Schawk (SGK) 10-Q 2009 Q1 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2008

Commission File Number 001-09335

SCHAWK, INC.

(Exact name of Registrant

as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

66-0323724
(I.R.S. Employer Identification No.)

1695 River Road
Des Plaines, Illinois
(Address of principal executive office)

60018
(Zip Code)

847-827-9494
(Registrant’s telephone number, including area code)

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. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero	Accelerated filerþ	Non-accelerated filero	Smaller reporting companyo
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Act). Yeso Noþ

The number of shares of the Registrant’s Common Stock outstanding as of October 31, 2008, was 25,945,593.

SCHAWK, INC.

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

September 30, 2008

	Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3. Quantitative and Qualitative Disclosures about Market Risk		38
Item 4. Controls and Procedures		38
PART II — OTHER INFORMATION
Item 1A. Risk Factors		41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		42
Item 6. Exhibits		43
Signatures		43
EX-18
EX-31.1
EX-31.2
EX-32

2

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Schawk, Inc.
Consolidated Balance Sheets
(Unaudited)
(In Thousands, Except Share Amounts)

	September 30,			December 31,
	2008			2007
				(Restated)
Assets
Current assets:
Cash and cash equivalents	$	18,095		$	11,754
Trade accounts receivable, less allowance for doubtful accounts of $1,846 at September 30, 2008 and $2,026 at December 31, 2007		93,309			111,685
Inventories		25,142			21,563
Prepaid expenses & other current assets		11,774			13,500
Current assets of discontinued operations		1,790			1,893
Income tax receivable		11,852			—
Assets held for sale		2,085			—
Deferred income taxes		4,720			4,755
Total current assets		168,767			165,150
Property and equipment, less accumulated depreciation of $97,956 at September 30, 2008 and $87,584 at December 31, 2007		64,115			76,237
Goodwill		231,054			246,368
Intangible assets, net		38,234			41,528
Other assets		5,308			4,831
Long term assets of discontinued operations		606			873
Total assets	$	508,084		$	534,987
Liabilities and Stockholders’ Equity
Current liabilities:
Trade accounts payable	$	18,999		$	26,040
Accrued expenses		54,183			52,296
Income taxes payable		—			4,754
Current portion of long-term debt and capital lease obligations		3,572			4,433
Current liabilities of discontinued operations		1,069			392
Total current liabilities		77,823			87,915
Long-term debt		110,190			105,942
Other liabilities		19,553			24,547
Deferred income taxes		18,304			15,814
Stockholders’ equity:
Common stock, $0.008 par value, 40,000,000 shares authorized, 29,380,225 and 29,213,166 shares issued at September 30, 2008 and December 31, 2007, respectively; 26,545,584 and 27,013,482 shares outstanding at September 30, 2008 and December 31, 2007, respectively		217			216
Additional paid-in capital		186,124			184,110
Retained earnings		127,199			131,457
Accumulated comprehensive income		7,677			14,162
		321,217			329,945
Treasury stock, at cost, 2,834,641 and 2,199,684 shares of common stock at September 30, 2008 and December 31, 2007, respectively		(39,003	)		(29,176	)
Total stockholders’ equity		282,214			300,769
Total liabilities and stockholders’ equity	$	508,084		$	534,987

See accompanying notes.

3

Schawk, Inc.
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
				(Restated)						(Restated)
Net sales	$	124,167		$	129,316		$	381,052		$	398,990
Cost of sales		81,300			83,311			249,275			256,976
Gross profit		42,867			46,005			131,777			142,014
Selling, general and administrative expenses		36,869			32,600			108,441			97,656
Acquisition integration and restructuring expenses		1,942			—			5,116			—
Impairment of long-lived assets		3,451			—			5,635			—
Operating income		605			13,405			12,585			44,358
Other income (expense):
Interest income		63			85			201			175
Interest expense		(1,625	)		(2,278	)		(5,099	)		(7,046	)
		(1,562	)		(2,193	)		(4,898	)		(6,871	)
Income (loss) from continuing operations before income taxes		(957	)		11,212			7,687			37,487
Income tax provision		5,280			4,381			8,915			14,512
Income (loss) from continuing operations		(6,237	)		6,831			(1,228	)		22,975
Income (loss) from discontinued operations, net of tax		(439	)		15			(412	)		(175	)
Net income (loss)	$	(6,676	)	$	6,846		$	(1,640	)	$	22,800
Earnings per share:
Basic:
Income (loss) from continuing operations	$	(0.23	)	$	0.25		$	(0.05	)	$	0.86
Income (loss) from discontinued operations	$	(0.02	)		—		$	(0.01	)	$	(0.01	)
Net income (loss) per common share	$	(0.25	)	$	0.25		$	(0.06	)	$	0.85
Diluted:
Income (loss) from continuing operations	$	(0.23	)	$	0.25		$	(0.05	)	$	0.83
Income (loss) from discontinued operations	$	(0.02	)		—		$	(0.01	)		—
Net income (loss) per common share	$	(0.25	)	$	0.25		$	(0.06	)	$	0.83
Weighted average number of common and common equivalent shares outstanding:
Basic		27,027			26,891			27,071			26,764
Diluted		27,027			27,797			27,071			27,625
Dividends per common share	$	0.0325		$	0.0325		$	0.0975		$	0.0975

See accompanying notes

4

Schawk, Inc.
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2008 and 2007
(Unaudited)
(In Thousands)

	2008			2007
				(Restated)
Operating activities
Net income (loss)	$	(1,640	)	$	22,800
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation		12,962			13,009
Amortization		3,101			2,619
Impairment of long-lived assets		6,257			—
Non cash restructuring charge		592			—
Share-based compensation expense		918			776
Tax benefit from stock options exercised		(50	)		(920	)
Gain realized on sale of property and equipment		(162	)		(995	)
Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:
Trade accounts receivable		16,395			16,598
Inventories		(3,913	)		(2,385	)
Prepaid expenses and other current assets		936			(1,339	)
Trade accounts payable, accrued expenses and other liabilities		(8,252	)		(13,708	)
Income taxes		(2,839	)		2,080
Net cash provided by operating activities		24,305			38,535
Investing activities
Proceeds from sales of property and equipment		1,108			2,581
Capital expenditures		(10,256	)		(10,880	)
Acquisitions, net of cash acquired		(2,826	)		(19,009	)
Other, net		(2	)		146
Net cash used in investing activities		(11,976	)		(27,162	)
Financing activities
Net principal proceeds (payments) on debt		4,409			(13,740	)
Tax benefit from stock options exercised		50			920
Common stock dividends		(2,599	)		(2,607	)
Purchase of common stock		(9,846	)		(42	)
Issuance of common stock		1,098			3,294
Net cash used in financing activities		(6,888	)		(12,175	)
Effect of foreign currency rate changes		900			1,239
Net increase in cash and cash equivalents		6,341			437
Cash and cash equivalents beginning of period		11,754			10,177
Cash and cash equivalents end of period	$	18,095		$	10,614

See accompanying notes.

5

Schawk, Inc.
Notes to Consolidated Interim Financial Statements
(Unaudited)
(In thousands, except per share data)

NOTE 1. BASIS OF PRESENTATION AND RESTATEMENTS OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

The consolidated interim unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although management of Schawk, Inc. (the Company) believes the disclosures included are adequate to make the information presented not misleading. In the opinion of management, all adjustments necessary for a fair presentation for the periods presented have been recorded. These financial statements should be read in conjunction with the Company’s consolidated financial statements and the notes thereto for the three years ended December 31, 2007, as filed with its 2007 annual report on Form 10-K.

Restatement reported in Form 10-K for the year ended December 31, 2007

As stated in the Company’s Form 10-K for the year ended December 31, 2007, the Company restated its 2006 and 2005 consolidated financial statements to correct accounting errors discovered subsequent to the issuance of the original financial statements and to correct errors that were discovered during the financial statement audits for the respective years but which were not recorded because they were considered at the time of the original financial statement issuance to be immaterial. In addition, the quarterly results for 2006 and the first three quarters of 2007 were restated. Accordingly, the consolidated financial statements and footnote disclosures for the three and nine month periods ended September 30, 2007, as presented in this Form 10-Q, have been restated to reflect all adjustments related to those periods.

The accounting errors corrected in the restated consolidated financial statements are summarized as follows:

Computer software capitalized for sale to customers

The Company’s capitalization of internally developed software costs for sale was not in accordance with Statement of Financial Accounting Standards No. 86“Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed” (“FAS No. 86”), because substantially all of the costs were incurred prior to the point at which technological feasibility was established for the computer software under development. The costs were capitalized as part of the work performed by the Company’s Digital Solutions subsidiary which develops and sells computer software. The consolidated financial statements for the three and nine month periods ended September 30, 2007 have been restated to expense the improperly capitalized computer software development costs, net of accumulated amortization, in the correct accounting period.

Software developed for internal use

The Company improperly capitalized costs for software developed for internal use and did not properly follow AICPA Statement of Position No. 98-1“Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”(“SOP No. 98-1”). The costs capitalized in error represented internal employee labor and outside consultant fees for developing the Company’s cost accounting, job-tracking, billing and other accounting systems, which, however, did not meet the criteria for capitalization under the SOP. The consolidated financial statements for the three and nine month periods ended September 30, 2007 have been restated to expense the amounts capitalized in error, net of accumulated amortization, in the correct accounting period.

Software revenue recognition

The Company’s computer software revenue recognition policy was not in accordance with AICPA Statement of Position No. 97-2“Software Revenue Recognition", Statement of Position No. 98-9“Software Revenue Recognition, with Respect to Certain Transactions” and Emerging Issues Task Force No. 00-21 “Revenue Arrangements with Multiple Deliverables.” The revenue recognition policy, relating to the Company’s Digital Solutions subsidiary that develops and sells computer software, incorrectly resulted in the recognition of revenue before it was earned. The Company had multiple element arrangements subject to Statement of Position No. 98-9 for which it had not established vendor-specific objective evidence of fair value for certain undelivered elements. The Company improperly allocated revenues to various elements and as a result had improperly recorded revenue for certain delivered elements. The consolidated financial statements for the three and nine month periods ended September 30, 2007 have been restated to properly record revenue, net of the related deferred expenses, in the correct accounting period.

6

Other revenue recognition adjustments

The Company’s policy for revenue recognition related to its graphic-services operations was, in certain cases, not in accordance with SEC Staff Accounting Bulletin 104, Topic 13 “Revenue Recognition” (“SAB No. 104”). SAB No. 104 requires that revenue only be recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. The Company accrues revenue for unbilled jobs relating to its graphics design business at the end of each month. Because the Company did not maintain effective controls over this process, revenue relating to certain jobs was recognized prior to one or more of the SAB No. 104 criteria being met. The consolidated financial statements for the nine month period ended September 30, 2007 have been restated to properly reflect revenue, net of the related inventory cost, in the correct accounting period.

Reserve reversal from litigation settlements

In the first quarter of 2007, the Company reversed certain pre-acquisition liabilities from its Seven acquisition related to a business arrangement with a bankrupt customer, for which it was determined that the liabilities no longer existed. The reversal of the liabilities should have been recorded in the fourth quarter of 2006, when the impact of the settlement agreement related to the bankrupt customer was recorded. The consolidated financial statements for the nine month period ended September 30, 2007 have been restated to reflect this transaction in the proper period.

Inventory valuation adjustments

The Company reviewed its procedures and methods for valuing work-in-process inventory during 2007 and concluded that certain period costs had been incorrectly included in the calculation of the overhead rates used to value work-in-process inventory, which primarily consists of deferred payroll and overhead costs. In addition, the originally issued consolidated financial statements included certain inventory accounting errors identified during prior year financial audits but which were not recorded at the time because they were considered to be immaterial. The consolidated financial statements for the three and nine month periods ended September 30, 2007 have been restated to exclude non-inventoriable costs from the inventory valuation and to record inventory errors that were considered to be immaterial when the original financial statements were issued.

Other adjustments, net

In the course of restating its consolidated financial statements for 2006 and 2005, the Company has recorded in the proper periods a number of transactions that were either previously identified but considered immaterial at the time of the original financial statement issuance or that were identified during the 2007 financial audit and related to prior periods. The consolidated financial statements for the three and nine month periods ended September 30, 2007 have been restated to record these adjustments in the correct accounting period.

Income tax adjustments

The consolidated financial statements for the three month and nine month periods ended September 30, 2007 have been restated to record the tax effect of the adjustments described above.

7

The following table sets forth a reconciliation of previously reported and restated net income:

	Three Months			Nine Months
	Ended September 30,			Ended September 30
	2007			2007
As reported — net income	$	4,118		$	21,908
Pre-tax adjustments:
Software capitalized for sale to customers		4,081			3,167
Software developed for internal use		(109	)		(501	)
Software revenue recognition		(46	)		(482	)
Other revenue recognition adjustments		—			(309	)
Reserve reversal from litigation settlements		—			(1,751	)
Inventory valuation adjustments		659			1,060
Other adjustments, net		(34	)		335
Total adjustments to pretax income from continuing operations		4,551			1,519
Related tax effects of adjustments noted above		(1,823	)		(627	)
Total adjustments to income from continuing operations		2,728			892
As restated — net income	$	6,846		$	22,800

The following table sets forth a reconciliation of previously reported and restated earnings per share for the period shown:

	Three Months		Nine Months
	Ended September 30,		Ended September 30,
	2007		2007
Basic earnings per share:
Income per common share from continuing operations
As reported	$	0.15	$	0.82
Adjustments	$	0.10	$	0.04
As restated	$	0.25	$	0.86
Diluted earnings per share:
Income per common share from continuing operations
As reported	$	0.15	$	0.79
Adjustments	$	0.10	$	0.04
As restated	$	0.25	$	0.83

8

The following is a summary of the effect of the restatement on the originally issued Consolidated Statements of Operations and Consolidated Statements of Cash Flows:

Consolidated Statements of Operations

	Three Months Ended						Nine Months Ended
	September 30, 2007						September 30, 2007
	Previously						Previously
	Reported			Restated			Reported			Restated
Net sales	$	130,874		$	129,316		$	404,884		$	398,990
Cost of sales		89,394			83,311			263,790			256,976
Gross profit		41,480			46,005			141,094			142,014
Selling, general and administrative expenses		32,577			32,600			98,456			97,656
Operating income		8,903			13,405			42,638			44,358
Other income (expense):
Interest and dividend income		85			85			175			175
Interest expense		(2,303	)		(2,278	)		(7,133	)		(7,046	)
		(2,218	)		(2,193	)		(6,958	)		(6,871	)
Income from continuing operations before income taxes		6,685			11,212			35,680			37,487
Income tax provision		2,567			4,381			13,772			14,512
Income from continuing operations		4,118			6,831			21,908			22,975
Income (loss) from discontinued operations		—			15			—			(175	)
Net income	$	4,118		$	6,846		$	21,908		$	22,800
Earnings per share:
Basic from continuing operations	$	0.15		$	0.25		$	0.82		$	0.86
Basic from discontinued operations		—			—			—			(0.01	)
Basic from net income	$	0.15		$	0.25		$	0.82		$	0.85
Diluted from continuing operations	$	0.15		$	0.25		$	0.79		$	0.83
Diluted from discontinued operations		—			—			—			—
Diluted from net income	$	0.15		$	0.25		$	0.79		$	0.83

9

Consolidated Statements of Cash Flows

	Nine Months Ended
	September 30, 2007
	Previously
	Reported			Restated
Operating activities
Net income	$	21,908		$	22,800
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		14,129			13,009
Amortization		2,619			2,619
Write-off software costs		3,343			—
Share-based compensation expense		776			776
Tax benefit from stock options exercised		(920	)		(920	)
Gain realized on sale of equipment		(995	)		(995	)
Changes in operating assets and liabilities, net of effects from acquisitions:
Trade accounts receivable		16,040			16,598
Inventories		(464	)		(2,385	)
Prepaid expenses and other current assets		(1,238	)		(1,339	)
Trade accounts payable and accrued expenses		(15,755	)		(13,708	)
Income taxes refundable/payable		1,453			2,080
Net cash provided by operating activities		40,896			38,535
Investing activities
Proceeds from disposal of property and equipment		2,581			2,581
Capital expenditures		(12,677	)		(10,880	)
Acquisitions, net of cash acquired		(19,493	)		(19,009	)
Other		66			146
Net cash used in investing activities		(29,523	)		(27,162	)
Financing activities
Net principal payments on debt		(13,740	)		(13,740	)
Tax benefit from stock options exercised		920			920
Common stock dividends		(2,607	)		(2,607	)
Purchase of common stock		(42	)		(42	)
Issuance of common stock		3,294			3,294
Net cash used in financing activities		(12,175	)		(12,175	)
Effect of foreign currency rate changes		1,239			1,239
Net increase in cash and cash equivalents		437			437
Cash and cash equivalents beginning of period		10,177			10,177
Cash and cash equivalents end of period	$	10,614		$	10,614

Restatement to correct error in the financial statements for the year ended December 31, 2002

In May 2008, as part of a strategic review, the Company discovered an error in its accounting for the goodwill associated with one of its Canadian operating units, Cactus, which is a large-format print producer acquired by the Company in 1999. For purposes of goodwill testing, this operation had been incorrectly aggregated with the Company’s broader Canadian reporting unit at December 31, 2007 and 2006, and with all operating units of the Company for fiscal years 2002 through 2005. At December 31, 2007 and in previous fiscal years, however, Cactus should have been treated as a separate reporting unit because it is a dissimilar business and met the requirements of a separate reporting unit under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS No. 142”). Because Cactus should have been treated as a separate reporting unit, its goodwill should have been tested for impairment on a stand-alone basis.

Treating Cactus as a separate reporting unit, the Company performed a discounted cash flow analysis using historical and projected financial performance of Cactus and determined that the goodwill associated with Cactus was impaired by approximately $2,191 as of December 31, 2002. The Company performed an analysis to determine if this error was material to the current period or any individual prior period, taking into account the requirements of SEC Staff Accounting Bulletin No. 99,“Materiality” and SEC Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. Based on this analysis, the Company concluded that the error was material to the results of operations for the year ended December 31, 2002, and would have been material to the 2008 income statement.

10

The Company has presented unaudited restated consolidated balance sheet information as of December 31, 2007 in this Form 10-Q for the quarterly period ended September 30, 2008, to reflect changes in the amounts of previously reported goodwill, retained earnings and accumulated comprehensive income, to reflect the correction of this error. The restatement has resulted in a decrease of goodwill in the amount of $3,527 as of December 31, 2007, a decrease in accumulated comprehensive income of $1,336 due to the fluctuation in exchange rates between the Canadian dollar and the US dollar and a decrease in retained earnings of $2,191. The accounting error has no effect on net income for any period after fiscal 2002.

The Company does not consider the correction of this error material to any financial statements included in its Form 10-K for the year ended December 31, 2007. As a result, the Company will present the impact of this correction in “Item 6, Selected Financial Data��� and to the appropriate financial statements when it files its Form 10-K for the year ended December 31, 2008.

11

The following is a summary of the effect of the restatement on the December 31, 2007 Consolidated Balance Sheet:

	December 31, 2007
	Previously
	Reported			Restated
Assets
Current assets:
Cash and cash equivalents	$	11,754		$	11,754
Trade accounts receivable, less allowance for doubtful accounts of $2,026		113,215			111,685
Inventories		21,902			21,563
Prepaid expenses and other		13,524			13,500
Current assets of discontinued operations		—			1,893
Deferred income taxes		4,755			4,755
Total current assets		165,150			165,150
Property and equipment, net		77,083			76,237
Goodwill		249,895			246,368
Intangible assets		41,528			41,528
Other assets		4,858			4,831
Long term assets of discontinued operations		—			873
Total assets	$	538,514		$	534,987
Liabilities and Stockholders’ Equity
Current liabilities:
Trade accounts payable	$	26,308		$	26,040
Accrued expenses		52,420			52,296
Income taxes payable		4,754			4,754
Current portion of long-term debt		4,433			4,433
Current liabilities of discontinued operations		—			392
Total current liabilities		87,915			87,915
Long-term debt		105,942			105,942
Other long-term liabilities		24,547			24,547
Deferred income taxes		15,814			15,814
Stockholders’ Equity:
Common stock		216			216
Additional paid-in capital		184,110			184,110
Retained earnings		133,648			131,457
Accumulated comprehensive income, net		15,498			14,162
		333,472			329,945
Treasury stock, at cost		(29,176	)		(29,176	)
Total stockholders’ equity		304,296			300,769
Total liabilities and stockholders’ equity	$	538,514		$	534,987

The restatements described above resulted in a $8,305 decrease to retained earnings and a $577 increase to accumulated comprehensive income as of January 1, 2007.

NOTE 2. INTERIM RESULTS

Results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

NOTE 3. DESCRIPTION OF BUSINESS

The Company is a leading provider of brand point management services, enabling companies of all sizes to connect their brands with consumers to create deeper brand affinity. The Company provides clients, at their option, access to a fully integrated or modular set of products and services on a global or local basis. The Company has been in operation since 1953, headquartered in Chicago, Illinois and is incorporated under the laws of the State of Delaware. The Company presently has operations in North America (U.S., Canada and Mexico), Asia (Singapore, China, Japan and Malaysia), Europe (United Kingdom, Belgium and Spain), India and Australia.

12

The Company’s services include brand strategy, creative design, tactical design and adaptive design. The Company’s services also include both digital and analog image database archival management as well as 3D imaging for package design, large format printing, digital photography, workflow management consulting services, and various related outsourcing and graphics arts consulting services. The Company’s Digital Solutions subsidiary develops and sells computer software. The Company’s facilities produce conventional, electronic and desktop color separations, creative design, art production, electronic retouching, conventional and digital plate making and digital press proofs. The Company has particular expertise in preparing color images for high volume print production runs of consumer products packaging. The Company functions as a vital interface between its Fortune 1000 consumer products clients, their creative designers and their converters or printers in assuring the production of consistent, high quality packaging materials in increasingly shorter turnaround and delivery times.

NOTE 4. INVENTORIES

Inventories consist of the following:

	September 30,			December 31,
	2008			2007
Raw materials	$	2,980		$	3,090
Work in process		23,119			19,430
		26,099			22,520
Less: LIFO reserve		(957	)		(957	)
	$	25,142		$	21,563

NOTE 5. EARNINGS PER SHARE

Basic earnings per share and diluted earnings per share are shown on the Consolidated Statements of Operations. Basic earnings per share are computed by dividing net income by the weighted average shares outstanding for the period. Diluted earnings per share are computed by dividing net income by the weighted average number of common shares, including restricted shares, and common stock equivalent shares (stock options) outstanding for the period. There were no reconciling items to net income to arrive at income available to common stockholders.

The following table sets forth the number of common and common stock equivalent shares used in the computation of basic and diluted earnings per share:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Weighted average shares-Basic		27,027		26,891		27,071		26,764
Effect of dilutive stock options		—		906		—		861
Adjusted weighted average shares and assumed conversions-Diluted		27,027		27,797		27,071		27,625

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Since the Company was in a loss position for the three month and nine month periods ended September 30, 2008, there was no difference between the number of shares used to calculate basic and diluted loss per share for those periods. Potentially dilutive securities that are not included in the diluted per share calculations because they would be antidilutive are as follows:

	Three Months Ended		Nine Months Ended
	September 30, 2008		September 30, 2008
Stock options		459		514

NOTE 6. COMPREHENSIVE INCOME

The components of comprehensive income for the three and nine month periods ended September 30, 2008 and 2007 are as follows:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2008			2007		2008			2007
				(Restated)					(Restated)
Net income (loss)	$	(6,676	)	$	6,846	$	(1,640	)	$	22,800
Foreign currency translation adjustments		(6,051	)		4,621		(6,485	)		9,343
Comprehensive income (loss)	$	(12,727	)	$	11,467	$	(8,125	)	$	32,143

NOTE 7. STOCK BASED COMPENSATION

Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R),“Share-Based Payments,”(“SFAS No. 123(R)”), which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. SFAS No. 123(R) supersedes the Company’s previous accounting methodology using the intrinsic value method under Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees”(“APB No. 25"). Under the intrinsic value method, no share-based compensation expense related to stock option awards granted to employees had been recognized in the Company’s Consolidated Statements of Operations, as all stock option awards granted under the plans had an exercise price equal to the market value of the Common Stock on the date of the grant.

The Company adopted SFAS No. 123(R) using the modified prospective transition method. Under this transition method, compensation expense recognized during the three and nine month periods ended September 30, 2008 and September 30, 2007 included compensation expense for all share-based awards granted prior to, but not yet vested, as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and using an accelerated expense attribution method. Compensation expense during the three and nine month periods ended September 30, 2008 and September 30, 2007 for share-based awards granted subsequent to January 1, 2006 is based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R) and is computed using the straight-line expense attribution method.

The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model with the assumptions included in the table below. The Company uses historical data among other factors to estimate the expected price volatility, the expected option life and the expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The following assumptions were used to estimate the fair value of options granted during the nine month periods ended September 30, 2008 and 2007, using the Black-Scholes option-pricing model.

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	Nine Months ended September 30,
	2008	2007
Expected dividend yield	0.81%-0.83%	0.68%- 0.71%
Expected stock price volatility	31.5%-34.8%	28.24%-28.50%
Risk-free interest rate range	2.98%-3.75%	4.53%- 4.54%
Weighted-average expected life of options	6.5-7.5 years	5.5-6.0 years
Forfeiture rate	1.00%-2.00%	2.72%

The total fair value of options and restricted stock granted during the three and nine month periods ended September 30, 2008 was $408 and $2,217, respectively. As of September 30, 2008, there was $2,768 of total unrecognized compensation cost related to nonvested options and restricted shares outstanding. That cost is expected to be recognized over a weighted average period of approximately 2 years. Expense recognized under SFAS No. 123(R) for the three and nine-month periods ended September 30, 2008 was $362 and $918, respectively. Expense recognized under SFAS No. 123(R) for the three and nine month periods ended September 30, 2007 was $214 and $776 respectively.

NOTE 8. ACQUISITIONS

Marque Brand Consultants Pty Ltd.

Effective May 31, 2008, the Company acquired 100% of the outstanding stock of Marque Brand Consultants Pty Ltd, an Australia-based brand strategy and creative design firm that provides services to consumer products companies. The net assets and results of operations of Marque are included in the Consolidated Financial Statements in the other operating segment beginning June 1, 2008. The primary reason for the acquisition was to expand the Company’s creative design business in Australia. Having an expanded creative design capability in Australia will allow the Company to provide services for its multinational clients with Australian operations. Marque is a sister company to Perks Design Partners Pty Ltd., which the Company acquired August 1, 2007.

The purchase price of $2,470 consisted of $994 paid in cash to the seller at closing, $1,108 paid to escrow accounts, $294 paid for a net tangible asset adjustment and $74 paid for acquisition-related professional fees. The Company has recorded a preliminary purchase price allocation based on a tangible and intangible asset appraisal performed by an independent consulting firm. A summary of the fair values assigned to the acquired assets is as follows:

Inventory	$	1
Other current assets		1
Fixed assets		40
Customer relationships		1,174
Non-compete agreement		84
Trade names		33
Accounts payable		(48	)
Income tax payable		(136	)
Other current liabilities		(49	)
Total cash paid at closing, net of $1,370 cash acquired	$	1,100

At September 30, 2008, there is no goodwill related to this acquisition recorded in the Company’s consolidated financial statements. However, the purchase price may be increased if certain thresholds of net sales and earnings before interest and taxes are exceeded for the seven month period ending December 31, 2008 and for calendar year 2009. The purchase price allocation will be adjusted if the additional purchase price amounts are earned, which may result in the recognition of goodwill in the Company’s consolidated financial statements. Supplemental pro-forma information is not presented because the acquisition is considered to be immaterial to the Company’s consolidated financial statements.

Protopak Innovations, Inc.

Effective September 1, 2007, the Company acquired 100% of the outstanding stock of Protopak Innovations, Inc. (“Protopak”), a Toronto, Canada-based Company that produces prototypes and samples used by the consumer products packaging industry as part of the marketing and sales of their products. The net assets and results of operations of Protopak are included in the Consolidated Financial Statements in the North America and Europe operating segment.

15

The primary reason for the acquisition was to complement the Company’s existing consumer packaging business. The prototype service provided by Protopak will allow the Company to provide its customers with product packaging samples reflecting its customers’ proposed modifications to its products. Prior to acquiring this business, the Company had, for the most part, outsourced this service. The Company determined that Protopak was a leader in this business and serviced many U.S.-based multinational consumer product companies both in Canada and for clients’ U.S. offices. Many of Protopak’s clients were also clients of the Company, so management of the Company believed there was a complimentary fit between the two businesses. These were the primary factors that resulted in the recognition of goodwill in the Company’s consolidated financial statements. The goodwill is not deductible for tax purposes.

The base purchase price of $12,109 consisted of $11,367 paid in cash to the seller, $588 accrued for a working capital adjustment based on the final closing date balance sheet and $154 paid for acquisition-related professional fees. The Company paid the working capital adjustment in April 2008. During the first quarter of 2008, the Company finalized the purchase price allocation based on a tangible and intangible asset appraisal performed by an independent consulting firm. The final allocation resulted in an increase of $285 in the fair value assigned to fixed assets with a corresponding decrease of $285 in goodwill. In addition, in the first quarter of 2008, $18 of professional fees related to the acquisition was capitalized as additional goodwill. A summary of the final fair values assigned to the acquired assets is as follows:

Trade accounts receivable	$	836
Other current assets		132
Fixed assets		765
Goodwill		7,020
Customer relationships		4,736
Non-compete agreement		379
Trade names		284
Accounts payable		(52	)
Income tax payable		(84	)
Deferred income taxes		(2,176	)
Total cash paid at closing, net of $269 cash acquired	$	11,840

The purchase price may be increased if certain thresholds of earnings before interest and taxes are exceeded for the fiscal years ending September 30, 2008, September 30, 2009 and September 30, 2010. The purchase price allocation will be adjusted if the additional purchase price amounts are earned. Because the earnings threshold was exceeded for the fiscal year ended September 30, 2008, the Company accrued $676 for a purchase price adjustment at September 30, 2008 and allocated the additional purchase price to goodwill. It is expected that this purchase price adjustment will be paid to the former owners in the fourth quarter of 2008. Supplemental pro-forma information is not presented because the acquisition is considered to be immaterial to the Company’s consolidated financial statements.

Benchmark Marketing Services, LLC

On May 31, 2007, the Company acquired the operating assets of Benchmark Marketing Services, LLC, a Cincinnati, Ohio-based creative design agency that provides services to consumer products companies. The net assets and results of operations of Benchmark are included in the Consolidated Financial Statements in the other operating segment. The primary reason for the acquisition was to acquire an established workforce in the Cincinnati area to complement our existing Anthem Cincinnati creative design operation. This resulted in the recognition of goodwill in the Company’s consolidated financial statements. The goodwill is deductible as an operating expense for tax purposes.

The base purchase price of $5,833 consisted of $5,213 paid in cash to the seller at closing, $550 paid to the seller for a working capital adjustment based on the closing date balance sheet and $70 paid for acquisition-related professional fees. In addition, the Company recorded a reserve of $666 as of the date of acquisition for the estimated expenses associated with vacating the leased premises that Benchmark currently occupies. Based on an integration plan formulated at the time of the acquisition, it was determined that the Benchmark operations would be merged with the Company’s existing Anthem Cincinnati operations. The Anthem Cincinnati facility is in the process of being expanded and upgraded to accommodate the combined operations and Benchmark will relocate upon completion of the facility improvements. It is expected that the Benchmark facility will be vacated during the fourth quarter of 2008. The initial reserve and subsequent reserve modifications were recorded as adjustments to goodwill in accordance with Emerging Issues Task Force No. 95-3 “Recognition of Liabilities in Connection with a Purchase Business Combination.” (“EITF No. 95-3”) and as adjustments to current and non-current liabilities.

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The following table summarizes the reserve activity from December 31, 2007 through September 30, 2008:

	Balance						Balance
	December 31,						March 31,
	2007		Adjustments		Payments		2008
Facility closure cost	$	666		—		—	$	666

	Balance							Balance
	March 31,							June 30,
	2008		Adjustments			Payments		2008
Facility closure cost	$	666	$	(71	)		—	$	595

	Balance							Balance
	June 30,							September 30,
	2008		Adjustments			Payments		2008
Facility closure cost	$	595	$	(36	)		—	$	559

The purchase price may be adjusted if certain sales targets are exceeded for the fiscal years ending May 31, 2008, and May 31, 2009. No purchase price adjustment was recorded for the fiscal year ended May 31, 2008 because the sales target was not exceeded. The Company is in the process of finalizing the integration plan for this acquisition. Supplemental pro-forma information is not presented because the acquisition is considered to be immaterial to the Company’s consolidated financial statements.

WBK, Inc

On July 1, 2006, the Company acquired the operating assets of WBK, Inc., a Cincinnati, Ohio-based design agency that provides services to retailers and consumer products companies. The net assets and results of operations of WBK are included in the Consolidated Financial Statements in the other operating segment. A primary reason for the acquisition of WBK, Inc. was to acquire an established design firm in Cincinnati with a track record in working with major consumer product clients. This resulted in the recognition of goodwill in the Company’s consolidated financial statements. The goodwill is deductible as an operating expense for tax purposes.

The purchase price of $4,865 consisted of $4,813 paid in cash to the seller and $52 of acquisition-related professional fees. The Company recorded a purchase price allocation based upon a tangible and intangible asset fair value appraisal provided by an independent consulting firm. The purchase agreement provides for potential increases to the purchase price if certain earning thresholds are exceeded for the years 2006 through 2009. No earn-out was due for 2006 because the earning threshold was not met. The Company paid $943 in the first quarter of 2008 to the former owner of WBK for the earn-out due for the year 2007. The additional purchase price was allocated to goodwill.

Seven Worldwide Holdings, Inc.

On January 31, 2005, the Company acquired 100 percent of the outstanding stock of Seven Worldwide Holdings, Inc. (“Seven Worldwide”). The purchase price of $210,568 consisted of $135,566 paid in cash at closing, $4,482 of acquisition-related professional fees and the issuance of 4,000 shares of the Company’s Class A common stock with a value of $70,520. The net assets and results of operations of Seven Worldwide are included in the Consolidated Financial Statements primarily in the North America and Europe operating segment. A primary reason for the acquisition was to acquire a graphic services company with an established, knowledgeable work force in the retail, advertising and pharmaceutical markets. Seven Worldwide Holdings, Inc. also had an established work force and presence in the United Kingdom and Australia with consumer packaging companies, and the Company was seeking to expand its presence in these regions. This resulted in the recognition of goodwill in the Company’s consolidated financial statements.

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During the 12 months ended January 31, 2006, management of the Company completed its assessment of the combined operations of the Company and Seven Worldwide and implemented its plan to exit certain facilities of the acquired company. During 2005, the Company closed seven facilities in the US and the UK and downsized several others. Two additional facilities were closed in early 2006 in accordance with the Company’s exit plan. A total of 712 employees were terminated during 2005 and in early 2006. In addition, the Company’s management decided to market the Book and Publishing operations of the acquired company, since this business was outside the core business of the Company. Effective as of February 28, 2006, the Company sold substantially all of the operating assets of its Book and Publishing operations.

The Company recorded an estimated exit reserve at January 31, 2005 in the amount of $12,775. The major expenses included in the exit reserve were employee severance and lease termination expenses. As management of the Company completed its assessment of the acquired operations, additional amounts were added to the initial reserve estimate. The initial reserve and subsequent reserve modifications were recorded as adjustments to goodwill in accordance with EITF No. 95-3 and as adjustments to current and non-current liabilities. The reserve balance related to facility closings will be paid over the term of the leases of the closed facilities, with the longest lease expiring in 2015. The remaining reserve balance of $2,999 is included in Accrued expenses and Other non-current liabilities on the Consolidated Balance Sheet as of September 30, 2008.

The following table summarizes the reserve activity from December 31, 2007 through September 30, 2008:

	Balance								Balance
	December 31,								March 31,
	2007		Adjustments			Payments			2008
Employee severance	$	70	$	—		$	—		$	70
Facility closure cost		3,851		(109	)		(299	)		3,443
Total	$	3,921	$	(109	)	$	(299	)	$	3,513

	Balance								Balance
	March 31,								June 30,
	2008		Adjustments			Payments			2008
Employee severance	$	70	$	(70	)	$	—		$	—
Facility closure cost		3,443		—			(238	)		3,205
Total	$	3,513	$	(70	)	$	(238	)	$	3,205

	Balance								Balance
	June 30,								September 30,
	2008		Adjustments			Payments			2008
Facility closure cost	$	3,205	$	(23	)	$	(183	)	$	2,999
Total	$	3,205	$	(23	)	$	(183	)	$	2,999

Weir Holdings Limited

On December 31, 2004, the Company acquired the operating assets and assumed certain liabilities of Weir Holdings Limited, a company registered under the laws of England, and its subsidiaries. Weir Holdings, which operates under the trade name “Winnetts”, is one of the leading providers of graphic services to consumer products companies, retailers and major print groups in the United Kingdom and European markets. The net assets and results of operations of Winnetts are included in the Consolidated Financial Statements in the North America and Europe operating segment. The primary reason for this acquisition was to expand the Company’s graphic services offering into Europe. Weir Holdings was an established graphic services company with a knowledgeable work force and was the first graphic services acquisition in Europe by the Company. This resulted in the recognition of goodwill in the Company’s consolidated financial statements.

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In connection with its acquisition of the assets of Winnetts, the Company established a facility exit reserve at December 31, 2004 in the amount of $2,500, primarily for employee severance and lease abandonment expenses. During 2005, the management of the Company completed its assessment of the acquired operations and implemented its plan to exit certain of the facilities of the acquired company. During 2005, the Company closed one facility in the UK and downsized several others. A total of 39 employees were terminated. The exit reserve balance related to employee severance was paid during 2006. The exit reserve related to the facility closure will be paid over the term of the lease, which expires in 2014. The initial reserve and subsequent reserve modifications were recorded as adjustments to goodwill in accordance with EITF No. 95-3 and as adjustments to current and non-current liabilities. The remaining reserve balance of $294 is included in accrued expenses and other non-current liabilities on the Consolidated Balance Sheet as of September 30, 2008.

The following table summarizes the reserve activity from December 31, 2007 through September 30, 2008:

	Balance								Balance
	December 31,								March 31,
	2007		Adjustments			Payments			2008
Facility closure cost	$	409	$	(79	)	$	(8	)	$	322
Total	$	409	$	(79	)	$	(8	)	$	322

	Balance						Balance
	March 31,						June 30,
	2008		Adjustments		Payments		2008
Facility closure cost	$	322	$	—	$	—	$	322
Total	$	322	$	—	$	—	$	322

	Balance							Balance
	June 30,							September 30,
	2008		Adjustments			Payments		2008
Facility closure cost	$	322	$	(28	)	$	—	$	294
Total	$	322	$	(28	)	$	—	$	294

Other acquisitions

During the third quarter of 2008, the Company accrued $86 for an anticipated first year earnout for a company acquired in 2007, to be paid subsequent to December 31, 2008. The additional purchase price was allocated to goodwill.

During the nine month period ended September 30, 2007, the Company paid $577 to the former owners of a company acquired in 2004. The additional purchase price was paid pursuant to the contingency provisions of the purchase agreements and was allocated to goodwill.

NOTE 9. DEBT

The Company borrows under a credit agreement dated January 28, 2005 with JPMorgan Chase Bank, N.A. The credit agreement provides for a five-year unsecured revolving credit facility of $115,000, expandable to $125,000, with interest at LIBOR plus a margin based on the Company’s cash flow leverage ratio. At September 30, 2008 and December 31, 2007, $42,333 and $36,655, respectively, was outstanding under this agreement and is included in Long-term debt on the Consolidated Balance Sheet.

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On February 28, 2008, the Company entered into an amendment of its revolving credit agreement, which amended certain covenants of the credit agreement to allow the Company to increase its restricted payments (primarily dividends and stock repurchases) and maximum acquisition amounts. Specifically, the amendment increased the aggregate dollar amount of restricted payments that the Company may make from $15,000 to $45,000 annually, increased the Company’s allowable maximum acquisition amount from $50,000 to $75,000 annually and increased the Company’s permitted foreign subsidiary investment amount from $60,000 to $120,000.

The Company also borrows under private placement financing agreements. The Company executed a Note Purchase and Private Shelf Agreement dated January 28, 2005, pursuant to which the Company sold $50,000 in a series of three Senior Notes. The first note, in the amount of $10,000, will mature in 2010 and bears interest at 4.81 percent. The second and third notes, each in the amount of $20,000, mature in 2011 and 2012, respectively, and bear interest at the rate of 4.99 percent and 5.17 percent, respectively. The total of these notes, $50,000, is included in Long-term debt on the Consolidated Balance Sheet as of both September 30, 2008 and December 31, 2007. The Company also sold a series of notes under a Note Purchase Agreement dated December 23, 2003. The first note under this agreement, with an outstanding amount of $12,858, bears interest at 4.90 percent and is payable in annual installments of $2,143 from 2008 to 2013. The second note under this agreement, with an outstanding amount of $8,571, bears interest at 4.98 percent and is payable in annual installments of $1,429 from 2009 to 2014. The total of these notes, $21,429, is included in the Company’s September 30, 2008 financial statements as follows: $3,572 is included in Current portion of long-term debt and capital lease obligations, and $17,857 is included in Long-term debt. At December 31, 2007, the total outstanding under these notes, $22,857, was included in the Company’s financial statements as follows: $3,572 was included in Current portion of long-term debt and capital lease obligations, and $19,285 was included in Long-term debt. The notes issued under both these agreements are unsecured.

The borrowings under these agreements are subject to certain restrictive covenants. The Company is in compliance with all covenants as of September 30, 2008.

NOTE 10. GOODWILL AND INTANGIBLE ASSETS

The Company accounts for goodwill in accordance with SFAS No. 142,“Goodwill and Other Intangible Assets” (“SFAS No. 142”).Under SFAS No. 142, the Company’s goodwill is not amortized throughout the period, but is subject to an annual impairment test. The Company performs its annual impairment test as of December 31 each year; however, in the fourth quarter of 2008, the Company intends to change this to October 1 annually, commencing with October 1, 2008, in order to have the required testing completed prior to its year-end closing activities. This change will not delay, accelerate or avoid an impairment charge. Accordingly, the Company believes that this accounting change is preferable in its circumstances. This change is not anticipated to have an impact on the Company’s interim consolidated financial statements for any period presented. Recognizing that this constitutes a change in accounting principle under SFAS No.154, “Accounting Changes and Error Corrections, (“SFAS No. 154”), a replacement of APB Opinion No. 20 and FASB Statement No. 3”, the Company intends to disclose this change in accounting principle in its future SEC filings.

The quarterly changes in the carrying amount of goodwill during 2008 were as follows:

	North America/			Other operating
	Europe segment			Segment			Total
Balance at December 31, 2007(Restated)	$	222,202		$	24,166		$	246,368
Additional purchase accounting adjustments		(267	)		952			685
Adjustments to exit reserves		(188	)		—			(188	)
Adjustments to exit reserve present value		78			—			78
Foreign currency translation		(709	)		(114	)		(823	)
Balance at March 31, 2008	$	221,116		$	25,004		$	246,120

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	North America/			Other operating
	Europe segment			Segment			Total
Balance at March 31, 2008	$	221,116		$	25,004		$	246,120
Acquisitions		—			1,256			1,256
Additional purchase accounting adjustments		(766	)		(6	)		(772	)
Adjustments to exit reserves		(70	)		(71	)		(141	)
Adjustments to exit reserve present value		—			13			13
Foreign currency translation		196			12			208
Balance at June 30, 2008	$	220,476		$	26,208		$	246,684

	North America/			Other operating
	Europe segment			Segment			Total
Balance at June 30, 2008	$	220,476		$	26,208		$	246,684
Acquisitions		—			35			35
Additional purchase accounting adjustments		(9,889	)		(1,205	)		(11,094	)
Adjustments to exit reserves		—			(36	)		(36	)
Adjustments to exit reserve present value		—			6			6
Foreign currency translation		(3,445	)		(1,096	)		(4,541	)
Balance at September 30, 2008	$	207,142		$	23,912		$	231,054

The Company’s intangible assets subject to amortization are as follows:

		September 30, 2008
	Weighted			Accumulated
	Average Life	Cost		Amortization			Net
Customer relationships	15.0 years	$	48,522	$	(11,496	)	$	37,026
Digital images	5.1 years		918		(632	)		286
Developed technologies	3.0 years		712		(712	)		—
Non-compete agreements	3.2 years		1,254		(871	)		383
Patents	20.0 years		84		(84	)		—
Trade names	2.1 years		674		(473	)		201
Contract acquisition cost	3.0 years		935		(597	)		338
	14.0 years	$	53,099	$	(14,865	)	$	38,234

		December 31, 2007
	Weighted			Accumulated
	Average Life	Cost		Amortization			Net
		(Restated)		(Restated)
Customer relationships	15.0 years	$	48,767	$	(9,058	)	$	39,709
Digital images	5.0 years		935		(493	)		442
Developed technologies	3.0 years		712		(687	)		25
Non-compete agreements	3.4 years		1,201		(717	)		484
Patents	20.0 years		84		(84	)		—
Trade names	2.2 years		658		(361	)		297
Contract acquisition cost	3.0 years		935		(364	)		571
	14.1 years	$	53,292	$	(11,764	)	$	41,528

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Intangible assets were recorded at fair market value as of the dates of the acquisitions based upon independent third party appraisals. The fair values and useful lives assigned to customer relationship assets are based on the period over which these relationships are expected to contribute directly or indirectly to the future cash flows of the Company. The acquired companies typically have had key long-term relationships with Fortune 500 companies lasting 15 years or more. Because of the custom nature of the work that the Company does, it has been our experience that customers are reluctant to change suppliers. Amortization expense related to the intangible assets was $1,036 and $3,101 for the three and nine month periods ended September 30, 2008, respectively, and $937 and $2,619 for the three and nine month periods ended September 30, 2007, respectively. Amortization expense for each of the next five years beginning October 1, 2008 is expected to be approximately $4,118 for fiscal year 2009, $3,643 for 2010, $3,198 for 2011, $3,130 for 2012 and $3,107 for 2013.

NOTE 11. INCOME TAXES

Income tax expense for the third quarter of 2008 was $5,280 compared to $4,381 for the third quarter of 2007. Included in the expense for the third quarter of 2008 is a $4,231 adjustment to increase FIN 48 reserves. The income tax expense for the nine month periods ended September 30, 2008 and September 30, 2007 was $8,915 and $14,512, respectively. The effective tax rate for the nine month periods ended September 30, 2008 and September 30, 2007 was 116.0 percent and 38.7 percent, respectively. The increase in the year-to-date effective rate for 2008 compared to 2007 is due to an increase in FIN 48 tax reserves of $3,095, valuation allowances of $1,551 and the recording of a federal provision-to-return adjustment of $585.

The Company has unrecognized tax benefits of $7,786 and $13,597 at September 30, 2008 and December 31, 2007, respectively. During the quarter ended September 30, 2008, the Company effectively settled the IRS audit of the former Seven Consolidated Group tax years 1996 to 2003 and paid additional interest in the amount of $964 and a partial settlement of related state taxes in the amount of $619 with the filing of amended returns reflecting the IRS adjustments. In addition, the Company effectively settled Internal Revenue Service audits of Schawk Inc. for the years 2005 and 2006 with no additional taxes due. As a result of the closures of these audits, the Company recorded a decrease during the third quarter of 2008 in its FIN 48 reserves of $5,273 as a reduction to goodwill and $1,175 as a reduction to the income tax provision and an increase in its deferred tax assets of $5,278 as a reduction to goodwill. In addition, for the third quarter of 2008, the Company established reserves for new uncertain tax positions of $4,550 related to the Company’s foreign operations.

The pre-acquisition income tax years for the former Seven Consolidated Group are closed through 2004. The federal income tax returns of Schawk, Inc. and subsidiaries are closed through 2006. The Company is not currently under IRS examination for any open tax years. The Company is currently under examination by various state and local tax authorities for years ranging from 2000 to 2005.

NOTE 12. SEGMENT AND GEOGRAPHIC REPORTING

The Company organizes and manages its operations primarily by geographic area and measures profit or loss of its segments based on operating income. The accounting policies used to measure operating income of the segments are the same as those used to prepare the consolidated financial statements. The Company aggregates its operations in the United States, Canada and Europe into one reportable operating segment (North America/Europe) since they have similar economic characteristics. The Company’s other operations in Asia and Australia, its creative design operation (Anthem) and its Digital Solutions business are grouped together into one reportable segment (Other operating segment) for purposes of disclosing segment information as they do not meet any of the quantitative thresholds for separate disclosure in accordance with the relevant provisions of Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“FAS No. 131”). Anthem has creative design operations in the United States, Canada, Europe and Asia and the Digital Solutions business has operations in the United States and Europe.

Corporate consists of unallocated general and administrative activities and associated expenses including in part, executive, legal, finance, information technology, human resources and certain facility costs. In addition, certain costs and employee benefit plans are included in corporate and not allocated to operating segments.

The company has disclosed operating income (loss) as the primary measure of segment earnings (loss). This is the measure of profitability used by the company’s chief operating decision maker and is most consistent with the presentation of profitability reported within the condensed consolidated financial statements.

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Segment information relating to results of operations was as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
				(Restated)						(Restated)
Sales to External Customers:
North America and Europe	$	105,002		$	108,777		$	324,255		$	342,423
Other operating segments		19,165			20,539			56,797			56,567
Total	$	124,167		$	129,316		$	381,052		$	398,990
Operating Income (loss):
North America and Europe	$	9,546		$	16,702		$	39,986		$	54,098
Other operating segments		(931	)		1,231			(2,418	)		3,982
Corporate		(8,010	)		(4,528	)		(24,983	)		(13,722	)
Operating income		605			13,405			12,585			44,358
Interest expense, net		(1,562	)		(2,193	)		(4,898	)		(6,871	)
Income (loss) from continuing operations before income taxes	$	(957	)	$	11,212		$	7,687		$	37,487

NOTE 13. CONTINGENCIES

Kohlberg & Company Indemnity

The stock purchase agreement entered into by the Company with Kohlberg & Company, L.L.C. (“Kohlberg”) to acquire Seven Worldwide provided for a payment of $10,000 into an escrow account. The escrow was established to insure that funds were available to pay Schawk, Inc. any indemnity claims it may have under the stock purchase agreement. During 2006, Kohlberg filed a Declaratory Judgment Complaint in the state of New York seeking the release of the $10,000 held in escrow. The Company has filed a counter-motion for summary judgment asserting that Schawk, Inc. has valid claims against the amounts held in escrow and that, as a result, such funds should not be released but rather paid out to Schawk, Inc. Kohlberg has denied that it has any indemnity obligations to the Company. At September 30, 2008, the Company had recorded a receivable from Kohlberg on its Consolidated Balance Sheet in the amount of $3,787, for a Seven Worldwide Delaware unclaimed property liability settlement and certain other tax settlements paid by the Company for pre-acquisition tax liabilities and related professional fees. In addition, in February 2008, the Company paid $6,000 in settlement of Internal Revenue Service audits of Seven Worldwide, Inc., that had been accrued as of the acquisition date, for the pre-acquisition years of 1996 to 2003. During the third quarter ended September 30, 2008, the Company paid interest of $964 in final settlement of Internal Revenue Service audits of Seven Worldwide, Inc. for the years 1996-2003. Additionally during the third quarter, 2008, the Company paid $619 as a partial settlement of state taxes with the filing of amended returns reflecting Internal Revenue Service adjustments. The Company believes it is entitled to indemnification for all amounts under the terms of the stock purchase agreement and that recoverability is probable.

NOTE 14. COST REDUCTION PLAN

Beginning in the second quarter of 2008, the Company incurred costs for employee terminations, obligations for future lease payments, fixed asset impairments, and other associated costs as part of its previously announced plan to reduce costs through a consolidation and realignment of its work force and facilities. The total expense recorded for the three month and the nine month periods ended September 30, 2008 was $1,942 and $5,116 respectively. The costs associated with these actions are covered under Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”)and Statement of Financial Accounting Standards No. 112, “Employers’ Accounting for Postemployment Benefits” (“SFAS No. 112”).

The following table summarizes the expense recorded and the cash payments for the three and nine month periods ended September 30, 2008. The remaining reserve balance of $3,188 is included in accrued expenses and other current liabilities on the Consolidated Balance Sheet at September 30, 2008.

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	Employee			Lease
	Terminations			Obligations			Total
Second quarter 2008:
Expense recorded	$	1,677		$	908		$	2,585
Cash payments		(341	)		(114	)		(455	)
Liability balance June 30, 2008		1,336			794			2,130
Third quarter 2008:
Expense recorded		1,144			795			1,939
Cash payments		(670	)		(211	)		(881	)
Liability balance September 30, 2008	$	1,810		$	1,378		$	3,188

In addition to the expense shown in the table above, the Company recorded fixed asset impairment charges related to its cost reduction plan in the amount of $3 and $592 for the three and nine month periods ended September 30, 2008, respectively.

The total expense of $1,942 and $5,116 recorded in the three and nine months periods ended September 30, 2008 respectively, is presented as Acquisition integration and restructuring expense in the Consolidated Statement of Operations. For the three month period ended September 30, 2008, $1,589 was recorded in the North America and Europe segment, $148 was recorded in the Other operating segment and $205 was recorded in Corporate. For the nine month period ended September 30, 2008, $3,986 was recorded in the North America and Europe segment, $697 was recorded in the Other operating segment and $433 was recorded in Corporate.

NOTE 15. IMPAIRMENT OF LONG-LIVED ASSETS

During the third quarter of 2008, the Company made a decision to sell certain land and buildings which are currently leased to a third party and engaged an independent appraiser to assess their market value. Based on the appraisal report, the Company determined that the carrying value of the property could not be supported by its estimated market value. The carrying value at September 30, 2008 of $5,185 was written down to its estimated fair value, less anticipated cost to sell, of $2,085. The $3,100 charge is included in Impairment of long-lived assets in the Consolidated Statement of Operations. The expense was recorded in the North America and Europe segment.

The Company has engaged a real estate broker to market the property and expects a sale to occur within the next twelve months. In accordance with the Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”),the adjusted carrying value of the land and buildings is classified as “Assets held for sale” on the Consolidated Balance Sheet as at September 30, 2008.

During the second and third quarter of 2008, software that had been capitalized by the Company in accordance with AICPA Statement of Position No. 98-1“Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”(“SOP No. 98-1”) was reviewed for impairment due to changes in circumstances which indicated that the carrying amount of the asset might not be recoverable. These changes in circumstances included the expectation that the software would not provide substantive service potential and there was a change in the extent to which the software was to be used. In addition, it was determined that the cost to modify the software for the Company’s needs would significantly exceed originally expected development costs.

As a result of these circumstances, the Company has written down the capitalized costs of the software to fair value. The amount of this write-down in the three and nine months period ended September 30, 2008 was $152 and $2,336, respectively, and is included in Impairment of long-lived assets in the Consolidated Statement of Operations. The expense was recorded in the North America and Europe segment.

Also included in Impairment of long-lived assets in the Consolidated Statement of Operations is $199 of additional fixed asset impairments recorded during the three and nine months period ended September 30, 2008, mainly related to leasehold improvements at a production facility where the lease was terminated prior to the contractual lease termination date. The expense was recorded in the North America and Europe segment.

Additionally, during the three and nine months period ended September 30, 2008, the Company incurred $3 and $592, respectively, of fixed asset impairments relating to its cost reduction plan - - refer to Note 14.

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NOTE 16. DISCONTINUED OPERATIONS

During the third quarter of 2008, the Company made a decision to sell its large format printing operation located in Toronto, Canada and began actively marketing the business to potential buyers. The operation to be sold is a separate reporting unit and is considered to be outside of the Company’s core business. The Company expects to complete a sale of the business within one year. In accordance with SFAS No. 144, the Company has classified the business for sale as discontinued operations.

The Company recorded an impairment loss of $622 during the third quarter of 2008 to write-down the net assets of the business to fair value, less cost to sell. The impairment charge is included in Income (loss) from discontinued operations on the Company’s Consolidated Statement of Operations. In addition, the results of operations of the business to be sold are reported as discontinued operations for all periods presented in this quarterly report and the assets and liabilities of the discontinued operation have been segregated in the Consolidated Balance Sheet.

Operating results for the discontinued operations for the periods presented in this quarterly report are as follows:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2008			2007		2008			2007
Net sales	$	1,279		$	1,473	$	4,237		$	4,163
Cost of sales		979			1,083		3,094			3,357
Gross profit		300			390		1,143			806
Selling, general and administrative expenses		334			366		1,137			1,082
Impairment writedown		622			—		622			—
Operating income (loss)		(656	)		24		(616	)		(276	)
Interest expense		—			—		—			12
Income (loss) before income taxes		(656	)		24		(616	)		(288	)
Income tax provision		(217	)		9		(204	)		(113	)
Net income (loss)	$	(439	)	$	15	$	(412	)	$	(175	)

Summarized assets and liabilities of the discontinued operations are as follows:

	September 30,		December 31,
	2008		2007
Trade accounts receivable, net	$	1,418	$	1,530
Inventories		345		339
Prepaid expenses and other current assets		27		24
Current assets of discontinued operations	$	1,790	$	1,893
Property and equipment, net	$	580	$	846
Other assets		26		27
Long-term assets of discontinued operations	$	606	$	873
Trade accounts payable	$	303	$	268
Accrued expenses		766		124
Current liabilities of discontinued operations	$	1,069	$	392
Net assets of discontinued operations	$	1,327	$	2,374

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NOTE 17. GAINS AND LOSSES FROM FOREIGN CURRENCY TRANSACTIONS

For the three month periods ended September 30, 2008 and September 30, 2007, the Company recorded pre-tax foreign exchange losses (gains) of $1,909 and ($54), respectively. For the nine month periods ended September 30, 2008 and September 30, 2007, these losses (gains) were $1,383 and ($35), respectively. These losses (gains) were recorded by international subsidiaries primarily for unhedged currency exposure arising from intercompany debt obligations. These losses (gains) are included in selling, general and administrative expenses in the Consolidated Statement of Operations.

NOTE 18. RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141(R),“Business Combinations”(“SFAS No. 141(R)”). SFAS No. 141(R) replaces SFAS No. 141,“Business Combinations", but retains the requirement that the purchase method of accounting for acquisitions be used for all business combinations. SFAS No. 141(R) expands on the disclosures previously required by SFAS No. 141, better defines the acquirer and the acquisition date in a business combination, and establishes principles for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed and any non controlling interests in the acquired business. SFAS 141(R) changes the accounting for acquisition related costs from being included as part of the purchase price of a business acquired to being expensed as incurred and will require the acquiring company to recognize contingent consideration arrangements at their acquisition date fair values, with subsequent changes in fair value generally to be reflected in earnings, as opposed to additional purchase price of the acquired business. As the Company has a history of growing its business through acquisitions, the Company anticipates that the adoption of SFAS 141(R) will have an impact on its results of operations in future periods, which impact depends on the size and the number of acquisitions it consummates in the future.

SFAS No. 141(R) also requires an acquirer to record an adjustment to income tax expense for changes in valuation allowances or uncertain tax positions related to acquired businesses. Certain of the Company’s acquisitions consummated in prior years would be subject to changes in accounting for the changes in valuation allowances on deferred tax assets. After December 31, 2008, reductions of valuation allowances would reduce the income tax provision as opposed to goodwill. SFAS No. 141(R) is effective for all business combinations with an acquisition date in the first annual period following December 15, 2008 and early adoption is not permitted. The Company will adopt SFAS No. 141(R) as of January 1, 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51” (“SFAS No. 160”).SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, with earlier adoption prohibited. This statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net earnings attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. The statement also amends certain of ARB No. 51’s consolidation procedures for consistency with the requirements of SFAS No. 141(R). This statement also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. The adoption of SFAS No. 160 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

On January 1, 2008, the Company adopted the provisions of Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115”(“SFAS No. 159”). SFAS No. 159 permits entities to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis under a fair value option. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment in retained earnings. Subsequent to adopting SFAS No. 159, changes in fair value are recognized in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 did not have an impact on the Company’s consolidated financial statements as the Company did not elect to measure any financial assets or financial liabilities at fair value.

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On January 1, 2008, the Company adopted the provisions of Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements, but does not require any additional fair value measurements. Relative to SFAS No. 157, the FASB has issued FASB Staff Position No. 157-2, which delays the effective date of SFAS No. 157 for one year for certain nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. As required, the Company adopted SFAS No. 157 on January 1, 2008, for financial assets and liabilities and for nonfinancial assets and liabilities that are remeasured at least annually. There was no material effect on its financial statements upon adoption. The Company does not expect a material impact on its financial statements from adoption of SFAS No. 157 as it pertains to nonfinancial assets and nonfinancial liabilities for the first quarter of 2009.

In April 2008, the FASB issued FASB Staff Position No. 142-3, “Determining the Useful Life of Intangible Assets”(“FSP No. 142-3”). FSP 142-3 amends the factors to be considered in determining the useful life of intangible assets. Its intent is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure its fair value by allowing an entity to consider its own historical experience in renewing or extending the useful life of a recognized intangible asset. FSP No. 142-3 is effective for fiscal years beginning after December 15, 2008. The Company is currently assessing the statement but its adoption is not expected to have a material impact on its consolidated financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements contained herein that relate to the Company’s beliefs or expectations as to future events are not statements of historical fact and are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act.) The Company intends any such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1999. Although the Company believes that the assumptions upon which such forward-looking statements are based are reasonable within the bounds of its knowledge of its business and operations, it can give no assurance the assumptions will prove to have been correct and undue reliance should not be placed on such statements. Important factors that could cause actual results to differ materially and adversely from the Company’s expectations and beliefs include, among other things, the strength of the United States economy in general and specifically market conditions for the consumer products industry; the level of demand for the Company’s services; loss of key management and operational personnel; the ability of the Company to remedy known internal control deficiencies and weaknesses and the discovery of any additional control deficiencies or weaknesses, which may require substantial costs and resources to rectify; the ability of the Company to implement its growth strategy, including its ability to implement its cost reduction and market repositioning plans; the stability of state, federal and foreign tax laws; the ability of the Company to identify and exploit industry trends and to exploit technological advances in the imaging industry; the stability of political conditions in other countries in which the Company has production service capabilities; terrorist attacks, wars, diseases and other geo-political events as well as other factors detailed in the Company’s filings with the Securities and Exchange Commission. The Company assumes no obligation to update publicly any of these statements in light of future events.

EXECUTIVE-LEVEL OVERVIEW

Financial results

Net sales decreased to $124.2 million in the third quarter of 2008 from $129.3 million in the third quarter of 2007. The year to date 2008 net sales decreased to $381.1 million from $399.0 million in 2007. The loss for the third quarter 2008 from continuing operations was $6.2 million or $0.23 per fully diluted share as compared to income from continuing operations of $6.8 million or $0.25 per fully diluted share in the third quarter of 2007. For the nine months ended September 30, 2008, the loss from continuing operations was $1.2 million or $0.05 per fully diluted share, as compared to income from continuing operations of $23.0 million or $0.83 per fully diluted share for the nine months ended September 30, 2007. During the third quarter of 2008, the Company experienced a slowdown in business as compared to the third quarter of 2007. The slowdown was particularly evident in our domestic business in the United States, which represents more than two-thirds of our sales. The quarter-over-quarter sales decline was the result of lower sales in the North America and Europe reportable segment, which declined by $3.8 million, or 3.5 percent and lower sales in the Other reportable segment of $1.3 million or 6.3 percent.

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The year to date sales decline was the result of lower sales in the North America and Europe reportable segment, which declined by $18.1 million or 5.3 percent.

The Company recorded expenses of $1.9 million and $5.1 million in the third quarter and year-to-date periods of 2008, respectively, related to its cost reduction plan. In addition, the Company recorded $3.5 million and $5.6 million of impairment charges in the third quarter and year-to-date periods of 2008, respectively, related primarily to land and buildings which are for sale and for internally developed software which is not being used as originally intended.

Business overview

Marketing, promotional and advertising spending by consumer products companies and retailers drives a majority of the Company’s revenues. The markets served are primarily consumer products, pharmaceutical, entertainment and retail. The Company’s business in this area involves producing graphic images for various applications. Generally, the Company or a third party creates an image and then the image is manipulated to enhance the color and to prepare it for print. The applications vary from consumer product packaging, including food and beverage packaging images, to retail advertisements in newspapers, including freestanding inserts (FSI’s) and magazine ads. The graphics process is generally the same regardless of the application. The following steps in the graphics process must take place to produce a final image:

• Strategic Analysis

• Planning and Messaging

• Conceptual Design

• Content Creation

• File Building

• Retouching

• Art Production

• Pre-Media

The Company’s involvement in a client project may involve many of the above steps or just one of the steps, depending on the client’s needs. Each client assignment, or ''job’’, is a custom job in that the image being produced is unique, even if it only involves a small change from an existing image, such as adding a ''low fat’’ banner on a food package. Essentially, such changes equal new revenue for us. The Company is paid for its graphic imaging work regardless of the success or failure of the food product, the promotion or the ad campaign.

Historically, a substantial majority of the Company’s revenues have been derived from providing graphic services for consumer product packaging applications. Packaging changes occur with such frequency and lack of notice, and client turn-around requirements are so tight, that there is little backlog. There are regular promotions throughout the year that create revenue opportunities for us, for example: Valentine’s Day, Easter, Fourth of July, Back-to-School, Halloween, Thanksgiving and Christmas. In addition, there are event-driven promotions that occur regularly, such as the Super Bowl, Grammy Awards, World Series, Indianapolis 500 and the Olympics. Additionally, changing regulatory requirements necessitate new packaging and a high degree of documentation. Lastly, there are a number of health related ''banners’’ that are added to food and beverage packaging, such as ''heart healthy,’’ ''low in carbohydrates,’’ ''enriched with essential vitamins,’’ ''low in saturated fat’’ and ''caffeine free.’’ All of these items require new product packaging designs or changes in existing designs, in each case creating additional opportunities for revenue. Graphic services for the consumer products packaging industry generally involve higher margins due to the substantial expertise necessary to meet consumer products companies’ precise specifications and to quickly, consistently and efficiently bring their products to market, as well as due to the complexity and variety of packaging materials, shapes and sizes, custom colors and storage conditions.

As a result of recent acquisitions, the Company has increased the percentage of its revenue derived from providing graphics services to advertising and retail clients and added to its service offering graphic services to the entertainment market. These clients typically require high volume, commodity-oriented prepress graphic services. Graphic services for these clients typically yield relatively lower margins due to the lower degree of complexity in providing such services, and the number and size of companies in the industry capable of providing such services.

In the first three quarters of 2008, approximately 8.6 percent of the Company’s total revenues came from its largest single client. While the Company seeks to build long-term client relationships, revenues from any particular client can fluctuate from period to period due to the client’s purchasing patterns. Any termination of or significant reduction in the Company business relationship with any of its principal clients could have a material adverse effect on its business, financial condition and results of operations.

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Cost reduction actions

Beginning in the second quarter of 2008, the Company incurred restructuring costs for employee terminations, obligations for future lease payments, fixed asset impairments, and other associated costs as part of its previously announced plan to reduce costs through a consolidation and realignment of its work force and facilities. The total expense recorded for the three month and the nine month periods ended September 30, 2008 was $1.9 million and $5.1 million, respectively. The costs associated with these actions are covered under Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”)and Statement of Financial Accounting Standards No. 112, “Employers’ Accounting for Postemployment Benefits” (“SFAS No. 112”).

The total expense of $1.9 million and $5.1 million recorded in the three and nine month periods ended September 30, 2008, respectively, is presented as Acquisition integration and restructuring expense in the Consolidated Statement of Operations. For the three month period ended September 30, 2008, $1.6 million was recorded in the North America and Europe segment, $0.1 million was recorded in the Other operating segment and $0.2 million was recorded in Corporate. For the nine month period ended September 30, 2008, $4.0 million was recorded in the North America and Europe segment, $0.7 was recorded in the Other operating segment and $0.4 million was recorded in Corporate. See Note 14 for additional information.

The restructuring costs are expected to total between $7.0 million and $8.5 million in 2008. Non-cash charges are expected to comprise $0.7 million of the total charges. Costs savings in 2008 are estimated to range between $4.0 million and $5.0 million with full year 2009 savings expected to be between $13.0 million and $15.0 million.

Discontinued operations

During the third quarter of 2008, the Company made a decision to sell its large format printing operation located in Toronto, Canada and began actively marketing the business to potential buyers. The operation to be sold is a separate reporting unit and is considered to be outside of the Company’s core business. The Company expects to complete a sale of the business within one year. In accordance with SFAS No. 144, the Company has classified the business for sale as discontinued operations.

The Company recorded an impairment loss of $622 during the third quarter of 2008 to write-down the net assets of the business to fair value, less cost to sell. The impairment charge is included in Income (loss) from discontinued operations on the Company’s Consolidated Statement of Operations. In addition, the results of operations of the business to be sold are reported as discontinued operations for all periods presented in this quarterly report and the assets and liabilities of the discontinued operation have been segregated in the Consolidated Balance Sheet.

Goodwill impairment and restatement of previously issued financial statements

In May 2008, as part of a strategic review, the Company discovered an error in its accounting for the goodwill associated with one of its Canadian operating units, Cactus, which is a large-format print producer acquired by the Company in 1999. For purposes of goodwill testing, this operation had been incorrectly aggregated with the Company’s broader Canadian reporting unit at December 31, 2007 and 2006, and with all operating units of the Company for fiscal years 2002 through 2005. At December 31, 2007 and in previous fiscal years, however, Cactus should have been treated as a separate reporting unit because it is a dissimilar business and met the requirements of a separate reporting unit under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS No. 142”). Because Cactus should have been treated as a separate reporting unit, its goodwill should have been tested for impairment on a stand-alone basis.

Treating Cactus as a separate reporting unit, the Company performed a discounted cash flow analysis using historical and projected financial performance of Cactus and determined that the goodwill associated with Cactus was impaired by approximately $2.2 million as of December 31, 2002. The Company performed an analysis to determine if this error was material to the current period or any individual prior period, taking into account the requirements of SEC Staff Accounting Bulletin No. 99,“Materiality” and SEC Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. Based on this analysis, the Company concluded that the error was material to the results of operations for the year ended December 31, 2002 and would have been material to the 2008 income statement.

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The Company has presented unaudited restated consolidated balance sheet information as of December 31, 2007 in this Form 10-Q for the three months ended September 30, 2008 to reflect changes in the amounts of previously reported goodwill, retained earnings and accumulated comprehensive income to reflect the correction of this error. The restatement has resulted in a decrease of goodwill in the amount of $3.5 million as of December 31, 2007, a decrease in accumulated comprehensive income of $1.3 million due to the fluctuation in exchange rates between the Canadian dollar and the US dollar and a decrease in retained earnings of $2.2 million. The accounting error has no effect on net income for any period after fiscal 2002.

The Company does not consider the correction of this error material to any financial statements included in its Form 10-K for the year ended December 31, 2007. As a result, the Company will present the impact of this correction in “Item 6, Selected Financial Data” and to the appropriate financial statements when it files its Form 10-K for the year ended December 31, 2008.

The Company has previously disclosed and identified in prior period reports the existence of material weaknesses in the Company’s internal control over financial reporting as of December 31, 2007 in the areas of revenue recognition, software development cost capitalization, income taxes and entity level controls. The Company considers the failure to treat Cactus as a separate reporting unit under FAS No. 142 and to timely identify and reflect the goodwill impairment for Cactus as of December 31, 2002 as evidence of continued weakness in its control environment. As previously disclosed, the Company remains focused on improving its internal controls and is working toward remedying identified internal control weaknesses throughout 2008.

Critical accounting estimates

The discussion and analysis of the Company’s financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of its financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting estimates are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. The Company believes that its critical accounting estimates are limited to those described below.

Accounts Receivable.The Company’s clients are primarily consumer product manufacturers, converters and advertising agencies; retailers, both grocery and non-grocery and entertainment companies, none of which individually represents more than 9 percent of total revenue. Accounts receivable consists primarily of amounts due to the Company from its normal business activities. In assessing the carrying value of its accounts receivable, the Company estimated the recoverability by making assumptions based on its historical write-off experience and specific risks identified in the accounts receivable portfolio. Based on the Company’s estimates and assumptions, an allowance for doubtful accounts of $1.8 million was established at September 30, 2008, compared to an allowance of $2.0 million at December 31, 2007. A change in the Company’s assumptions would result in the Company recovering an amount of its accounts receivable that differs from the carrying value. Any difference could result in an increase or decrease in bad debt expense. A 10 percent to 20 percent increase in the Company’s write-off experience would result in an approximately $0.1 million to $0.2 million increase in bad debt expense for a given period, based upon the Company’s methodology for calculating the allowance for doubtful accounts.

Impairment of Long-Lived Assets.The Company evaluates the recoverability of long-lived assets by comparing their carrying value to the expected future undiscounted cash flows to be generated from such assets when events or circumstances indicate that impairment may have occurred. During the third quarter of 2008, the Company made a decision to sell certain land and buildings which are currently leased to a third party and engaged an independent appraiser to assess their market value. Based on the appraisal report, the Company determined that the carrying value of the property could not be supported by its estimated market value. The carrying value at September 30, 2008 of $5.2 million was written down to its estimated fair value, less anticipated cost to sell, of $2.1 million. The $3.1 million charge is included in Impairment of long-lived assets in the Consolidated Statement of Operations. The expense was recorded in the North America and Europe segment.

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The Company has engaged a real estate broker to market the land and buildings and expects a sale to occur within the next twelve months. In accordance with the Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” “(SFAS No. 144”),the estimated fair value of the land and buildings is classified as “Assets held for sale” on the Consolidated Balance Sheet as at September 30, 2008.

During the second and third quarter of 2008, software that had been capitalized by the Company in accordance with AICPA Statement of Position No. 98-1“Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”(“SOP No. 98-1”) was reviewed for impairment due to changes in circumstances which indicated that the carrying amount of the asset might not be recoverable. These changes in circumstances included the expectation that the software would not provide substantive service potential and there was a change in the extent to which the software was to be used. In addition, it was determined that the cost to modify the software for the Company’s needs would significantly exceed originally expected development costs.

As a result of these circumstances, the Company has written down the capitalized costs of the software to fair value. The amount of this write-down in the three and nine months periods ended September 30, 2008 was $0.2 million and $2.3 million, respectively, and is included in Impairment of long-lived assets in the Consolidated Statement of Operations. The expense was recorded in the North America and Europe segment.

Also included in Impairment of long-lived assets in the Consolidated Statement of Operations is $0.2 million of additional fixed asset impairments recorded during the three and nine month periods ended September 30, 2008, mainly related to leasehold improvements at a production facility where the lease was prematurely terminated. The expense was recorded in the North America and Europe segment.

Additionally, during the nine months period ended September 30, 2008, the Company incurred $0.6 million of fixed asset impairments relating to its cost reduction plan — refer to Note 15.

Goodwill and Other Acquired Intangible Assets.The Company has made acquisitions in the past that included a significant amount of goodwill, customer relationships and to a lesser extent other intangible assets. Effective in 2002, goodwill is no longer amortized but is subject to an annual (or under certain circumstances more frequent) impairment test based on its estimated fair value. Customer relationships and other intangible assets are amortized over their useful lives and are tested for impairment when events and circumstances indicate that an impairment condition may exist. Events that may indicate potential impairment include a loss of or a significant decrease in volume from a major customer, a change in the expected useful life of an asset, a change in the market value of an asset, a significant adverse change in legal factors or business climate, unanticipated competition relative to a major customer or the loss of key personnel relative to a major customer. When a potential impairment condition has been identified, an impairment test of the intangible asset is performed, based on the estimated future undiscounted cash flows.

The Company performs the required impairment test of goodwill and indefinite-lived intangible assets annually, or more frequently if conditions warrant. For purposes of the goodwill impairment test, the reporting units of the Company, after considering the requirements of Statement of Financial Accounting Standards (“SFAS No. 142”)“Goodwill and Other Intangible Assets (as amended)” and the relevant provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”, and related interpretive literature are defined primarily on a geographic basis. Goodwill is allocated to the reporting unit that benefits from the synergies arising from each business acquired. The impairment test performed by the Company is based on an estimate of the fair value of the Company’s reporting units. This fair value is calculated using a discounted cash flow of earnings model. A change in the Company’s business climate in future periods, including a significant downturn in the Company’s operations, and/or a significant decrease in the market value of the Company’s common stock could result in an impairment charge. The Company determined that no adjustment to goodwill was necessary when it performed its annual impairment testing in 2007. However, in the second quarter of 2008, the Company determined that an error had occurred in its December 31, 2007 and previous years goodwill impairment test related to one of its Canadian operating units, Cactus, which required an adjustment to goodwill. See discussion above in “Goodwill impairment and restatement of previously issued financial statements” section for more information.

The Company did not identify any other events or changes in circumstances that would indicate an impairment condition existed at September 30, 2008.

The Company performs its annual impairment test as of December 31 each year; however, in the fourth quarter of 2008, the Company intends to change this to October 1 annually, commencing with October 1, 2008, in order to have the required testing completed prior to its year-end closing activities. This change will not delay, accelerate or avoid an impairment charge. Accordingly, the Company believes that this accounting change is preferable in its circumstances.

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This change is not anticipated to have an impact on the Company’s interim consolidated financial statements for any period presented. Recognizing that this constitutes a change in accounting principle under SFAS No.154, “Accounting Changes and Error Corrections, (“SFAS No. 154”), a replacement of APB Opinion No. 20 and FASB Statement No. 3”, the Company intends to disclose this change in accounting principle in its future SEC filings.

Income Taxes.Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets arising from temporary differences and net operating losses will not be realized. The Company has provided valuation allowances against deferred tax assets, primarily arising from the acquisition of Seven Worldwide Holdings in 2005, due to the dormancy of the companies generating the tax assets or due to income rules limiting the availability of the losses to offset future taxable income.

The Company reviews quarterly its position with respect to the recoverability of its deferred tax assets in accordance with Financial Accounting Standards No. 109, “Accounting for Income Taxes”(“FAS No.109”). A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets arising from temporary differences and net operating losses will not be realized. During the second quarter of 2008, the Company reviewed its business plan with respect to its UK operations and determined that it is no longer more likely than not that deferred taxes provided for its UK net operating losses will be recovered. A valuation allowance of $1.5 million was provided in the second quarter, resulting in the net deferred tax assets of its UK operations being fully reserved.

Federal, state and foreign tax authorities regularly audit the Company, like other multi-national companies, and tax assessments may arise several years after tax returns have been filed. Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation FIN No. 48,“Accounting for Uncertainty in Income Taxes (as amended)—an interpretation of FASB Statement No. 109”. FIN No. 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50 percent likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Actual outcomes could result in a change in reported income tax expense for a particular period. See Note 11 to the Consolidated Financial Statements for further discussion.

The Company has unrecognized tax benefits of $7.8 million and $13.6 million at September 30, 2008 and December 31, 2007, respectively. During the quarter ended September 30, 2008, the Company effectively settled the IRS audit of the former Seven Consolidated Group for tax years 1996 to 2003 and paid additional interest in the amount of $1.0 million and a partial settlement of the state taxes in the amount of $0.6 million with the filing of amended returns reflecting the IRS adjustments. In addition, the Company effectively settled the Internal Revenue Service audits of Schawk Inc. for the years 2005 and 2006 with no additional taxes due. As a result of the closures of these audits, the Company recorded a decrease during the third quarter of 2008 in its FIN 48 reserves of $5.3 million as a reduction to goodwill and $1.2 million as a reduction to the income tax provision and an increase in its deferred tax assets of $5.3 million as a reduction to goodwill. In addition, for the third quarter of 2008, the Company established new uncertain tax positions of $4.6 million related to the Company’s foreign operations.

Exit Reserves.The Company records reserves for the consolidation of workforce and facilities of acquired companies. The exit plans are approved by company management prior to, or shortly after, the acquisition date and may be modified during the twelve-month period following the acquisition, as conditions change. The exit plans provide for severance pay, lease abandonment costs and other related expenses. A change in any of the assumptions used to estimate the exit reserves that result in a decrease to the reserve would result in a decrease to goodwill. Any change in assumptions that result in an increase to the exit reserves would result in a charge to income. See Note 8 to the Consolidated Financial Statements for further discussion. At September 30, 2008 and December 31, 2007, the Company had exit reserves of approximately $3.9 million and $5.0 million, respectively, that were included in Accrued expenses and Other non current liabilities on the Consolidated Balance Sheet, for exit activities completed primarily in 2005 and early 2006 for facility closure costs. The Company does not anticipate a significant increase or decrease in these reserves, as the Company does not anticipate a material change to the assumptions used with respect to the facility closure costs.

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Results of operations

The following table sets forth, for the periods indicated, the percentage relationship to net sales of selected items in our consolidated income statement for continuing operations.

Schawk, Inc.
Comparative Consolidated Statements of Operations
Three Months Ended September 30, 2008 and 2007
Unaudited
(in thousands)

							$			%
	2008			2007			Change			Change
				(Restated)
Net sales	$	124,167		$	129,316		$	(5,149	)		(4.0	%)
Cost of sales		81,300			83,311			(2,011	)		(2.4	%)
Gross profit		42,867			46,005			(3,138	)		(6.8	%)
Gross profit percentage		34.5	%		35.6	%
Selling, general and administrative expenses		36,869			32,600			4,269			13.1	%
Acquisition integration and restructuring expenses		1,942			—			1,942			—
Impairment of long-lived assets		3,451			—			3,451			—
Operating income		605			13,405			(12,800	)		(95.5	%)
Operating income percentage		0.5	%		10.4	%
Other income (expense):
Interest income		63			85			(22	)		(25.9	%)
Interest expense		(1,625	)		(2,278	)		653			(28.7	%)
		(1,562	)		(2,193	)		631			(28.8	%)
Income (loss) from continuing operations before income taxes		(957	)		11,212			(12,169	)	nm
Income tax provision		5,280			4,381			899			20.5	%
Effective income tax rate	nm				39.1	%
Income (loss) from continuing operations, net of tax		(6,237	)		6,831			(13,068	)	nm
Income (loss) from discontinued operations		(439	)		15			(454	)	nm
Net income (loss)	$	(6,676	)	$	6,846		$	(13,522	)	nm

Three months ended September 30, 2008 compared to three months ended September 30, 2007

Net sales in the third quarter of 2008 were $124.2 million compared to $129.3 million in the same period of the prior year, a reduction of $5.1 million, or 4.0 percent. The quarter-over-quarter decline in sales was the result of lower sales in North America and Europe, which declined by $3.8 million, or 3.5 percent and the Other reportable segment which declined by $1.3 million or 6.3 percent. Sales contributed by acquisitions for the three months ended September 30, 2008 compared to the same prior year period totaled $1.7 million or 1.4 percent. Excluding acquisitions, revenue would have declined by 5.3 percent versus the same period last year.

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Consumer products packaging accounts sales in the third quarter of 2008 were $81.6 million, or 65.7 percent of total sales, as compared to $81.9 million or 63.3 percent in the same period of last year, representing a decline of 0.4 percent. Advertising and retail accounts sales of $31.1 million in the third quarter of 2008, or 25.1 percent of total sales, declined 10.0 percent as compared to the same period last year. Entertainment account sales of $9.2 million in the third quarter of 2008 or 7.4 percent of total sales, declined 17.5 percent as compared to the same period last year. Results during the third quarter compared with the year ago period mirror the slowdown in the U.S. economy as a number of customers have delayed projects, resulting in lower revenue for the Company. No major customers were lost during the quarter.

Gross profit was $42.9 million, or 34.5 percent, of sales in the third quarter of 2008, a decline of $3.1 million, or 6.8 percent, from $46.0 million or 35.6 percent of sales in the third quarter of 2007. The decrease in gross profit is largely attributable to the decrease in sales volume.

Operating income decreased by $12.8 million to $0.6 million in the third quarter of 2008 from $13.4 million in the third quarter of 2007. The third quarter 2008 operating income percentage was 0.5 percent compared to 10.4 percent in the 2007 third quarter. The decrease in operating income in the third quarter of 2008 compared to the third quarter of 2007 is principally due to lower sales volume as discussed above, acquisition integration and restructuring expenses of $1.9 million, charges for impairment of long-lived assets of $3.5 million and an increase in selling, general and administrative expenses of $4.3 million. The increase in selling, general and administrative expenses over the prior period is principally due to an increase in professional and consulting fees of $2.2 million attributable to audit fees and other costs related to the Company’s internal control remediation and related matters, and consulting fees related to the Company’s re-branding initiative and currency losses on foreign exchange transactions of $1.9 million.

The $1.9 million acquisition integration and restructuring expense was recorded in connection with previously announced plans to consolidate, reduce and re-align the Company’s work force and operations. The Company incurred these costs for employee terminations, obligations for future lease payments, fixed asset impairments, and other associated costs in the third quarter of 2008.

During the third quarter of 2008, the Company recorded a $3.1 million long-lived asset impairment charge for property which it currently leases to a third party and has decided to sell. It was determined that the carrying value of the land and building could not be supported by the estimated market value of the property. During the quarter, the Company also wrote down the carrying value of certain software capitalized for internal use by $0.2 million and leasehold improvements by $0.2 million.

In addition, for the three months ended September 30, 2008 and September 30, 2007, the Company recorded pre-tax foreign exchange losses (gains) of $1.9 million and ($0.1) million respectively, These losses (gains) were recorded by international subsidiaries that had unhedged currency exposure arising primarily from intercompany debt obligations. The losses in the three months ended September 30, 2008 were primarily due to unrealized losses that are attributable to an 8.9 percent decline in the rate of the British pound in relation to the United States dollar and a 9.8 percent decline of the Malaysian ringgit in relation to the Australian dollar. These losses (gains) are included in selling, general and administrative expenses in the Consolidated Statement of Operations.

Interest expense in the third quarter of 2008 was $1.6 million compared to $2.3 million in the third quarter of 2007 as a result of a decrease in average outstanding debt and a reduction in average interest rates.

Income tax expense for the third quarter of 2008 was $5.3 million compared to $4.4 million in the third quarter of 2007. The third quarter income tax expense, which would be expected to be a tax benefit due to the pretax loss for the quarter, was affected by several tax adjustments, in particular an increase in reserves for new uncertain tax positions related to the Company’s foreign operations of $4.2 million.

In the third quarter of 2008, the Company recorded a $0.4 million loss, net of tax, from discontinued operations, representing an impairment writedown as well as the operating results for a business that was for sale at September 30, 2008.

Other Information

Depreciation and amortization expense was $5.1 million for both the third quarter of 2008 and 2007.

Capital expenditures in the third quarter of 2008 were $4.8 million compared to $3.1 million in the same period of 2007.

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Schawk, Inc.
Comparative Consolidated Statements of Operations
Nine Months Ended September 30, 2008 and 2007
Unaudited
(in thousands)

							$			%
	2008			2007			Change			Change
				(Restated)
Net sales	$	381,052		$	398,990		$	(17,938	)		(4.5	%)
Cost of sales		249,275			256,976			(7,701	)		(3.0	%)
Gross profit		131,777			142,014			(10,237	)		(7.2	%)
Gross profit percentage		34.6	%		35.6	%
Selling, general and administrative expenses		108,441			97,656			10,785			11.0	%
Acquisition integration and restructuring expenses		5,116			—			5,116			—
Impairment of long-lived assets		5,635			—			5,635			—
Operating income		12,585			44,358			(31,773	)		(71.6	%)
Operating income percentage		3.3	%		11.1	%
Other income (expense):
Interest income		201			175			26			14.9	%
Interest expense		(5,099	)		(7,046	)		1,947			(27.6	%)
		(4,898	)		(6,871	)		1,973			(28.7	%)
Income from continuing operations before income taxes		7,687			37,487			(29,800	)		(79.5	%)
Income tax provision		8,915			14,512			(5,597	)		(38.6	%)
Effective income tax rate	nm				38.7	%
Income (loss) from continuing operations		(1,228	)		22,975			(24,203	)	nm
Loss from discontinued operations, net of tax		(412	)		(175	)		(237	)	nm
Net income (loss)	$	(1,640	)	$	22,800		$	(24,440	)	nm

Nine months ended September 30, 2008 compared to nine months ended September 30, 2007

Year to date net sales through September 30, 2008 were $381.1 million compared to $399.0 million in the same period of the prior year, a reduction of $17.9 million, or 4.5 percent. Year to date sales declined in the North America and Europe segment by $18.2 million, or 5.3 percent. Partially offsetting this sales decline was an increase is sales in the Company’s Other reportable segment of $0.3 million. Sales contributed by acquisitions for the nine months ended September 30, 2008 compared to the same prior year period totaled $7.5 million or 2.0 percent. Excluding acquisitions, revenue would have declined by 6.4 percent versus the same period last year.

Consumer products packaging accounts sales through September 30, 2008 were $246.7 million, or 64.8 percent of total sales, as compared to $248.9 million in the same period of last year, representing a decline of 0.9 percent. Advertising and retail accounts sales of $101.3 million through September 30, 2008, or 26.6 percent of total sales, declined 8.3 percent as compared to the same period of the prior year. Entertainment accounts sales of $28.3 million through September 30, 2008 or 7.4 percent of total sales, declined 18.1 percent as compared to the same period last year. Results during the nine month period ended September 30, 2008 compared with the year ago period mirror the slowdown in the U.S. economy as a number of customers have delayed projects, resulting in lower revenue for the Company. No major customers were lost during the nine month period ended September 30, 2008.

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Gross profit was 34.6 percent in the first nine months of 2008, a decline from 35.6 percent in the same period of 2007. The decrease in gross profit of $10.2 million from the prior year period is largely attributable to the decrease in sales volume.

Operating income decreased to $12.6 million in the first nine months of 2008 from $44.4 million in the same period of 2007. For the first-nine months of 2008, the operating income percentage was 3.3 percent compared to 11.1 percent for the first nine months of 2007. The decrease in operating income in the first nine months of 2008 compared to the first nine months of 2007 is principally due to lower sales volume, cost reduction plan expenses of $5.1 million, charges for impairment of long-lived assets of $5.6 million and an increase in selling, general and administrative expenses of $10.8 million. The increase in selling, general and administrative expenses over the prior period is principally due to a $5.9 million increase in professional and consulting fees, which included audit fees and other costs related to the Company’s internal control remediation and related matters, professional fees for due diligence related to a potential acquisition which was not consummated, and consulting fees related to the Company’s re-branding initiative, as well as $2.6 million in selling, general and administrative expenses from companies acquired in 2007, currency losses of $1.4 million from foreign exchange transactions and a $1.1 million gain on sale of assets in the 2007 period that was not repeated in the 2008 period.

For the nine months ended September 30, 2008 and September 30, 2007, the Company recorded pre-tax foreign exchange losses of $1.4 million and $0 million, respectively. These losses were recorded by international subsidiaries that had unhedged currency exposure arising primarily from intercompany debt obligations. The losses in the nine months ended September 30, 2008 were primarily due to unrealized losses that are attributable to a 9.0 percent decline in the rate of the British pound.

Interest expense in the first nine months of 2008 was $5.1 million compared to $7.0 million in the first nine months of 2007 as a result of a decrease in average outstanding debt and a reduction in average interest rates. Outstanding debt fell by $16.5 million at September 30, 2008, compared to outstanding debt at September 30, 2007.

The effective tax rate for the nine month periods ended September 30, 2008 and September 30, 2007 was 116.0 percent and 38.7 percent, respectively. The increase in the effective rate for 2008 compared to 2007 is due to an increase in reserves for uncertain tax positions of $3.0 million, valuation allowances of $1.6 million and the recording of a federal provision to return adjustment of 0.6 million.

For the nine month period ended September 30, 2008, the Company recorded a $0.4 million loss, net of tax, from discontinued operations, representing an impairment writedown as well as the operating results for a business that was for sale at September 30, 2008.

Other Information

Depreciation and amortization expense was $16.1 million for the first nine months of 2008 compared to $15.6 million in the prior-year first nine months.

Capital expenditures in the first nine months of 2008 were $10.3 million compared to $10.9 million in the same period of 2007.

Liquidity and capital resources

As of September 30, 2008, the Company had $18.1 million in consolidated cash and cash equivalents, compared to $11.8 million at December 31, 2007. The Company finances its business from available cash, a revolving credit facility and from cash generated from operations.

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Cash provided by operating activities.Cash provided by operations was $24.3 million in the first nine months of 2008 compared to cash provided by operations of $38.5 million in the first nine months of 2007. The decrease in net cash provided by operating activities was mainly due to a decrease in income levels for the first nine months of 2008 compared to the first months of 2007. Depreciation and amortization expense in the first nine months of 2008 was $13.0 million and $3.1 million, respectively, as compared to $13.0 million and $2.6 million, respectively, in the first nine months of the prior year.

Cash used in investing activities.Cash used in investing activities was $12.0 million for the nine months ended September 30, 2008 compared to $27.2 million of cash used in investing activities during the comparable 2007 period. Capital expenditures were $10.3 million in the first nine months of 2008 compared to $10.9 million in the first nine months of 2007. The cash used in investing activities includes acquisitions in the first nine months of 2008 of $2.8 million compared to $19.0 million in the first nine months of 2007. Also the proceeds from the sale of property and equipment was $1.1 million in the first nine months of 2008 compared to $2.6 million in the first nine months of the prior year.

Cash used in financing activities.Cash used in financing activities in the first nine months of 2008 was $6.9 million compared to $12.2 million of cash used in financing activities during the first nine months of 2007. The cash used in financing activities in the first nine months of 2008 reflects $4.4 million of proceeds from debt compared to $13.7 million of payments on debt in the comparable 2007 period. The Company used $9.8 million to purchase shares of its common stock during the first nine months of 2008. No common stock was purchased in the comparable 2007 period. In addition, the Company received proceeds of $1.1million from the issuance of common stock during the first nine months of 2008 compared to $3.3 million in the first nine months of 2007. The issuance of common stock in both periods is attributable to stock option exercises and issuance of shares pursuant to the Company’s employee stock purchase plan.

Dividends and share repurchases.Dividend payments on common stock were $2.6 million for both nine-month periods ended September 30, 2008 and 2007. It is anticipated that the Company will continue to pay dividends at the current level for the remainder of 2008. In February 2008, the Company’s Board of Directors authorized a share repurchase program to allow for the repurchase of up to two million shares. The Company amended its credit facility to allow for a greater number of shares to be repurchased by revising the restricted payments covenant under its credit facility to increase the limit to $45 million annually from $15 million annually. During the first nine months of 2008, the Company paid $9.8 million to purchase 636,300 shares pursuant to this authorization.

Revolving credit agreement and other indebtedness.The Company borrows under a credit agreement with JPMorgan Chase Bank, N.A, which provides for a five year unsecured revolving credit facility of $115.0 million, expandable to $125.0 million, with interest at LIBOR plus a margin based on the Company’s cash flow leverage ratio. At September 30, 2008 and December 31, 2007, $42.3 million and $36.7 million, respectively, was outstanding under this agreement and is included in Long-term debt on the Consolidated Balance Sheet. Approximately $72.7 million was available under the credit facility at September 30, 2008, without regard to the facility’s accordion feature. The Company also has borrowings under a Note Purchase and Private Shelf Agreement with Prudential Investment Management Inc, pursuant to which the Company sold $50.0 million in a series of three Senior Notes. The first note, in the amount of $10.0 million, will mature in 2010 and bears interest at 4.81 percent. The second and third notes, each in the amount of $20.0 million, mature in 2011 and 2012, respectively, and bear interest at the rate of 4.99 percent and 5.17 percent respectively. The total of these notes, $50.0 million, is included in Long-term debt on the Consolidated Balance Sheet as of both September 30, 2008 and December 31, 2007.

On February 28, 2008, the Company entered into an amendment of its revolving credit agreement, which amended certain covenants of the credit agreement to allow the Company to increase its restricted payments (primarily dividends and stock repurchases) and maximum acquisition amounts. Specifically, the amendment increased the aggregate dollar amount of restricted payments that the Company may make from $15.0 million to $45.0 million annually, increased the Company’s allowable maximum acquisition amount from $50.0 million to $75.0 million annually and increased the Company’s permitted foreign subsidiary investment amount from $60.0 million to $120.0 million.

The Company also sold a series of notes under a Note Purchase Agreement dated December 23, 2003. The first note under this agreement, with an outstanding amount of $12.9 million, bears interest at 4.9 percent and is payable in annual installments of $2.1 million from 2008 to 2013. The second note under this agreement, with an outstanding amount of $8.6 million, bears interest at 4.98 percent and is payable in annual installments of $1.4 million from 2009 to 2014. The total of these notes, $21.4 million, is included in the Company’s September 30, 2008 financial statements as follows: $3.6 million is included in Current portion of long-term debt and capital lease obligations, and $17.8 million is included in Long-term debt. At December 31, 2007, the total outstanding under these notes, $22.9 million, was included in the

37

Company’s financial statements as follows: $3.6 million was included in Current portion of long-term debt and capital lease obligations, and $19.3 million was included in Long-term debt. The notes issued under both these agreements are unsecured.

Long-term debt increased to $110.2 million at September 30, 2008 from $105.9 million at December 31, 2007. Management believes that the level of working capital is adequate for the Company’s liquidity needs related to normal operations both currently and in the foreseeable future, and that the Company has sufficient resources to support its operations, either through currently available cash and cash generated from future operations, or pursuant to its revolving credit facility.

Off-balance sheet arrangements and contractual obligations

The Company does not have any material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on its financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

There have been no material changes in the Company’s minimum debt, lease and other material noncancelable commitments from those reported in the Company’s Form 10-K for the year ended December 31, 2007, except as follows:

The table below shows the change in the Company’s contractual obligations related to uncertain tax positions from December 31, 2007 to September 30, 2008.

			Less Than		One to Three
	Total		One Year		Years
Uncertain tax positions – December 31, 2007	$	16,188	$	8,142	$	8,046
Uncertain tax positions – September 30, 2008		8,997		1,452		7,545
Decrease	$	7,191	$	6,690	$	501

The decrease in uncertain tax positions reflects the settlement of various tax audits and statute of limitation closures during the nine months ended September 30, 2008.

Recent Accounting Pronouncements

See Note 18 to the consolidated financial statements, included in Part I, Item 1, for information on recent accounting pronouncements.

Impact of inflation

The Company believes that over the past three years inflation has not had a significant impact on its results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A discussion regarding market risk is disclosed in the Company’s Form 10-K for the year ended December 31, 2007. There have been no material changes in information regarding market risk relating to the Company’s business on a consolidated basis since December 31, 2007.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the Securities and Exchange Commission (SEC), and to process, summarize and report this information within the time periods specified in the rules of the SEC. An evaluation of the Company’s disclosure controls and procedures was conducted by the Company’s management, with the participation of the Chief Executive and Chief Financial Officers, as

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of the end of the period covered by this report. Based upon the material weaknesses in its internal controls identified and discussed in its Form 10-K for the fiscal year ended December 31, 2007, and as further discussed below, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that its disclosure controls and procedures were not effective as of September 30, 2008.

Material Weaknesses

A material weakness is a deficiency or combination of deficiencies, in internal controls over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. As reported in the Company’s Form 10-K for the year ended December 31, 2007, management has identified the following material weaknesses in internal control over financial reporting:

Revenue Recognition

The Company determined that it had a deficiency in internal control over revenue recognition. In the fourth quarter of 2007, the Company put processes in place to improve its compliance with the revenue recognition policy under the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 (“SAB No. 104”); however, as of December 31, 2007, the Company had not established effective controls over revenue recognition. Specifically, it had not designed effective controls to ensure that all criteria of revenue recognition are met prior to invoicing. It also had not designed an effective control over the process to accurately record amounts related to earned but unbilled revenue at period end.

In addition, in conjunction with management’s efforts to appropriately recognize software and services revenue, management identified material weaknesses in the internal controls over software revenue recognition. Specifically, the Company had multiple element arrangements subject to AICPA Statement of Position No. 97-2“Software Revenue Recognition”, Statement of Position No. 98-9“Software Revenue Recognition, with Respect to Certain Transactions” and Emerging Issues Task Force No. 00-21 “Revenue Arrangements with Multiple Deliverables” for which it had not established vendor-specific objective evidence of fair value for certain undelivered elements. The Company improperly allocated revenues to various elements and as a result had improperly recorded revenue for certain delivered elements.

Accounting for Capitalized Software Costs

Software developed for sale to third parties.The Company identified a material weakness in internal controls related to the capitalization of internally developed software costs with respect to software for sale to third parties as of December 31, 2007. The Company’s capitalization of software developed for sale to third parties was not in accordance with Statement of Financial Accounting Standards No. 86“Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed”in that the Company was capitalizing costs before technological feasibility was reached.

Software developed for internal use.Management also concluded that the Company had a material weakness in internal controls related to the accounting for costs pertaining to internal use software as of December 31, 2007. On certain software development projects, information required in employee time reports was not consistently maintained, and required project documentation, in particular formal project plans, and commencement and completion dates of project phases was not prepared and monitored. In addition, certain external costs were improperly capitalized. As a result, the Company capitalized amounts in error and did not properly follow the provisions of AICPA Statement of Position No. 98-1“Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”.

Accounting for Income Taxes

The Company determined that a material weakness existed at December 31, 2007 with respect to accounting for income taxes. The Company had inadequate supervision and review of those responsible for recording income tax related journal entries which resulted in an inability to properly reconcile current tax payable and gross deferred tax liabilities to the general ledger on a timely basis. This weakness resulted in significant revisions being made to the Company’s income tax accounts prior to finalization of the tax accounts as reported in its December 31, 2007 consolidated financial statements.

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Entity-level controls

Due to the nature and number of material weaknesses identified above, as well as the necessity to restate prior period financial statements, the Company concluded that its entity-level controls were not effective in the areas of control environment, risk assessment and control activities (e.g. review of journal entries). In particular, in certain areas the level of accounting knowledge, experience and training was not sufficient to properly control the accounting for revenue (including software revenue and costs), software development cost capitalization, and income taxes and a more appropriate tone with respect to the importance of accounting and control awareness needed to be established. The Company considers the failure to treat its Cactus business as a separate reporting unit under FAS No. 142 and to timely identify and reflect the goodwill impairment for Cactus as of December 31, 2002 as evidence of continued weakness in its control environment.

Remediation of Material Weaknesses

In an effort to remediate the identified material weaknesses and other deficiencies, the Company has taken certain actions, and is committed to taking further action, as discussed below:

Revenue recognition. In January 2008 the Company instituted a worldwide training program and a monthly test of documentation per location to train employees on proper revenue recognition in accordance with SEC Staff Accounting Bulletin No. 104, Topic 13 “Revenue Recognition” and emphasize the need for maintaining adequate documentation. This is an initial step to be followed up with a thorough review and evaluation of the process around revenue recognition with the objective being the design of effective controls to make sure the criteria for revenue recognition have been met prior to invoicing or recognizing unbilled revenue. After these controls over revenue recognition have been designed and implemented, the Company will conduct formal revenue recognition training sessions for key accounting and operating personnel. The enhanced testing of internal control over revenue has been included in the Company’s internal audit program for 2008.

With respect to software revenue recognition, the Company has conducted training for the accounting personnel responsible for the software revenue accounting on the principles of AICPA Statement of Position No. 97-2“Software Revenue Recognition”, Statement of Position No. 98-9“Software Revenue Recognition, with Respect to Certain Transactions” and Emerging Issues Task Force No. 00-21 “Revenue Arrangements with Multiple Deliverables” and has added detailed accounts to the general ledger to improve the accounting for deferred revenues and costs. The Audit Committee of the board of directors has also directed internal audit to add testing of software revenue recognition to their audit program for 2008. During the third quarter, a review by internal audit of software revenue and related costs was performed and no exceptions to current accounting guidance was found.

Accounting for Internal Use software costs. With respect to software developed for internal use, in the fourth quarter of 2007, the Company instituted a more comprehensive timekeeping system to better document and monitor activities of both internal personnel and external contractors that work on software for internal use. The Company’s plan to remediate this weakness includes: developing controls to ensure that project plans clearly delineate activities relating to planning, application development and post implementation/support and that minor upgrades and enhancements are expensed as incurred and educating employees with respect to the requirements of AICPA Statement of Position No. 98-1“Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”. The Audit Committee of the board of directors has also directed internal audit to add testing of software capitalization to their audit program for 2008.

Accounting for income taxes. New controls are being developed to verify that formal reconciliations to the general ledger of all tax accounts are being prepared properly on a quarterly basis. In addition, a new monitoring control is being developed to monitor tax balances on a periodic basis in each of the twelve countries in which the Company currently operates. The Company is expecting to add resources as required to improve accounting for income taxes. An external accounting firm tests internal controls on an annual basis for the Company. The Company intends to ensure that the additional controls will be implemented prior to December 31, 2008.

Entity-level controls. The Company continues to develop a process to emphasize at all levels of the Company’s organization the importance of internal controls. The Company is seeking to institutionalize a stronger commitment to internal controls and to verify that all process owners are involved with the performance of internal controls. The Company will provide training, as appropriate, to process owners on the appropriate requirements to document and perform internal control procedures. The Company plans to implement additional formal policies and procedures over performance and formalized review of its internal controls and significant accounting procedures and to hire additional accounting personnel as necessary with the requisite areas of expertise to ensure proper accounting and reporting. Both

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permanent (including a new Chief Financial Officer) and interim financial management personnel have been hired to direct the remediation efforts on all material weaknesses and the Company is working with an accounting firm to design and implement new controls under the supervision of the Chief Financial Officer and the Audit Committee of the Board of Directors. In addition, personnel have been hired to monitor corporate and operations results and internal control.

The following actions, under the supervision of the Audit Committee of the Board of Directors and the Company’s management, have been implemented since the Company filed its 2007 Form 10-K:

1)	The Company has augmented its quarterly financial procedures to allow for more substantive review of financial results before the release of quarterly earnings and the filing of the quarterly reports on Form 10-Q.
2)	The Company has added resources to support the additional review procedures and to support remediation activities.
3)	The Company has commenced a project to identify remediation action plans to effectively resolve its material weaknesses and other Sarbanes-Oxley compliance issues.

Change in Internal Control over Financial Reporting

Except as discussed above, there have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

PART II — OTHER INFORMATION

ITEMS 1, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.

ITEM 1A. RISK FACTORS

The Company has included in Part I, Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2007 and in Part II, Item 1A, of its Form 10-Q for the quarter ended March 31, 2008, descriptions of certain risks and uncertainties that could affect the Company’s business, future performance or financial condition. The risk factors described in the Company’s prior reports as well as those described below (collectively, the “Risk Factors”) could materially adversely affect our business, financial condition, future results or trading price of our common stock. In addition to the other information contained in the reports the Company files with the SEC, investors should consider these Risk Factors prior to making an investment decision with respect to the Company’s stock. The risks described in our Risk Factors, however, are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently consider immaterial also may materially adversely affect our business, financial condition and/or operating results.

The price for our common stock can be volatile and unpredictable.

The market price of our common stock can be volatile and, recently, the market price of our common stock has experienced greater fluctuations. For example, from June 1 through September 1, 2008, the high and low sales price of our common stock on the New York Stock Exchange ranged from $17.49 to $9.92, and from September 1 through November 1, 2008, the high and low sales price of our common stock ranged from $18.61 to $10.46. The market price of our common stock may continue to experience strong fluctuations as a result of quarterly variations in our operating results, analysts’ earnings estimates or investors’ expectations concerning our future results and our business generally. In addition, the market price of our common stock may fluctuate due to broader market and industry factors, such as:

• adverse information about, or the operating and stock price performance of, other companies in our industry or companies that comprise our client base, such as consumer goods companies;

• deterioration or adverse changes in general economic conditions;

• continued high levels of volatility in the stock markets due to, among other things, disruptions in the capital and credit markets; and

• announcements of new clients or service offerings by our competitors.

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These market and industry factors may seriously harm the market price of our common stock, regardless of our actual operating performance.

Our operating results may be adversely affected by issues that affect our clients’ spending decisions during periods of economic downturn.

Recent deterioration in global economic conditions, if sustained, along with continued volatility and disruption in the credit and capital markets and declining consumer and business confidence, could significantly impact the overall demand for our services. As our clients come under increasing pressures, it may result in, among other consequences, a reduction in our clients’ spending on the services that we provide, which could have a material adverse effect on our operating cash flows, financial condition or results of operations.

Impairment charges have had and could continue to have a material adverse effect on our financial results.

During the third quarter of 2008, we recorded a $3.1 impairment charge related to land and buildings that we lease to a third party. We have also recorded impairment charges in the past in connection with our cost reduction plan and certain capitalized software costs. Future events may occur that could adversely affect the value of our assets and require additional impairment charges. Such events may include, but are not limited to, strategic decisions made in response to changes in economic and competitive conditions and the impact of deteriorating economic environment generally. Circumstances and conditions that gave rise to these charges may continue in the future, which may create a need to record additional impairment adjustments that could have a material adverse affect on our financial results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of Equity Securities by the Company

As previously disclosed, the Company occasionally repurchases its common shares, pursuant to a general authorization from the Board of Directors, which is renewed annually. In prior years, the current general authorization allowed the Company to repurchase up to $2 million in shares of Company common stock in the open market per year. In February 2008, the Company’s Board of Directors authorized an increase in the share repurchase program to allow for the repurchase of up to two million shares. In addition, shares of common stock are occasionally tendered to the Company by certain employee and director stockholders in payment of stock options exercised, although no shares had been tendered during the nine months ended September 30, 2008. The Company records the receipt of common stock in payment for stock options exercised as a purchase of treasury stock.

The following table summarizes the shares repurchased by the Company during the three months ended September 30, 2008:

(amounts in thousands, except per share amounts)

							Maximum No. of
	Total No.		Avg. Price		No. Shares Purchased		Shares that May Yet
	Shares		Paid Per		as Part of Publicly		Be Purchased Under
Period	Purchased		Share		Announced Program		the Program
7/1 – 7/31		—		—		—
8/1 – 8/31		119	$	14.24		119		1,881
9/1 – 9/30		517	$	15.71		517		1,364
Total		636	$	15.43		636

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ITEM 6. EXHIBITS

A. Exhibits

EXHIBIT #	DESCRIPTION
3.1	Certificate of Incorporation of Schawk, Inc., as amended. Incorporated herein by reference to Exhibit 4.2 to Registration Statement No. 333-39113.
3.3	By-Laws of Schawk, Inc., as amended. Incorporated herein by reference to Exhibit 4.3 to Registration Statement No. 333-39113.
4.1	Specimen Class A Common Stock Certificate. Incorporated herein by reference to Exhibit 4.1 to Registration Statement No. 33-85152.
10.1	Employment Agreement dated as of September 18, 2008 between Schawk, Inc. and Timothy J. Cunningham (incorporated herein by reference to Exhibit 10.1 to Form 8-K filed with the SEC on September 23, 2008).
18	Letter dated November 4, 2008 regarding change in accounting principle *
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. *
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. *
32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * * Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 17^th day of November, 2008.

Schawk, Inc.
(Registrant)

/s/ David A. Schawk          
President, Chief Executive Officer and Director

/s/ Timothy J. Cunningham
Chief Financial Officer and Chief Accounting Officer

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