.6 relates to foreign currency notes payable and revolving credit facility obligations. Of the remaining $58.0 balance related to United States dollar notes payable obligations, we expect to repay $51.0 as it becomes due in Q1 2006.

      The Company has commitments related to certain sales offices, showrooms, and equipment under non-cancelable operating leases that expire at various dates through 2020. Minimum payments for operating leases having initial or remaining non-cancelable terms in excess of one year are presented in the contractual obligation table above.

      Committed capital expenditures represent obligations we have related to property, plant and equipment purchases. See more detail under the Cash provided by (used in) investing activities section.

      We define purchase obligations as non-cancelable signed contracts to purchase goods or services beyond the needs of meeting current backlog or production.

      Other long-term liabilities represent contribution and benefit payments expected to be made for our defined contribution, deferred compensation, pension and post-retirement benefit plans. It should be noted our obligations related to post-retirement benefit plans are not contractual and the plans could be amended at the discretion of the Compensation Committee of the Board of Directors. We limited our disclosure of contributions and benefit payments to 10 years as information beyond this time period was not available. See Note 9 to the consolidated financial statements for further discussion regarding these plans.

      The contractual obligations table above is current as of February 25, 2005. The amounts of these obligations could change materially over time as new contracts or obligations are initiated and existing contracts or obligations are terminated or modified.

      Our total liquidity facilities as of February 25, 2005 were:

      At February 25, 2005, we had no borrowings against our $250.0 3-year global committed bank facility. Our obligations under this facility are unsecured and unsubordinated. The Company may, at its option, and subject to customary conditions, request to increase the aggregate commitment by up to $100.0 by obtaining at least one commitment from one or more lenders. This facility and certain of our other financing and lease facilities require us to satisfy financial covenants including a minimum net worth covenant, a maximum debt ratio covenant, a minimum interest coverage ratio covenant and an asset coverage ratio covenant. In October 2003, Moody’s Investor Services lowered its rating on the Company to Ba1, thus activating the asset ratio covenant. Although we have $372.3 of available capacity, our maximum debt ratio covenant would limit additional borrowings to approximately $122.6 as of February 25, 2005. As of February 25, 2005, we were in compliance with all covenants under this facility and our other financing and lease facilities. The amounts available to us under the various uncommitted lines are subject to change or cancellation by the banks at any time. Our long-term debt rating is BBB- from Standard & Poor’s and Ba1 from Moody’s Investor Service.

      On October 13, 2004, we filed a universal shelf registration statement with the Securities and Exchange Commission that will allow the Company to offer various types of securities from time to time in the future. The shelf registration statement includes a primary component of up to $200.0 of debt securities and a secondary component of up to 7.5 million shares of Class A common stock.

Critical accounting policies

      Management’s Discussion and Analysis of Results of Operations and Financial Condition is based upon our consolidated financial statements and accompanying notes. The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Although these estimates are based on historical data and management’s knowledge of current events and actions it may undertake in the future, actual results may differ from the estimates if different conditions occur. The accounting policies that typically involve a higher degree of judgment, estimates and complexity are listed and explained below. These policies were discussed with the Audit Committee and affect all segments of the Company.

      Goodwill represents the difference between the purchase price and the related underlying tangible and identifiable intangible net asset values resulting from business acquisitions. Annually, or if conditions indicate an earlier review is necessary, the carrying value of the reporting unit is compared to an estimate of its fair value. As discussed in Note 2 to the consolidated financial statements, if the estimated fair value is less than the carrying value, goodwill is impaired and will be written down to its estimated fair value. Goodwill is assigned to and the fair value is tested at the reporting unit level.

We evaluate goodwill using five reporting units — North America, SDP, International, PolyVision and IDEO. As of February 25, 2005, we had $210.2 of goodwill recorded on our balance sheet as follows:

      During Q4 2005, we performed our annual impairment assessment of goodwill in our reporting units consistent with the prior year. In testing for potential impairment, we measured the estimated fair value of our reporting units using a combination of two methods based upon a discounted cash flow valuation (“DCF”) and a market value approach (“MVA”). The first method used a 100% weighting factor based on DCF while the second valuation was based upon 50% of DCF and 50% of MVA. In either case, we concluded no impairment existed in any reporting unit.

      The DCF analysis was based on the present value of projected cash flows and a residual value and used the following assumptions:

      The MVA used a set of four comparable companies to derive a range of market multiples for the last twelve months’ revenue and earnings before interest, taxes, depreciation and amortization. The MVA was not calculated for PolyVision or IDEO as there is no comparable market data available to make these calculations meaningful.

      As of the valuation date, the enterprise value available for goodwill determined by each method described above is in excess of the underlying reported value of the goodwill as follows:

      For each reporting unit, this excess is primarily driven by the residual value of future years. Thus, increasing the discount rate from 11.5% to 12.5%, leaving all other assumptions unchanged, would reduce the excess amounts above to the following amounts:

      We also perform impairment analyses on our other intangible assets not subject to amortization using an income approach based on the cash flows attributable to the related products. These intangible assets primarily consist of trademarks within the PolyVision reporting unit. As of the valuation date, the fair value exceeded the book value by approximately $3.6. A 5% decrease in projected revenue would result in a reduction of the excess fair value by $1.8. A 1% increase in the discount rate would result in a reduction of the excess fair value by $2.5.

      For our intangible assets subject to amortization and our other long-lived assets including property, plant and equipment, an impairment analysis is performed at least annually. In accordance with SFAS No. 144, an impairment loss is recognized if the carrying amount of a long-lived asset is not recoverable and its carrying amount exceeds its fair value. In testing for impairment, we first determined if the asset was recoverable. We then compared the undiscounted cash flows over the asset’s remaining life to the carrying value.

      See Note 2, Note 5 and Note 7 to the consolidated financial statements for more information regarding goodwill, other intangible assets and property, plant and equipment.

      The determination of the obligation and expense for pension and other post-retirement benefits is dependent on the selection of certain actuarial assumptions used in calculating such amounts. These assumptions include, among others, the discount rate, expected long-term rate of return on plan assets and rates of increase in compensation and health care costs. These assumptions are reviewed and updated annually based on relevant external and internal factors and information, including but not limited to, long-term expected fund returns, expenses paid from the fund, rates of termination, medical inflation, technology and quality care changes, regulatory requirements, plan changes and governmental coverage changes. See Note 9 to the consolidated financial statements for more information regarding employee benefit plan obligations including a sensitivity analysis.

      The allowance for credit losses related to accounts receivable, investments in leases and notes receivable is maintained at a level considered by management to be adequate to absorb an estimate of probable future losses existing at the balance sheet date. In estimating probable losses, we review accounts that are past due, non-performing, or in bankruptcy. We also review accounts that may have higher credit risk using information available about the customer or dealer, such as financial statements, news reports, and published credit ratings. We also use general information regarding industry trends, the general economic environment and information gathered through our network of field based employees. Using an estimate of current fair market value of the collateral and other credit enhancements, such as third party guarantees, we arrive at an estimated loss for specific accounts and estimate an additional amount for the remainder of the trade balance based on historical trends.

Our projection of credit losses is based on estimates, and as a result we cannot predict with certainty the amount of such losses. Changes in economic conditions, the risk characteristics and composition of the portfolio, bankruptcy laws or regulatory policies and other factors could impact our actual and projected credit losses and the related allowance for possible credit losses. If we had made different assumptions about probable credit losses, our financial position and results of operations could have differed. Uncollectible receivable balances are written off when we determine that the balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance when received. See further discussion regarding concentrations of credit risk in Note 14 of the consolidated financial statements.

      Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse.

      The Company has operating loss carryforwards of $334.8 and tax credit carryforwards of $27.7 available in certain jurisdictions to reduce future taxable income. Future tax benefits for these carryforwards are recognized to the extent that realization of these benefits is considered more likely than not. We estimate a tax savings from the operating loss carryforwards before valuation allowance of $125.6, but we have recorded a valuation allowance of $26.0 which reduces our estimated tax savings to $99.6. Additionally, we have recorded a valuation allowance of $4.3 against our tax credit carryforwards which reduces our estimated tax savings to $23.4. It is considered more likely than not that a benefit of $123.0 will be realized on these carryforwards. This determination is based on the expectation that related operations will be sufficiently profitable or various tax, business and other planning strategies will enable us to utilize the carryforwards. To the extent that available evidence raises doubt about the realization of a deferred income tax asset, a valuation allowance is established. We cannot be assured that we will be able to realize these future tax benefits or that future valuation allowances will not be required. A 10% decrease in the expected amount of benefit to be realized on the carryforwards would result in a decrease in net income of approximately $12.3.

Forward-looking Statements

      From time to time, in written reports and oral statements, the company discusses its expectations regarding future events. These forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “possible,” “potential,” “predict,” “project,” or other similar words, phrases or expressions. Forward-looking statements involve a number of risks and uncertainties that could cause actual results to vary. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation: (1) competitive and general economic conditions and uncertainty domestically and internationally; (2) delayed or lost sales and other impacts related to acts of terrorism, acts of war or governmental action; (3) changes in domestic or international laws, rules and regulations, including the impact of changed environmental laws, rules or regulations; (4) major disruptions at our key facilities or in the supply of any key raw materials, components or finished goods; (5) competitive pricing pressure; (6) pricing changes by the company, its competitors or suppliers; (7) currency fluctuations; (8) changes in: (a) customer demand and order patterns; (b) financial stability of customers, dealers (including changes in their ability to pay for product and services, dealer financing and other amounts owed to the company) or suppliers; (c) relationships with customers, suppliers, employees and dealers; and (d) the mix of products sold and of customers purchasing (including large project business); (9) the success (including product performance and customer acceptance) of new products, current product innovations and platform simplification, and their impact on the company’s manufacturing processes; (10) the success of the company’s investment in certain ventures; (11) the company’s ability to successfully: (a) implement

list price increases; (b) reduce its costs, including actions such as global supply chain management, workforce reduction, facility rationalization, disposition of excess assets (including real estate) at more than book value and/or related impairments, production consolidation, reduction of business complexity and culling products; (c) implement technology initiatives; (d) integrate acquired businesses; (e) migrate to a less vertically integrated manufacturing model; (f) implement lean manufacturing principles; (g) initiate and manage alliances; and (h) manage consolidated dealers; (11) possible acquisitions or divestitures by the company; (12) changes in business strategies and decisions; and (13) other risks detailed in this and other filings with the Securities and Exchange Commission. The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement. Unpredictable or unknown factors could also have material adverse effects on the company. All forward-looking statements included in this report are expressly qualified in their entirety by the foregoing cautionary statements. Steelcase undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.

Recently Issued Accounting Standards

      There have not been any new accounting standards that are expected to have a significant impact on the Company in the near term.

      The principal market risks (i.e., the risk of loss arising from adverse changes in market rates and prices) to which we are exposed include foreign exchange risk, interest rate risk and equity price risk.

Foreign Exchange Risk

      Operating in international markets involves exposure to the possibility of volatile movements in foreign exchange rates. These exposures may impact future earnings and/or cash flows. Revenue from foreign locations (primarily Europe and Canada) represented approximately 25% and 26% of our consolidated revenue in 2005 and 2004, respectively. We actively manage the foreign currency exposures that are associated with committed foreign currency purchases and sales created in the normal course of business at the local entity level. Exposures that cannot be naturally offset within a local entity to an immaterial amount are hedged with foreign currency derivatives. We also have a significant amount of foreign currency net asset exposures. In February 2005 and March 2005, we entered into a series of forward contracts to hedge our net investment in Canada to reduce the risk of exposure to changes in exchange rates. The notional amount of these contracts was 45 million Canadian dollars in February 2005 and 25 million Canadian dollars in March 2005.

      Changes in foreign exchange rates that had the largest impact on translating our international operating profit for 2005 related to the euro and the Canadian dollar versus the U.S. dollar. We estimate that a 10% devaluation of the U.S. dollar against the local currencies would have increased our operating income by approximately $1.1 in 2005 and increased our loss in 2004 by approximately $2.0, assuming no changes other than the exchange rate itself. However, this quantitative measure has inherent limitations. The sensitivity analysis disregards the possibility that rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency.

      The translation of the assets and liabilities of our International subsidiaries is made using the foreign exchange rates as of the end of the year. Translation adjustments are not included in determining net income but are disclosed and accumulated in Other Comprehensive Income within shareholders’ equity until sale or substantially complete liquidation of the net investment in the International subsidiary takes place. In certain markets, the Company could recognize a significant gain or loss related to unrealized cumulative translation adjustments if we were to exit the market and

liquidate our net investment. As of February 25, 2005, the net foreign currency translation adjustments reduced shareholders’ equity by $26.4.

      Foreign exchange gains and losses reflect transaction gains and losses. Transaction gains and losses arise from monetary assets and liabilities denominated in currencies other than a business unit’s functional currency. For 2005, transaction gains and losses were immaterial.

Interest Rate Risk

      We are exposed to interest rate risk primarily on our notes receivable, investments in company owned life insurance, short-term borrowings and long-term debt. Substantially all of our interest rates on our term borrowings were fixed during 2004; thus our interest rate risk was minimized. A portion of our company owned life insurance is invested in fixed income securities. The valuation of these securities is sensitive to changes in market interest rates. We estimate that a 1% change in interest rates would not have had a material impact on our results of operations for 2005 or 2004.

      See Notes 2 and 14 of the consolidated financial statements for further discussion of interest rate swaps and derivative instruments. See Note 6 in the consolidated financial statements for further discussion of our investments in company owned life insurance.

Equity Price Risk

      We are exposed to equity price risk from the markets in the United States primarily on our investments in company owned life insurance. We estimate that a 10% adverse change in the broader United States equity markets would have reduced our operating income by approximately $4.0 in 2005 and increased our operating loss by approximately $2.0 in 2004. This quantitative measure has inherent limitations since not all of our equity investments are in similar asset classes. In addition, the investment managers actively manage certain equity investments and their results could be better or worse than the broader United States equity markets returns.

      See Note 6 in the consolidated financial statements for further discussion of our investments in company owned life insurance.