X Rite (XRIT) 10-Q 2008 Q2 Quarterly report

U.S. 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 June 28, 2008

Commission file number 0-14800

X-RITE, INCORPORATED

(Name of registrant as specified in charter)

Michigan	38-1737300
(State of Incorporation)	(I.R.S. Employer Identification No.)

4300 44th Street S.E., Grand Rapids, Michigan 49512

(Address of principal executive offices)

616-803-2100

(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.    Yes  x    No  ¨

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

Large accelerated filer¨	Accelerated filerx
Non-accelerated filer¨	Smaller reporting company¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)    ¨  Yes    x  No

On August 1, 2008, the number of outstanding shares of the registrant’s common stock, par value $.10 per share, was 29,605,684.

X-RITE, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

	June 28, 2008			December 29, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	28,343		$	20,300
Accounts receivable, less allowance of $2,601 in 2008 and $2,328 in 2007		44,617			47,050
Inventories		52,041			61,839
Deferred income taxes		2,620			2,571
Assets held for sale		7,614			7,614
Prepaid expenses and other current assets		6,764			6,318
		141,999			145,692
Property plant and equipment:
Land		2,796			2,796
Buildings and improvements		26,332			25,723
Machinery and equipment		29,293			27,250
Furniture and office equipment		24,220			22,596
Construction in progress		2,180			1,614
		84,821			79,979
Less accumulated depreciation		(37,732	)		(32,619	)
		47,089			47,360
Other assets:
Goodwill		287,696			288,208
Other intangibles, net		111,279			123,314
Cash surrender values of founders’ life insurance		20,022			21,168
Capitalized software (net of accumulated amortization of $7,952 in 2008 and $6,121 in 2007)		8,234			7,805
Deferred financing costs (net of accumulated amortization of $2,051 in 2008 and $527 in 2007)		14,262			15,786
Deferred income taxes		2,265			2,428
Other noncurrent assets		3,093			3,063
		446,851			461,772
	$	635,939		$	654,824

The accompanying notes are an integral part of these statements.

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X-RITE, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) – Continued

(in thousands)

	June 28, 2008		December 29, 2007
LIABILITIES AND SHAREHOLDERS’ INVESTMENT
Current liabilities:
Short-term borrowings	$	8,680	$	8,680
Current portion of long-term debt		390,150		2,700
Accounts Payable		11,362		17,724
Accrued liabilities:
Payroll and employee benefits		13,669		17,063
Restructuring		4,204		2,090
Income taxes		9,644		5,928
Deferred income taxes		6,298		6,090
Derivative financial instruments		12,165		81
Interest		4,260		1,368
Other		10,068		10,740
		470,500		72,464
Long-term liabilities:
Long-term debt, less current portion		—		378,300
Restructuring		1,095		2,232
Long-term compensation and benefits		1,316		1,541
Derivative financial instruments		—		4,862
Deferred income taxes		9,886		8,839
Accrued income taxes		5,672		1,713
Other		1,032		569
		489,501		470,520
Shareholders’ investment:
Common stock		2,916		2,903
Additional paid-in capital		112,297		109,439
Retained earnings		28,608		66,314
Accumulated other comprehensive income		2,617		5,648
		146,438		184,304
	$	635,939	$	654,824

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X-RITE, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share data)

	Three Months Ended						Six Months Ended
	June 28, 2008			June 30, 2007			June 28, 2008			June 30, 2007
Net Sales	$	73,461		$	60,745		$	139,380		$	118,462
Cost of sales:
Products sold		31,080			23,769			57,588			45,522
Inventory valuation adjustment		3,845			—			7,690			—
Restructuring and other related charges		117			9			349			137
		35,042			23,778			65,627			45,659
Gross profit		38,419			36,967			73,753			72,803
Operating expenses:
Selling and marketing		17,342			13,882			34,995			27,974
Research, development and engineering		7,734			9,692			16,371			18,325
General and administrative		8,282			5,181			18,146			11,559
Restructuring and other related charges		4,606			1,299			5,764			3,024
		37,964			30,054			75,276			60,882
Operating income (loss)		455			6,913			(1,523	)		11,921
Interest expense		(11,220	)		(4,358	)		(23,220	)		(8,970	)
Gain (loss) on sale of investment		1			837			(62	)		837
Other, net		204			52			(884	)		40
Income (loss) before income taxes		(10,560	)		3,444			(25,689	)		3,828
Income taxes		10,349			1,340			12,017			1,507
Net income (loss) from continuing operations		(20,909	)		2,104			(37,706	)		2,321
Discontinued operations
Net loss from operations		—			—			—			(39	)
Net gain (loss) on disposal		—			(36	)		—			7,596
		—			(36	)		—			7,557
Net income (loss)	$	(20,909	)	$	2,068		$	(37,706	)	$	9,878
Basic and diluted net income (loss) per share:
Net income (loss) from continuing operations	$	(0.72	)	$	0.07		$	(1.30	)	$	0.08
Discontinued operations
Net loss from operations		—			—			—			—
Net gain on disposal		—			—			—			0.26
Net income (loss)	$	(0.72	)	$	0.07		$	(1.30	)	$	0.34

The accompanying notes are an integral part of these statements.

–4–

X-RITE, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

	Six Months Ended
	June 28, 2008			June 30, 2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(37,706	)	$	9,878
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		3,577			3,386
Amortization of intangible assets		10,579			7,489
Amortization of deferred financing costs		1,523			624
Allowance for doubtful accounts		208			215
Deferred income taxes (credit)		1,023			(1,419	)
Gain on sale of business, excluding income tax benefit		—			(6,367	)
(Gain) loss on sale of investment		62			(837	)
Share-based compensation		2,125			1,596
Excess tax benefit from stock-based compensation		—			(76	)
Tax benefit from stock options exercised		—			342
Restructuring (including amortization expense of $0 in 2008 and $84 in 2007)		1,882			1,868
Inventory valuation adjustment		7,690			—
Interest rate swap expense		3,078			—
Other		22			(77	)
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable		4,159			2,316
Inventories		3,561			(4,829	)
Prepaid expenses and other current assets		299			(5,692	)
Accounts payable		(6,996	)		(595	)
Income taxes		8,112			3,354
Other current and non-current liabilities		(1,999	)		(6,767	)
Net cash provided by operating activities		1,199			4,409
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(2,130	)		(4,486	)
Investment in Founders’ life insurance, net		1,146			(375	)
Increase in other assets		(2,164	)		(1,614	)
Proceeds from sales of property and equipment		—			548
Proceeds from sale of business		—			14,314
Acquisitions, net of cash acquired		249			(600	)
Other		—			81
Net cash provided by (used for) investing activities		(2,899	)		7,868
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt		10,500			2,500
Payment of long-term debt		(1,350	)		(14,918	)
Issuance of common stock		85			76
Excess tax benefit from stock-based compensation		—			2,780
Net cash provided by (used for) financing activities		9,235			(9,562	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH ANDCASH EQUIVALENTS		508			48
NET INCREASE IN CASH AND CASH EQUIVALENTS		8,043			2,763
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		20,300			12,876
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	28,343		$	15,639

The accompanying notes are an integral part of these statements.

–5–

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements included herein have been prepared by X-Rite, Incorporated (“X-Rite” or the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2007 annual report on Form 10-K.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of June 28, 2008 and the results of its operations and its cash flows for the three and six month periods ended June 28, 2008 and June 30, 2007, respectively. All such adjustments were of a normal and recurring nature. The balance sheet at December 29, 2007 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

NOTE 2—NEW ACCOUNTING STANDARDS

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157,Fair Value Measurements(SFAS 157). SFAS 157 establishes a framework for measuring the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards that permit, or in some cases require, estimates of fair market value. SFAS 157 also expands financial statement disclosure requirements about a company’s use of fair value measurements, including the effect of such measures on earnings. SFAS 157 is effective for fiscal years beginning after November 15, 2007 (fiscal year 2008 for the Company). In February 2008, the FASB issued FASB Staff Position (FSP) 157-2,Partial Deferral of the Effective Date of Statement 157 (FSP 157-2). FSP 157-2 delays the effective date of SFAS 157, for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008 (fiscal year 2009 for the Company). Effective December 30, 2007 (fiscal year 2008), the Company adopted the provisions of SFAS 157 for financial assets and liabilities measured on a recurring basis. There was no impact to the Company’s consolidated condensed financial statements as a result of the adoption of SFAS 157. As of June 28, 2008, the Company recognized a liability of $12.2 million for the fair value of the derivative financial instruments. As of June 30, 2007 the Company had a nominal asset recognized for the fair value of the derivative financial instruments. In accordance with SFAS 157, these liabilities are classified within Level 2 of the fair value hierarchy. Level 2 represents financial instruments lacking quoted prices (unadjusted) from active market exchanges, including over-the-counter exchange-traded financial instruments. The Company did not have any additional assets or liabilities that were measured at fair value on a recurring basis.

In December 2007 the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)). SFAS 141(R) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. SFAS 141(R) is to be applied prospectively to business combinations for which the acquisition date is on or after an entity’s fiscal year that begins after December 15, 2008 (fiscal year 2009 for the Company). The adoption will affect the future accounting for business combinations.

–6–

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 2—NEW ACCOUNTING STANDARDS – continued

Effective at the beginning of fiscal year ending January 3, 2009, we adopted SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(SFAS No. 159). SFAS No. 159 allows companies to choose to measure certain financial instruments and certain other items at fair value. The statement requires that unrealized gains and losses are reported in earnings for items measured using the fair value option and establishes presentation and disclosure requirements. We have elected not to apply the fair value option to any of our financial instruments except for those expressly required by U.S. GAAP.

In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, 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 income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (fiscal year 2009 for the Company). Earlier adoption is prohibited. The Company currently does not have any noncontrolling interests and will assess the impact of this standard on the consolidated financial statements if and when a future acquisition occurs.

In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about how and why an entity uses derivative instruments, how the instruments are accounted for under SFAS No. 133 and its related interpretations, and how the instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The guidance in SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 (fiscal year 2009 for the Company). The adoption will increase the level of disclosure concerning derivative instruments in the Company’s consolidated financial statements.

NOTE 3—BUSINESS SEGMENTS

The Company is comprised of two primary operating segments, as defined in SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information. The Color Measurement segment consists of quality control instrumentation that measure, communicate, and simulate color. These products are used in several industries but in all cases their core application is the measurement of color. Company management views its products, technology, and key strategic decisions in terms of the global color measurement market and not the specific components of the markets it serves.

The Color Standards segment includes the operations of the Pantone, Inc. (Pantone) business unit. Pantone is a developer and marketer of products for the accurate communication and reproduction of color, servicing worldwide customers in a variety of industries including imaging and media, textiles, digital technology, plastics, and paint. The Company created the Color Standards business segment in connection with the acquisition of Pantone on October 24, 2007.

–7–

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 3—BUSINESS SEGMENTS – continued

The performance of the operating segments is evaluated by the Company’s management using various financial measures. The following is a summary of certain key financial measures for the respective fiscal years indicated:

(in thousands)	Three Months Ended					Six Months Ended
	June 28, 2008			June 30, 2007		June 28, 2008			June 30, 2007
Net Sales:
Color Measurement	$	61,855		$	60,745	$	115,934		$	118,462
Color Standards		11,606			—		23,446			—
Total	$	73,461		$	60,745	$	139,380		$	118,462
Depreciation and Amortization:
Color Measurement	$	5,426		$	5,108	$	10,870		$	10,875
Color Standards		821			—		3,286			—
Total	$	6,247		$	5,108	$	14,156		$	10,875
Operating Income (Loss):
Color Measurement	$	682		$	6,913	$	905		$	11,921
Color Standards		(227	)		—		(2,428	)		—
Total	$	455		$	6,913	$	(1,523	)	$	11,921
Capital Expenditures:
Color Measurement	$	868		$	1,748	$	1,938		$	4,486
Color Standards		176			—		192			—
Total	$	1,044		$	1,748	$	2,130		$	4,486

	June 28, 2008		December 29, 2007
Total Assets:
Color Measurement	$	458,606	$	468,609
Color Standards		177,333		186,215
Total	$	635,939	$	654,824

–8–

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 4—INVENTORIES

Inventories consisted of the following (in thousands):

	June 28, 2008		December 29, 2007
Raw materials	$	16,828	$	16,418
Work in process		19,564		28,532
Finished goods		15,649		16,889
Total	$	52,041	$	61,839

In connection with the acquisition of Pantone on October 24, 2007 the Company recorded the acquired inventory at fair market value. This resulted in a write-up of inventory in the amount of $15.4 million, which will be recognized in cost of sales ratably as the inventory is sold. As of June 28, 2008 and December 29, 2007 the unrecognized balance of the inventory write-up was $5.1 million and $12.8 million, respectively.

NOTE 5—ACQUISITIONS

Pantone, Inc.

On October 24, 2007, the Company completed its acquisition of Pantone for a purchase price of $174.4 million plus transaction costs. A working capital adjustment of $0.3 million was made in the second quarter of 2008, decreasing the cash consideration amount to $174.1 million.

The following table summarizes the aggregate consideration paid for the acquisition (in thousands):

Cash consideration	$	174,130
Transaction costs		1,737
Total acquisition consideration	$	175,867

The transaction was funded with cash, financed through new borrowings. Total cash acquired was $0.7 million.

Assets acquired and liabilities assumed in the acquisition were recorded on the Company’s Consolidated Balance Sheet based on their estimated fair values as of the date of the acquisition. Results of operations of Pantone have been included in the Company’s Consolidated Statements of Operations since the date of the acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed was allocated to goodwill. Pantone is included in the Company’s Color Standards segment; therefore all of the Goodwill recorded in the acquisition has been allocated to that segment. The purchase price allocation is preliminary and a final determination of required purchase accounting adjustments will be made upon finalization of asset valuations, and tax structuring decisions, as well as the completion of the integration process within one year of the acquisition date. Revisions to the fair values, which may be significant, will be recorded by the Company as further adjustments to the purchase price allocation.

–9–

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 5—ACQUISITIONS – continued

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed on October 24, 2007 (in thousands):

Current assets		$	33,111
Property, plant and equipment			2,262
Goodwill			85,853
Identifiable intangible assets
Customer relationships (estimated useful lives of 15 years)	33,500
Trademarks and trade names (estimated useful lives of 10 years)	23,890
Technology and patents (estimated useful lives of 15 years)	2,900
Covenants not to compete (estimated useful lives of 2-3 years)	8,600
Total intangible assets			68,890
Other assets			130
Total assets acquired			190,246
Current liabilities			(13,864	)
Long-term liabilities			(515	)
Total liabilities assumed			(14,379	)
Net assets acquired		$	175,867

As part of the purchase price allocation, an adjustment of $15.4 million was recorded to reflect the fair value of inventory at the date of the acquisition, which will be recognized in cost of sales ratably as the inventory is sold As of June 28, 2008, the Company has recognized $10.3 million related to the fair value valuation of Pantone’s inventory. During the three and six months ended June 28, 2008 the Company recognized $3.8 and $7.7 million, respectively, in cost of sales related to the fair value valuation of Pantone’s inventory.

The identifiable intangible assets are being amortized on a straight-line basis over their expected useful lives. The total weighted average amortization period for these intangible assets is 12 years.

The following unaudited pro forma information assumes the acquisition occurred as of the beginning of each of the periods presented. The pro forma information contains the actual combined operating results of X-Rite and Pantone, with the results prior to the acquisition date, adjusted to reflect the pro forma impact of the acquisition occurring at the beginning of the period. Pro forma adjustments include elimination of sales between X-Rite and Pantone during the periods presented, the amortization of acquired intangible assets, and the interest expense on debt incurred to finance the transaction. The pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been in effect for the periods presented (in thousands, except per share data):

	Three months ended June 30, 2007			Six months ended June 30, 2007
Net sales	$	72,315		$	139,920
Net loss		(6,611	)		(7,722	)
Basic and diluted net loss per share	$	(0.23	)	$	(0.27	)

–10–

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 6—RESTRUCTURING AND OTHER RELATED CHARGES

Restructuring

Amazys Restructuring Plan

In the first quarter of 2008, the Company completed the restructuring actions initiated in prior periods related to the integration of the Amazys acquisition (Amazys restructuring plan). The Amazys restructuring plan included the closure of duplicate facilities, elimination of redundant jobs, and consolidation of product lines. The restructuring plan included workforce reductions of 83 employees, all of which have been completed as of March 29, 2008, facility closures of approximately 14,000 square feet, various asset write-downs, and related costs for consulting and legal fees. The work force reductions included approximately $6.0 million related to the former CEO’s contract settlement. Asset write-downs include inventory, tooling, capitalized software, and other intangible asset write-downs directly related to discontinued product lines.

The only future charges that the Company anticipates incurring for this restructuring are related to adjustments of the former CEO’s severance estimate, the value of which is based on future results and stock price performance of the Company. The following table summarizes the remaining severance accrual balances related to these restructuring actions (in thousands):

	Severance			Asset Write Downs			Facility Exit and Lease Termination Costs			Other			Total
Balance at December 29, 2007	$	4,366		$	—		$	—		$	—		$	4,366
Charges incurred		1,017			232			—			—			1,249
Amounts paid or utilized		(1,467	)		(232	)		—			—			(1,699	)
Balance at March 29, 2008		3,916			—			—			—			3,916
Charges incurred		(59	)		117			103			24			185
Amounts paid or utilized		(275	)		(117	)		(103	)		(24	)		(519	)
Balance at June 28, 2008	$	3,582		$	—		$	—		$	—		$	3,582

–11–

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 6—RESTRUCTURING AND OTHER RELATED CHARGES – continued

April 2008 Restructuring Plan

On April 3, 2008, the Company responded to weaker than expected economic conditions and market specific softness that adversely affected revenues during the first quarter by implementing a revised cost savings and operational plan (April 2008 restructuring plan). The April 2008 restructuring plan included 98 headcount reductions at various locations worldwide as well as additional cost of sales and operating cost reductions, which were in addition to the reductions achieved as part of the Amazys restructuring plan.

	Severance			Other			Total
Balance at March 29, 2008	$	—		$	—		$	—
Charges incurred		2,537			1,706			4,243
Amounts paid or utilized		(1,602	)		(924	)		(2,526	)
Balance at June 28, 2008	$	935		$	782		$	1,717

Integration

Incremental costs incurred related to the integration of the Company’s acquisitions that do not qualify as restructuring under the provisions of SFAS 146,Accounting for Costs Associated with Exit or Disposal Activities, have been included in a separate line on the Company’s Condensed Consolidated Statements of Operations titled “Integration”. These costs include costs related to personnel working fulltime on integration work, integration related travel, and outside consultants’ work on strategic planning, culture and synergy assessments. All costs included in this caption were solely related to the integration and do not include normal business operating costs. Integration costs for the three and six month periods ended June 28, 2008 totaled $0.3 million and $0.5 million, respectively and for the three and six month periods ended June 30, 2007 totaled $0.4 million and $1.3 million, respectively.

–12–

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 7—DISCONTINUED OPERATIONS

In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, the Company classifies a business component that has been disposed of as a discontinued operation, if the cash flow of the component has been eliminated from the Company’s ongoing operations and the Company will no longer have any significant continuing involvement in the component.

On February 7, 2007, the Company completed the sale of its Labsphere subsidiary to Halma Holdings plc (“Halma”). Labsphere, which is based in North Sutton, New Hampshire, provides integrated spheres and systems as well as reflectance materials to the light measurement markets. This divestiture is part of the Company’s ongoing strategy to focus resources on its core color-related businesses. Under the terms of the agreement, Halma acquired all of the outstanding Labsphere stock for $14.3 million in cash, subject to certain closing adjustments. Proceeds from the sale were used to reduce the principal balance of the Company’s first lien credit facility.

In connection with the transaction, the Company recorded a net gain on the sale of $7.6 million during the quarter ended March 31, 2007 which is presented as a gain on sale of discontinued operations in the Condensed Consolidated Statement of Operations. The results of operations for the Labsphere subsidiary through the date of sale were reported within discontinued operations in the accompanying Condensed Consolidated Statements of Operations. Interest expense was not allocated to Labsphere, therefore, all of the Company’s interest expense is included within continuing operations.

The components of the income (loss) from discontinued operations are presented below (in thousands):

	Three Months Ended June 30, 2007			Six Months Ended June 30, 2007
Net sales	$	—		$	793
Loss from operations before income taxes	$	—		$	(52	)
Income tax benefit		—			13
Loss from operations before income taxes	$	—		$	(39	)
Gain (loss) on disposal	$	(48	)	$	6,367
Income tax benefit on disposal		12			1,229
Net gain (loss) on disposal	$	(36	)	$	7,596

There were no assets or liabilities of discontinued operations reported in the Condensed Consolidated Balance Sheets as of June 28, 2008. In the Condensed Consolidated Statement of Cash Flows, the cash flows of discontinued operations were not separately disclosed in any period presented.

–13–

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 8—GOODWILL AND OTHER INTANGIBLE ASSETS

A summary of changes in goodwill for the six months ended June 28, 2008, consisted of the following (in thousands):

	Color Measurement			Color Standards		Total
December 29, 2007	$	205,759		$	82,449	$	288,208
Acquisition purchase price adjustments		(3,936	)		3,404		(532	)
Foreign currency adjustments		20			—		20
June 28, 2008	$	201,843		$	85,853	$	287,696

In 2006, the Company recorded $194.0 million of goodwill and $78.1 million in intangible assets in connection with the Amazys acquisition. As of December 31, 2007, the Company established a valuation allowance against certain deferred tax assets acquired in the Amazys acquisition which increased goodwill. During the second quarter ended June 28, 2008, the Company adjusted certain deferred tax assets in connection with the Amazys acquisition due to exposures associated with final tax valuation calculations pertaining to the shutdown and liquidation of certain Amazys facilities. The reduction in the valuation allowance decreased goodwill by $3.9 million. In connection with the Pantone acquisition in October 2007, the Company recorded $85.9 million of goodwill and $68.9 million of intangible assets. See Note 5 for further discussion of the Pantone acquisition.

The following is a summary of changes in intangible assets for the six months ended June 28, 2008 (in thousands):

	December 29, 2007		Additions		Amortization			Change in Preliminary Valuation Assumptions			Foreign Currency Adjustments			June 28, 2008
Technology and patents	$	49,259	$	—	$	(3,907	)	$	(6,200	)	$	—		$	39,152
Customer relationships		37,881		—		(2,241	)		4,100			—			39,740
Trademarks and trade names		23,507		—		(458	)		3,610			—			26,659
Covenants not to compete		12,667		—		(2,134	)		(4,800	)		(5	)		5,728
Total	$	123,314	$	—	$	(8,740	)	$	(3,290	)	$	(5	)	$	111,279

Estimated amortization expense for intangible assets as of June 28, 2008, for each of the succeeding years is as follows (in thousands):

Remaining 2008	$	8,513
2009		15,778
2010		11,849
2011		11,793
2012		11,793
Thereafter		51,553

–14–

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 9—SHORT-TERM BORROWINGS AND LONG-TERM DEBT

In the first quarter of 2006, the Company incurred short-term borrowings of $13.5 million under its former revolving line of credit in connection with the acquisition of its new corporate headquarters and manufacturing facility in Grand Rapids, Michigan. This loan was converted to a mortgage loan in June 2006, secured by the Company’s former headquarters and manufacturing facility in Grandville, Michigan. The mortgage was renewed and extended in October of 2007 during which time the Company made a principal payment of $4.8 million. The mortgage agreement required monthly interest payments based on LIBOR plus 2.50 percent, with the principal balance due in full on August 30, 2008. In July 2008, the Company entered into a definitive purchase agreement to sell the property for $10.0 million. The purchase agreement provides for a 90 day due diligence period for the buyer to evaluate the property. The buyer has deposited an initial earnest money deposit of $0.2 million with an escrow agent to be applied as a credit to the purchase price at closing. Final closing on the sale will be based on completion of the Buyer’s inspection and due diligence process.

In connection with the Amazys acquisition in July 2006, the Company entered into secured senior credit facilities which provided for aggregate principal borrowings of up to $220 million. The credit facilities consisted of a $160 million first lien loan, which was comprised of a $120 million seven-year term loan and a $40 million five-year revolving line of credit, and a $60 million six-year term second lien loan.

In connection with the Pantone acquisition in October 2007, the Company entered into new secured senior credit facilities which provide for aggregate principal borrowings of up to $415 million and replaced the Company’s previous credit facilities established with the Amazys acquisition. The new credit facilities consist of a $310 million first lien loan, which is comprised of a $270 million five-year term loan and a $40 million five-year revolving line of credit, and a $105 million six-year term second lien loan. Obligations under these credit facilities are secured by essentially all of the tangible and intangible assets of the Company. Both facilities provide variable interest rate options from which the Company selected for interest calculations. The unused portion of the revolving credit facility is subject to a fee of 0.5 percent per annum.

During the first quarter of 2008, the Company selected the three month LIBOR plus 3.5 percent and 7.5 percent for most of the first and second lien facilities, respectively, as its primary interest rate index. Interest payments on LIBOR based loans are payable on the last day of each interest period, not to exceed three months. As a result of the covenant defaults described below, an interest penalty of 2.0 percent was incurred on all first lien balances, including the unused revolver, beginning in March and interest rates on the first lien debt automatically reset to prime plus 2.5 percent as of the March 2008 reset dates. Interest payments on loans linked to the prime rate are required to be paid on a scheduled quarterly basis. As of June 28, 2008, the Company had drawn $16.5 million against the revolving line of credit. Further draws on the line of credit are currently not allowed due to the Company’s default situation. Should further draws on the line become available the total available funds will be reduced by the outstanding balance on the Company’s mortgage loan.

The credit facilities contain certain operational and financial covenants regarding the Company’s ability to create liens, incur indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates, incur capital expenditures beyond prescribed limits, deliver certain reports and information, and meet certain financial ratios. On April 3, 2008, the Company announced that it was not in compliance with certain covenants under its secured credit facilities. The Company is actively engaged in discussions with the lenders to amend certain terms of its credit arrangements to allow for greater operating flexibility. The Company has reclassified its long-term debt to current liabilities until such time as new credit agreement terms and covenants are established. Further draws on the Company’s revolving line of credit would require the approval of the first lien lenders.

–15–

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 10—DERIVATIVE FINANCIAL INSTRUMENTS

The Company accounts for derivative financial instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as amended. As a result, the Company recognizes derivative financial instruments in the Condensed Consolidated Financial Statements at fair value regardless of the purpose or intent for holding the instruments. Changes in the fair value of derivative financial instruments are either recorded in income or in shareholders’ investment as a component of accumulated other comprehensive income (loss) depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or cash flow hedge.

Changes in fair values of derivatives accounted for as fair value hedges are recorded in income along with the portions of the changes in the fair values of the hedged items that relate to the hedged risk. Changes in fair values of derivatives accounted for as cash flow hedges, to the extent they are effective hedges, are recorded in other comprehensive income. Changes in fair values of derivatives not qualifying as hedges are reported in income.

Interest Rate Swaps

During the first quarter of 2008, the Company utilized interest rate swap agreements designated as cash flow hedges of the outstanding variable rate borrowings of the Company. These agreements resulted in the Company paying or receiving the difference between three month LIBOR and fixed interest rates at specified intervals, calculated based on the notional amounts. The interest rate differential to be paid or received was accrued as interest rates changed and was recorded as interest income or expense. Under SFAS 133, these swap transactions were designated as cash flow hedges, therefore the effective portion of the derivative’s gain or loss was initially recorded as a component of accumulated other comprehensive income, net of taxes, and subsequently reclassified into earnings when the hedged interest expense affected earnings.

On April 21, 2008, these interest rate swap agreements were terminated by the Company. The fair value of the swap arrangements as of the termination date was a liability of $12.1 million (the Settlement Amount). The Company is currently in negotiations regarding payment terms for the Settlement Amount. The termination of the swap arrangements resulted in an additional event of default under the Company’s secured credit facilities. The Company has reclassified its long-term derivative financial instruments liability to current liabilities until payment terms are established. The swap liability is accruing interest, which has been included in the derivative financial instruments line on the Company’s Condensed Consolidated Balance Sheet. Interest related to the swap liability totaled $0.1 million through June 28, 2008.

During the quarter ended March 29, 2008, the Company paid net interest settlements of $0.2 million. Portions of these interest rate swaps became ineffective during the first quarter of 2008 due to an interest rate floor on a portion of the Company’s debt that restricted the interest rate on the debt from floating to LIBOR. Losses on the ineffective portion of these hedges were reclassified from other comprehensive income to interest expense during the first quarter. No cash settlements were made during the second quarter of 2008. Due to termination of the swap contracts in April, related accumulated other comprehensive income balances have been frozen and will be recognized as interest expense over the period of the hedged cash flows. Interest expense recorded related to the terminated swaps during the six months ended June 28, 2008 totaled $3.2 million, which included first quarter cash payments of $0.2 million, accrued interest on the swap liability of $0.1 million, as well as $2.9 million of accumulated other comprehensive income recognized as interest expense related to ineffectiveness and post-termination reclassifications of second quarter accumulated other comprehensive income balances.

–16–

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 11—SHARE-BASED COMPENSATION

The Company accounts for share-based compensation in accordance with SFAS No. 123(R),Share-Based Payment. Share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense on a straight-line basis over the requisite service or performance periods.

Valuation of Share-Based Compensation

The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model. The valuation model relies on subjective assumptions that can materially affect the estimated value of options and it may not provide an accurate measure of the fair value of the Company’s stock options. Restricted stock awards are valued at closing market price on the date of the grant. Compensation expense for shares issued under the Employee Stock Purchase Plan is recognized for 15 percent of the market value of shares purchased, using the purchase date closing market price. This expense is recognized in the quarter to which the purchases relate.

The Company used the following assumptions in valuing employee options granted during the three and six months ended June 28, 2008 and the three and six months ended June 30, 2007:

	Three Months Ended				Six Months Ended
	June 28, 2008		June 30, 2007		June 28, 2008		June 30, 2007
Dividend yield	0	%	0	%	0	%	1	%
Volatility	48 – 55	%	54	%	48 – 55	%	57 – 58	%
Risk-free interest rates	3.2 – 3.6	%	4.6 – 4.8	%	2.7 – 3.6	%	4.5 – 4.7	%
Expected term of options	7 years		7 years		7 years		7 years

Share-Based Compensation Expense

Total share-based compensation expense recognized in the Condensed Consolidated Statements of Operations for the three and six months ended June 28, 2008 and June 30, 2007 was as follows (in thousands):

	Three Months Ended					Six Months Ended
	June 28, 2008			June 30, 2007		June 28, 2008			June 30, 2007
Stock options	$	484.9		$	542.3	$	937.2		$	896.9
Restricted stock		515.8			398.5		1,171.8			614.1
Employee stock purchase plan		7.1			12.5		15.6			22.7
Cash bonus conversion plan		—			31.6		—			62.4
		1,007.8			984.9		2,124.6			1,596.1
Vesting related to restructuring activities		(35.4	)		36.4		(50.0	)		603.4
Total share-based compensation expense	$	972.4		$	1,021.3	$	2,074.6		$	2,199.5

All share-based compensation expense was recorded in the Condensed Consolidated Statements of Operations in the line in which the salary of the individual receiving the benefit was recorded. As of June 28, 2008, there was unrecognized compensation cost for non-vested share-based compensation of $3.0 million related to options and $2.5 million related to restricted share awards. These costs are expected to be recognized over remaining weighted average periods of 1.94 and 1.69 years, respectively.

–17–

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 12—EMPLOYEE BENFIT PLANS

401(k) Retirement Savings Plans

The Company maintains 401(k) retirement savings plans for the benefit of substantially all full time U.S. employees. Investment decisions are made by individual employees. Investments in Company stock are not allowed under the plans. Participant contributions are matched by the Company based on applicable matching formulas.

Defined Benefit Plan

The Company maintains a defined benefit plan for employees of its X-Rite Europe GmbH subsidiary in Switzerland. The plan is part of an independent collective fund which provides pensions combined with life and disability insurance. The assets of the funded plans are held independently of the X-Rite’s assets in a legally distinct and independent collective trust fund which serves various unrelated employers. The Fund’s benefit obligations are fully reinsured by Swiss Life Insurance Company. The plan is valued by independent actuaries using the projected unit credit method. The liabilities correspond to the projected benefit obligations of which the discounted net present value is calculated based on years of employment, expected salary increases, and pension adjustments.

The last actuarial valuation was carried out as of December 29, 2007. Net projected periodic pension cost of the plan includes the following components:

	Three Months Ended						Six Months Ended
	June 28, 2008			June 30, 2007			June 28, 2008			June 30, 2007
Service cost	$	793		$	566		$	1,571		$	1,132
Interest		207			165			410			330
Expected return on plan assets		(277	)		(262	)		(548	)		(524	)
Less contributions paid by employees		(277	)		(191	)		(510	)		(382	)
Net periodic pension cost	$	446		$	278		$	923		$	556

The Company is currently evaluating what additional contributions if any will be made to the pension plan during the remainder of 2008. Actual contributions will be dependent upon investment returns, changes in pension obligations, and other economic and regulatory factors.

–18–

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 13—EARNINGS PER SHARE

The following table reconciles the numerators and denominators used in the calculations of basic and diluted earnings per share (“EPS”) (in thousands, except per share amounts):

	Three Months Ended						Six Months Ended
	June 28, 2008			June 30, 2007			June 28, 2008			June 30, 2007
Net Income (Loss)
Income (loss) from continuing operations	$	(20,909	)	$	2,104		$	(37,706	)	$	2,321
Discontinued operations
Net loss from operations		—			—			—			(39	)
Net gain (loss) on disposal		—			(36	)		—			7,596
Net income (loss)	$	(20,909	)	$	2,068		$	(37,706	)	$	9,878
Weighted-Average Common Shares Outstanding
Basic		29,108			28,839			29,074			28,751
Diluted		29,108			29,265			29,074			29,119
Basic and Diluted Earnings (Loss) Per Share
Income (loss) from continuing operations	$	(0.72	)	$	0.07		$	(1.30	)	$	0.08
Discontinued operations
Net loss from operations		—			—			—			—
Net gain on disposal		—			—			—			0.26
Net income (loss)	$	(0.72	)	$	0.07		$	(1.30	)	$	0.34

Dilutive potential shares consist of employee stock options and restricted common stock awards. The number of stock options and awards that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was approximately 3,012,000 and 2,763,000, respectively, for the three month and six month periods ended June 28, 2008 and 1,163,000 and 1,256,000, respectively, for the three and six month periods ended June 30, 2007.

NOTE 14—INCOME TAXES

The Company recorded a tax provision of $10.3 million and $12.0 million against pre-tax losses of $10.6 million and $25.7 million, for the three and six month periods ended June 28, 2008, respectively. The effective tax rate for the quarter and year to date provisions was (98.0) and (46.2) percent, respectively. The income tax provision primarily relates to adjustments for the potential tax exposures associated with final valuation calculations pertaining to the Amazys acquisition and related facility shutdown and liquidation.

The Company cannot currently recognize tax benefits associated with its U.S. domestic operating losses and has valuation allowances recorded against related net federal deferred income tax assets. In addition, the income tax provision reflects the fact that foreign taxes are currently not subject to foreign tax credit offsets given the net operating losses accumulated domestically.

The Company adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes (FIN 48) on December 31, 2006 (fiscal year 2007). FIN 48 requires the Company to evaluate whether the tax position taken will more likely than not be sustained upon examination by the appropriate taxing authority. It also provides guidance on the measurement of the amount of benefit a company is to recognize in its financial statements. Under FIN 48 a company should also classify a liability for unrecognized tax benefits as current to the extent the company anticipates making a payment within one year.

–19–

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 14—INCOME TAXES – continued

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. For the three and six month periods ended June 28, 2008, the Company accrued interest and penalties $0.6 and $0.7 million respectively, net of associated tax benefits. For the three and six month periods ended June 30, 2007, the Company accrued interest and penalties $0.1 and $0.2 million respectively, net of associated tax benefits.

The Company is subject to periodic audits by domestic and foreign tax authorities. During the second quarter of 2008, a periodic audit in one foreign tax jurisdiction was concluded, resulting in no additional amounts due. There are currently no other ongoing audits in foreign tax jurisdictions.

For the majority of tax jurisdictions, the Company is no longer subject to U.S. federal, state, and local, or non-U.S. income tax examinations by tax authorities for years before 1999.

The Company recorded tax provisions of $1.3 million and $1.5 million against pre-tax income from continuing operations of $3.4 million and $3.8 million, for the three and six month periods ended June 30, 2007, respectively. The effective tax rate for the quarter and year to date provisions was 38.9 and 39.4 percent, respectively. The Company’s effective tax rate was adjusted in the second quarter of 2007 to reflect changes in annual estimates related to income in lower tax jurisdictions, the effect of non-deductible charges related to equity-based compensation, losses attributable to certain foreign and domestic subsidiaries for which tax benefits are not currently available, and the impact of foreign taxes currently not subject to foreign tax credit offsets.

The Company also recorded an income tax benefit of $1.2 million (net of a valuation reserve of $0.9 million) from discontinued operations during the first quarter of 2007. This benefit was generated by the sale of the Labsphere business which resulted in a $6.4 million book gain, but a capital loss for income tax purposes of $5.8 million. The capital loss was attributable to differences between book and tax accounting for goodwill. The Company recorded a valuation reserve in connection with this transaction due to uncertainty over its ability to fully utilize its capital loss positions in a timely manner.

The U.S statutory rate for both tax years was 35.0 percent.

NOTE 15—COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) consists of net income (loss), foreign currency translation adjustments and gain or loss on the fair value of derivative instruments. Comprehensive income (loss) was $(18.2) and $(40.7) million, respectively, for the three month and six month periods ended June 28, 2008 and $3.0 and $12.4 million, respectively, for the three and six month periods ended June 30, 2007.

NOTE 16—FOUNDERS’ STOCK REDEMPTION AGREEMENTS AND RELATED LIFE INSURANCE POLICIES

During 1998, the Company entered into agreements with its founding shareholders for the future repurchase of 4.5 million shares of the Company’s outstanding stock. The agreements were terminated in November 2004. At that time, 3.4 million shares remained subject to repurchase. Prior to November 2004, the agreements required stock repurchases following the later of the death of each founder or his spouse. The cost of the repurchase agreements was to be funded by $160.0 million of proceeds from life insurance policies the Company purchased on the lives of certain of these individuals.

In June 2005, the Company entered into agreements with two life settlement providers for the sale of three life insurance policies owned by the Company with a total face value of $30.0 million. The Company received proceeds of $6.5 million, net of closing costs, from the sale of these policies. At June 28, 2008, the Company’s remaining life insurance portfolio consisted of eleven policies with a face value of $130.0 million.

–20–

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 16—FOUNDERS’ STOCK REDEMPTION AGREEMENTS AND RELATED LIFE INSURANCE POLICIES – continued

Under provisions of the life insurance policies originally purchased to fund the Founders’ Shares Redemption Program, the Company is allowed to determine the timing and amount of premium payments. Premiums on the remaining policies total $3.5 million per year. The Company elected not to make these premium payments for 2007 and no payments have been made through June 28, 2008. This election has not materially impacted the cash surrender values during this time, nor is it expected to affect payment of future benefits under the policies. The Company continues to review its options with regard to the future of the remaining policies.

NOTE 17—CONTINGENCIES, COMMITMENTS, AND GUARANTEES

The Company is involved in legal proceedings, legal actions, and claims arising in the normal course of business, including proceedings related to product, labor, and other matters. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. The Company records amounts for losses that are deemed probable and subject to reasonable estimate. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on its financial statements.

Pursuant to a standby letter of credit agreement, the Company has provided a financial guarantee to a third-party on behalf of its subsidiary, located in England. The term of the letter of credit is one year, with an automatic renewal provision at the grantors discretion. The face amount of the agreement is 0.2 million British Pounds, or approximately $0.3 million, as of June 28, 2008.

The Company’s product warranty reserves were nominal.

NOTE 18—SHAREHOLDER PROTECTION RIGHTS AGREEMENT

In November 2001, the Company’s Board of Directors adopted a Shareholder Protection Rights Plan (Plan). The Plan is designed to protect shareholders against unsolicited attempts to acquire control of the Company in a manner that does not offer a fair price to all shareholders.

Under the Plan, one purchase right automatically trades with each share of the Company’s common stock. Each right entitles a shareholder to purchase 1/100 of a share of junior participating preferred stock at a price of $30.00, if any person or group attempts certain hostile takeover tactics toward the Company. Under certain hostile circumstances, each right may entitle the holder to purchase the Company’s common stock at one-half its market value or to purchase the securities of any acquiring entity at one-half their market value. Rights are subject to redemption by the Company at $.005 per right and, unless earlier redeemed, will expire in the first quarter of 2012. Rights beneficially owned by holders of 15 percent or more of the Company’s common stock, or their transferees and affiliates, automatically become void.

–21–

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations

FORWARD-LOOKING STATEMENTS:

This discussion and analysis of financial condition and results of operations, as well as other sections of the Company’s Form 10-Q, contain 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, as amended, that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the industries it serves, the economy, and about the Company itself. Words such as “anticipates,” “believes,” “estimates,” “expects,” “likely,” “plans,” “projects,” “should,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. Furthermore, X-Rite, Incorporated undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements include, but are not limited to statements concerning liquidity, capital resources needs, tax rates, dividends and potential new markets.

The following management’s discussion and analysis describes the principal factors affecting the results of operations, liquidity, and capital resources, as well as the critical accounting policies, of X-Rite, Incorporated (also referred to as “X-Rite”, “the Company”). For purposes of this discussion, amounts from the accompanying condensed consolidated financial statements and related notes have been rounded to millions of dollars for convenience of the reader. These rounded amounts are the basis for calculations of comparative changes and percentages used in this discussion. This discussion should be read in conjunction with the accompanying condensed consolidated financial statements, which include additional information about the Company’s significant accounting policies, practices and transactions that underlie its financial results.

OVERVIEW OF THE COMPANY

X-Rite, Incorporated is a technology company that develops a full range of color management systems. The Company’s technologies assist manufacturers, retailers and distributors in achieving precise color appearance throughout their global supply chain. X-Rite products also assist printing companies, graphic designers, and professional photographers in achieving precise color reproduction of images across a wide range of devices and from the first to the last print. The Company’s products also provide retailers color harmony solutions at point of purchase. The key markets served include Imaging and Media, Industrial, and Retail. X-Rite generates revenue by selling products and services through a direct sales force as well as select distributors. The Company has sales and service facilities located in the United States, Europe, Asia, and Latin America.

Second Quarter Highlights:

• Achieved second quarter revenue of $73.5 million, a 21.1 percent increase over the second quarter of 2007, as a result of the acquisition of Pantone, Inc.

• Operating income was $0.5 million for the second quarter, despite restructuring and other related charges associated with the Company’s acquisitions and refinancing efforts.

• The Company’s cash position increased $9.9 million during the quarter to $28.3 million.

• Significant progress was made with interested parties regarding refinancing efforts and a new lender agreement.

The Company reported second quarter 2008 net sales of $73.5 million compared with $60.7 million in the same period of 2007. Gross margins were 52.3 percent and included $0.1 million of restructuring and other related charges and $3.9 million related to inventory valuation adjustments made as a result of the Pantone acquisition. Operating income totaled $0.4 million and included $4.6 million in restructuring and other related charges. The Company reported a net loss of $20.9 million, or $(0.72) per share, versus net income of $2.1 million, or $0.07 per share, for the same period in 2007.

–22–

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

Year-to-Date Results

Year to date net sales were $139.4 million, versus $118.5 million for the same period of 2007. Gross margins were 52.9 percent, and included $0.3 million of restructuring charges and $7.7 million related to inventory valuation adjustments made as a result of the Pantone acquisition. Operating losses totaled $1.5 million and included $5.8 million in integration and restructuring related charges. The Company reported a net loss of $37.7 million, or $(1.30) per share, versus net income of $9.9 million, or $0.34 per share, for the same period in 2007.

RESULTS OF OPERATIONS

The following discussion of the Company’s three and six month results of continuing operations excludes the results related to the Labsphere business, which have been segregated from continuing operations and reflected as discontinued operations for all periods presented.

The following table summarizes the results of the Company’s operations for the three and six month periods ended June 28, 2008, and June 30, 2007 (in millions):

	Three Months Ended										Six Months Ended
	June 28, 2008					June 30, 2007					June 28, 2008					June 30, 2007
Net sales	$	73.5		100.0	%	$	60.7		100.0	%	$	139.4		100.0	%	$	118.5		100.0	%
Cost of sales:
Products sold		31.1		42.3	%		23.7		39.0	%		57.6		41.3	%		45.5		38.4	%
Inventory valuation adjustment		3.9		5.3	%		—		—			7.7		5.5	%		—		—
Restructuring charges		0.1		0.1	%		—		—			0.3		0.3	%		0.1		0.1	%
Gross profit		38.4		52.3	%		37.0		61.0	%		73.8		52.9	%		72.9		61.5	%
Operating expenses		38.0		51.7	%		30.1		49.6	%		75.3		54.0	%		60.9		51.4	%
Operating income (loss)		0.4		0.6	%		6.9		11.4	%		(1.5	)	(1.1	)%		12.0		10.1	%
Interest expense		(11.2	)	(15.3	)%		(4.4	)	(7.2	)%		(23.2	)	(16.7	)%		(9.0	)	(7.6	)%
Other, net		0.2		0.3	%		0.9		1.4	%		(1.0	)	(0.7	)%		0.8		0.7	%
Income (loss) before taxes		(10.6	)	(14.4	)%		3.4		5.6	%		(25.7	)	(18.5	)%		3.8		3.2	%
Income taxes		10.3		14.0	%		1.3		2.1	%		12.0		8.6	%		1.5		1.2	%
Income (loss) from continuing operations		(20.9	)	(28.4	)%		2.1		3.5	%		(37.7	)	(27.1	)%		2.3		2.0	%
Discontinued operations
Net loss from operations		—		—			—		—			—		—			—		—
Net gain on disposal		—		—			—		—			—		—			7.6		6.4	%
Net income (loss)	$	(20.9	)	(28.4	)%	$	2.1		3.5	%	$	(37.7	)	(27.1	)%	$	9.9		8.4	%

–23–

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

Net Sales

Net Sales By Product Line

The Company has two reportable segments, Color Measurement and Color Standards. The Color Measurement segment is engaged in X-Rite’s traditional hardware and software technology business that develops a full range of color management systems. The Company’s technologies assist manufacturers, retailers, and distributors in achieving precise color appearance throughout their global supply chain. The Color Standards segment includes the operations of the Pantone, Inc. (Pantone) business unit. Pantone is a leading developer and marketer of products for the accurate communication and reproduction of color, servicing worldwide customers in a variety of industries including imaging and media, textiles, digital technology, plastics, and paint. The following table denotes net sales by product line for the three and six months ended June 28, 2008 and June 30, 2007 (in millions):

	Three Months Ended								Six Months Ended
	June 28, 2008				June 30, 2007				June 28, 2008				June 30, 2007
Imaging and Media	$	32.2	43.8	%	$	31.6	52.1	%	$	60.2	43.2	%	$	64.0	59.3	%
Industrial		12.2	16.6	%		12.3	20.3	%		23.7	17.0	%		23.2	24.6	%
Retail		5.9	8.0	%		6.1	10.0	%		10.0	7.2	%		11.0	10.3	%
Color Support Services		7.7	10.5	%		6.4	10.5	%		15.0	10.8	%		13.2	1.8	%
Other		3.9	5.3	%		4.3	7.1	%		7.0	5.0	%		7.1	4.0	%
Total Color Measurement		61.9	84.2	%		60.6	100.0	%		115.9	83.2	%		118.4	100.0	%
Color Standards		11.6	15.8	%		—	—			23.5	16.8	%		—	—
Total	$	73.5	100.0	%	$	60.6	100.0	%	$	139.4	100.0	%	$	118.4	100.0	%

Consolidated

Net sales for the three and six month periods ended June 28, 2008 were $73.5 million and $139.4 million, respectively, an increase of $12.8 million and $20.9 million, respectively, as compared to the same periods in 2007. On a percentage basis the three and six month increases were 21.1 and 17.6 percent, as compared to the 2007 results. These increases were primarily the result of the acquisition of Pantone, sales for which have been included in the Company’s financial statements as of the acquisition date, October 24, 2007. The Color Standards segment accounted for approximately $11.6 and $23.5 million in net sales for the three and six month periods ended June 28, 2008, respectively. The Color Measurement segment’s net sales increased by $1.2 million for the three months ended June 28, 2008 as compared to the same period a year ago, but decreased $2.6 million for the six months ended compared to the same period of 2007.

The Company experienced net sales growth in 2008 as compared to 2007, in all of the primary regions of the world where it conducts business, with the exception of Latin America. Net sales in North America for the three and six month periods ended June 28, 2008, increased $4.9 million and $7.5 million, respectively, or 22.8 percent and 17.9 percent, versus comparable periods in 2007. Net sales in Europe for the three and six month periods ended June 28, 2008, increased $5.5 million and $10.4 million, respectively, or 21.2 percent and 20.3 percent, respectively, as compared to the same periods in 2007. Net sales in Asia Pacific for the three and six month periods ended June 28, 2008, increased $2.7 million and $3.3 million, or 22.2 percent and 14.6 percent, respectively, versus comparable periods in 2007. Net sales in Latin America decreased $0.3 million for both the three and six month periods ended June 28, 2008, or 15.3 percent and 12.2 percent, respectively, when compared to the similar periods in 2007.

The Company’s primary foreign exchange exposures are from the Euro and the Swiss Franc. The impact of fluctuations in these currencies was reflected mainly in the Company’s European operations. Foreign currency fluctuations had a $4.1 million, or 5.6 percent, favorable effect on second quarter 2008 net sales, and a $7.4 million, or 5.3 percent, favorable effect on year to date sales for the period ending June 28, 2008 as compared to similar periods in 2007.

–24–

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

Color Measurement Segment

The Imaging and Media business provide solutions for commercial and package printing applications, digital printing and photo processing, photographic, graphic design and pre-press service bureaus in the imaging industries. For the three months ended June 28, 2008, the Imaging and Media business recorded an increase in net sales of $0.6 million, or 1.9 percent, compared with the second quarter of 2007. The increase was a result of the release of the Company’s newest product, ColorMunki, which generated approximately $3.0 million in revenue during the second quarter of 2008. For the six month period ended June 28, 2008, Imaging and Media net sales decreased $3.8 million, or 5.9 percent, compared with the similar period in 2007. These decreases were primarily the result a weak global economy in the pre-press and OEM markets that began in the first quarter. Imaging and Media sales declined slightly in all of the primary regions where the Company conducts operations, with the exception of Europe, which experienced growth of $1.2 million, or 7.9 percent and $0.5 million, or 1.7 percent for the three and six months ended June 28, 2008, respectively, as compared to the same period a year ago. The European revenue growth was driven by the favorable change in foreign currency exchange rates as compared to the prior year.

The Industrial business provides color measurement solutions for the automotive quality control, process control, and global supply chain markets. The Company’s products are an integral part of the manufacturing process for automotive interiors and exteriors, as well as textiles, plastics, and dyes. Industrial net sales were $12.2 million and $23.7 million for the three and six month periods ended June 28, 2008, respectively, compared to $12.3 million and $23.2 million respectively, for the comparable periods in 2007. While sales for the three month period remained flat as compared to 2007, sales for the six month period ended June 28, 2008 increased $0.5 million, or 2.2 percent compared to the same period a year ago. The increase in sales was primarily due to the industry’s acceptance of newly introduced products. Industrial sales in the second quarter of 2008 declined slightly in all of the primary regions where the Company conducts operations, with the exception of Asia Pacific. Year to date sales have declined in all primary regions where the Company conducts industrial operations, offset by growth in Europe of $0.9 million or 10.8 percent through June 28, 2008.

The Retail business markets its paint matching products under the Match-Rite name to home improvement centers, mass merchants, paint retailers and paint manufacturers. Net sales were $5.9 and $10.0 million for the three and six months periods ended June 28, 2008, respectively, a decrease of $0.2 million, or 3.3 percent, for the second quarter and $1.0 million, or 9.1 percent, for the year to date period as compared with 2007. The decreases are primarily attributable to delayed new product development efforts which are needed to meet the specific needs of our large customers in the International regions. Extremely strong growth from the previous year in the European market has easily outpaced current growth as this new market evolves, requiring upgraded products to maintain previous adoption levels. Geographically, Retail sales declined in Europe and Latin America for the three and six months ended June 28, 2008, as compared to 2007. The declines in Europe were $0.4 million, or 23.7 percent, and $0.7 million, or 22.0 percent for the three and six months ended June 28, 2008, compared to the same periods a year ago. In Latin America, sales decreased by $0.2 million, or 64.5 percent, and $0.2 million, or 53.4 percent, for the three and six months ended June 28, 2008, respectively, as compared with 2007. The decrease in sales was primarily offset by growth of $0.3 million, or 7.1 percent, in North America during the second quarter of 2008.

The Color Support Services business provides professional color training and support worldwide through seminar training, classroom workshops, on-site consulting, technical support and interactive media development. This group also manages the Company’s service repair departments. This product category was formed in 2007 as a result of the Amazys acquisition. Net sales increased $1.3 million and $1.8 million, or 20.3 percent and 13.6 percent, on a quarter and year to date basis, respectively, compared with 2007. Sales for the three and six months ended June 28, 2008 increased in Europe by $1.0 and $1.2 million and in Asia Pacific by $0.3 and $0.7 million, respectively, representing most of the increase from 2007.

–25–

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

The Company’s business denoted as Other consists of three primary business categories: Medical, Dental and Light. The Medical product category provides instrumentation designed for use in controlling variables in the processing of x-ray film. The Dental product category provides matching technology to the cosmetic dental industry through X-Rite’s Shade Vision systems. The Light product category specializes in color viewing systems designed to increase productivity and reduce costs, while providing accurate simulation of natural daylight. Other product category net sales for the second quarter were $3.9 million, a decrease of $0.4 million, or 9.3 percent, as compared to the same period of 2007. Other product category net sales for the six months ended June 28, 2008 remained relatively flat at $7.0 million as compared to $7.1 million in the prior year.

Color Standards Segment

The Color Standards segment includes the operations of the Pantone business unit. Pantone is a leading developer and marketer of products for the accurate communication and reproduction of color, servicing worldwide customers in a variety of industries including imaging and media, textiles, digital technology, plastics and paint. For the three and six month periods ended June 28, 2008, the color standards segment recorded $11.6 and $23.5 million in sales, respectively. This segment was not in existence prior to the acquisition of Pantone in October, 2007.

Cost of Sales and Gross Profit

Gross profit for three month period ended June 28, 2008 was $38.4 million, or 52.3 percent of sales, compared with $37.0 million, or 61.0 percent of sales, for the comparable period in 2007. For the six month period ended June 28, 2008, gross profit was $73.8 million, or 52.9 percent of sales, compared with $72.9 million, or 61.5 percent of sales, for the same period in 2007. Included in cost of sales for the three and six month periods ended June 28, 2008 were $3.9 million, or 5.3 percent of sales, and $7.7 million, or 5.5 percent of sales, respectively in purchase accounting inventory adjustments as a result of the Pantone acquisition purchase price allocation. This allocation process required the Company to value the Pantone acquired inventory at estimated fair value less a normal profit margin as of the date of the acquisition and subsequently recognize the adjustment in operations as the related inventory is sold. The fair value calculation resulted in an aggregate increase to inventory of $15.4 million. Excluding the effects of the purchase accounting valuation and restructuring charges in cost of sales, the Company’s gross margin related to continuing operations was $42.3 million, or 57.6 percent, and $81.5 million, or 58.5 percent for the three and six month periods ended June 28, 2008. Gross margins for the same period in 2007, excluding the effects of restructuring charges were $37.0 million, or 61.0 percent, and $73.0 million, or 61.6 percent, respectively. The decrease in margin is primarily due to the recognition of additional inventory reserves associated with the Company’s demonstration and evaluation inventory and lower absorption of fixed manufacturing costs. Lower absorption rates are the result of a significant decrease in inventory due to product mix changes with significant customers which had a further negative effect on inventory. The balance of inventory decreased $11.6 and $9.8 million for the three and six month periods ended June 28, 2008, respectively, resulting in the realization of previously capitalized expenses in the total cost of goods sold.

–26–

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

Operating Expenses

The following table compares operating expense components as a percentage of net sales (in millions):

	Three Months Ended								Six Months Ended
	June 28, 2008				June 30, 2007				June 28, 2008				June 30, 2007
Selling and marketing	$	17.4	23.6	%	$	13.9	23.0	%	$	35.0	25.1	%	$	28.0	23.6	%
Research, development and engineering		7.7	10.5	%		9.7	16.0	%		16.4	11.8	%		18.3	15.5	%
General and administrative		8.3	11.3	%		5.2	8.5	%		18.1	13.0	%		11.5	9.7	%
Restructuring and other related charges		4.6	6.3	%		1.3	2.1	%		5.8	4.0	%		3.1	2.6	%
Total	$	38.0	51.7	%	$	30.1	49.6	%	$	75.3	54.0	%	$	60.9	51.4	%

Selling and Marketing

Selling and marketing expenses for the second quarter and year to date 2008 increased by $3.5 million, or 25.2 percent, and $7.0 million, or 25.0 percent, respectively, compared to the same periods in 2007. Both the quarterly and year-to-date increases are attributable to incremental costs associated with the acquisition of Pantone in October 2007. Pantone’s selling and marketing expenses for the three and six months ended June 28, 2008 were $3.3 and $6.8 million, respectively.

Research, Development and Engineering

Research, development, and engineering expenses for the second quarter and year to date 2008 decreased by $2.0 million, or 20.6 percent, and $1.9 million, or 10.4 percent, respectively, compared to the same periods in 2007. Both the quarterly and year-to-date decreases are primarily attributable to lower compensation levels as a result of the restructuring activity that took place in the second quarter of 2008.

General and Administrative

General and Administrative expenses for the second quarter and year to date 2008 increased by $3.1 million, or 59.6 percent, and $6.6 million, or 57.4 percent, respectively, compared to the same periods in 2007. Both the quarterly and year-to-date increases in 2008 were partially attributable to added costs associated with Pantone operations, which totaled approximately $1.4 million and $4.3 million, respectively, amortization of acquisition related intangible assets of $0.3 million and $2.1 million, respectively, and the decline in the fair market value of Founder’s life insurance policies of $0.5 million and $1.4 million, respectively. In addition to these costs, the company paid a $0.8 million one-time property tax assessment on the Company’s former headquarters in Grandville, Michigan, during the second quarter of 2008.

–27–

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

Restructuring and Other Related Charges

Restructuring and other related charges expense during the three and six months ended June 28, 2008 increased $3.3 and $2.7 million, respectively, compared with the three and six months ended June 30, 2007. These increases were related to the April 4, 2008 restructuring (April 2008 restructuring plan) the Company announced in the second quarter of 2008. Included in the April 2008 restructuring plan the Company reduced its global headcount by 98 employees and took additional cost cutting initiatives cost of sales and operating expenses. For the three and six month periods ended June 28, 2008 the company expensed $4.2 million related to the April 2008 restructuring plan, including $2.5 million in severance costs and non-recurring professional fees of $1.7 million. In the first quarter of 2008 the Company completed the restructuring plan resulting from the Amazys acquisition in July 2006 (Amazys restructuring plan). In connection with the Amazys restructuring plan the Company recognized $1.2 and $0.2 million in expenses for the three and six months ended June 28, 2008. Included in the restructuring expenses are $1.0 million in severance costs, $0.3 million in asset write downs, and $0.1 million in facility exit and lease termination costs. Expenses recognized subsequent to the first quarter of 2008 represent unplanned charges incurred in connection with the Amazys acquisition plan.

Integration

Incremental costs incurred related to the integration of Amazys that do not qualify as restructuring under the provisions of SFAS 146,Accounting for Costs Associated with Exit or Disposal Activities, have been included in a separate line on the Company’s Condensed Consolidated Statements of Operations titled “Integration”. These costs include costs related to personnel working fulltime on integration work, integration related travel, and outside consultants’ work on strategic planning and culture and synergy assessments. All costs included in this caption were solely related to the integration and do not include normal business operating costs. Integration costs for the three and six month periods ended June 28, 2008 totaled $0.3 million and $0.5 million, respectively, a decrease of 25.0 percent and 61.5 percent as compared to similar periods in the prior year. The decrease in integration costs is related to the completion of the Amazys restructuring in the first quarter of 2008.

Other Income (Expense)

Interest Expense

Interest expense was $11.2 and $23.2 million for the three and six months ended June 28, 2008, which was primarily related to the borrowings and amortization of associated financing costs incurred to finance the acquisitions of Amazys and Pantone that occurred during July 2006 and October 2007, respectively. Included in interest expense for the three and six months ended June 28, 2008 are $1.2 and $3.1 million in expense related to the terminated interest rate swap agreements. These losses were reclassified from other comprehensive income (loss) to interest expense. For further discussions see Note 9 regarding the Company’s short and long-term indebtedness and Note 10 on the Company’s derivative financial instruments.

–28–

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

Other income (expense)

Other income (expense) consists of investment income, and losses from foreign exchange transactions. Other income (expense) totaled $0.2 and $(1.0) million for the three and six month periods ended June 28, 2008, and were primarily related to gains and losses on foreign exchange transactions.

Income Taxes

The Company recorded a tax provision of $10.3 million and $12.0 million against pre-tax losses of $10.6 million and $25.7 million, for the three and six month periods ended June 28, 2008, respectively. The effective tax rate for the quarter and year to date provisions was (98.0) and (46.2) percent, respectively. The income tax provision primarily relates to adjustments for the potential tax exposures associated with final valuation calculations pertaining to the Amazys acquisition and related facility shutdown and liquidation.

The Company cannot currently recognize tax benefits associated with its U.S. domestic operating losses and has valuation allowances recorded against related net federal deferred income tax assets. In addition, the income tax provision reflects the fact that foreign taxes are currently not subject to foreign tax credit offsets given the net operating losses accumulated domestically.

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. For the three and six month periods ended June 28, 2008, the Company accrued interest and penalties $0.6 and $0.7 million respectively, net of associated tax benefits. For the three and six month periods ended June 30, 2007, the Company accrued interest and penalties $0.1 and $0.2 million respectively, net of associated tax benefits.

The Company is subject to periodic audits by domestic and foreign tax authorities. During the second quarter of 2008, a periodic audit in one foreign tax jurisdiction was concluded, resulting in no additional amounts due. There are currently no other ongoing audits in foreign tax jurisdictions.

For the majority of tax jurisdictions, the Company is no longer subject to U.S. federal, state, and local, or non-U.S. income tax examinations by tax authorities for years before 1999.

The Company recorded tax provisions of $1.3 million and $1.5 million against pre-tax income from continuing operations of $3.4 million and $3.8 million, for the three and six month periods ended June 30, 2007, respectively. The effective tax rate for the quarter and year to date provisions was 38.9 and 39.4 percent, respectively. The Company’s effective tax rate was adjusted in the second quarter of 2007 to reflect changes in annual estimates related to income in lower tax jurisdictions, the effect of non-deductible charges related to equity-based compensation, losses attributable to certain foreign and domestic subsidiaries for which tax benefits are not currently available, and the impact of foreign taxes currently not subject to foreign tax credit offsets.

The Company also recorded an income tax benefit of $1.2 million (net of a valuation reserve of $0.9 million) from discontinued operations during the first quarter of 2007. This benefit was generated by the sale of the Labsphere business which resulted in a $6.4 million book gain, but a capital loss for income tax purposes of $5.8 million. The capital loss was attributable to differences between book and tax accounting for goodwill. The Company recorded a valuation reserve in connection with this transaction due to uncertainty over its ability to fully utilize its capital loss positions in a timely manner.

The U.S statutory rate for both tax years was 35.0 percent.

–29–

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

Net Income (Loss)

The Company recorded a loss from continuing operations of $20.9 million and $37.7 million respectively, for the three and six month periods ended June 28, 2008, compared to income of $2.1 million and $2.3 million for the comparable periods in 2007. On a per share basis, fully diluted net income (loss) per share from continuing operations was $(0.72) and $(1.30) per share for the three and six month periods in 2008, compared to $0.07 and $0.08 per share for the comparable periods in 2007.

The average number of common shares outstanding for purposes of calculating basic shares outstanding was higher in 2008 due to shares being issued in connection with the Company’s employee stock programs.

FINANCIAL CONDITION AND LIQUIDITY

Liquidity and Capital Resources

As highlighted in the Condensed Consolidated Statements of Cash Flows, the Company’s liquidity and available capital resources were impacted by four key components: (i) current cash and cash equivalents, (ii) operating activities, (iii) investing activities and (iv) financing activities. These components are summarized below (in millions):

	Six Months Ended
	June 28, 2008			June 30, 2007			Increase (Decrease)
Net cash flow provided by (used in):
Operating activities	$	1.2		$	4.4		$	(3.2	)
Investing activities		(2.9	)		7.9		$	(10.8	)
Financing activities		9.2			(9.6	)	$	18.8
Effect of exchange rate changes on cash and cash equivalents		0.5			—		$	0.5
Net increase in cash and cash equivalents		8.0			2.7		$	5.3
Cash and cash equivalents, beginning of period		20.3			12.9		$	7.4
Cash and cash equivalents, end of period	$	28.3		$	15.6		$	12.7

Cash and Cash Equivalents

At June 28, 2008, the Company had cash and cash equivalents of $28.3 million, compared with $20.3 million at December 29, 2007, an increase of $8.0 million. At June 28, 2008, approximately $15.3 million in cash and cash equivalents were held by subsidiaries outside of the United States compared to $12.4 million as of June 30, 2007.

Operating Activities

Net cash provided by operating activities was $1.2 and $4.4 million for the first six months of 2008 and 2007, respectively.

In 2008, cash provided by operating activities consisted of a net loss of $(37.7) million adjusted for non-cash items of $31.8 million and net cash provided by operating assets and liabilities of $7.1 million. Significant adjustments for non-cash items included $15.7 million in depreciation and amortization charges, $7.7 million in acquired inventory valuation adjustments, and $2.1 million in share-based compensation expense. Operating funds were also provided by a decrease in accounts receivable of $4.2 million, or 8.8 percent, due primarily to a decrease in sales for second quarter 2008 compared with fourth quarter 2007. A decrease in inventory of $3.6 million also provided additional operating funds. These sources of cash were partially offset by decreases in accounts payable and other liabilities of $7.0 and $2.0 million, respectively.

–30–

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

In 2007, cash provided by operating activities consisted of net income of $9.9 million, increased by non-cash items of $6.7 million and net cash used for operating assets and liabilities of $12.2 million. Significant adjustments for non-cash items included the gain on the sale of Labsphere of $6.4 million and a reduction of deferred income tax liabilities of $1.4 million, off-set by depreciation of $3.4 million and amortization of purchased intangibles of $7.5 million. Significant changes in working capital accounts included expenditures for increased inventories of $4.8 million and prepaid and other assets of $5.7 million and decreases in other current and noncurrent liabilities of $6.8 million.

Investing Activities

The most significant components of the Company’s investment activities were (i) sale of business, (ii) capital expenditures, (iii) short-term investment purchases and sales.

Significant cash used for investing activities in 2008 included capital expenditures of $2.1 million and increases in capitalized software costs of $2.2 million. Capital expenditures are primarily related to recurring capital spending, primarily for machinery, equipment and tooling for Company’s manufacturing facilities in the United States and Switzerland.

The Company’s most significant investing activities in the first six months of 2007 were the sale of Labsphere which provided $14.3 million in proceeds and capital expenditures of $4.5 million. Included in capital expenditures was $1.8 million related to the renovation costs of the Company’s new corporate headquarters and manufacturing facility in Grand Rapids, Michigan which was placed into service in January 2007. The remaining capital expenditures of $2.7 million were related to recurring capital spending, primarily for machinery, equipment and tooling for Company’s manufacturing facilities in the United States and Switzerland.

Financing Activities

The Company’s principal financing activities were the management of short and long term indebtedness incurred in connection with the acquisitions of Amazys and Pantone as well as the issuance of common stock and shares purchased in the employee stock purchase plan.

In the first quarter of 2006, the Company incurred short-term borrowings of $13.5 million under its former revolving line of credit in connection with the acquisition of its new corporate headquarters and manufacturing facility in Grand Rapids, Michigan. This loan was converted to a mortgage loan in June 2006, secured by the Company’s former headquarters and manufacturing facility in Grandville, Michigan. The mortgage was renewed and extended in October of 2007 during which time the Company made a principal payment of $4.8 million. The mortgage agreement requires monthly interest payments based on LIBOR plus 2.50 percent, with the principal balance due in full on August 30, 2008. In July 2008, the Company entered into a definitive purchase agreement to sell the property for $10.0 million. The purchase agreement provides for a 90 day due diligence period for the buyer to evaluate the property. The buyer has deposited an initial earnest money deposit of $0.2 million with an escrow agent to be applied as a credit to the purchase price at closing. Final closing on the sale will be based on completion of the Buyer’s inspection and due diligence process.

In connection with the Amazys acquisition in July 2006, the Company entered into secured senior credit facilities which provided for aggregate principal borrowings of up to $220 million. The credit facilities consisted of a $160 million first lien loan, which was comprised of a $120 million seven-year term loan and a $40 million five-year revolving line of credit, and a $60 million six-year term second lien loan.

In connection with the Pantone acquisition in October 2007, the Company entered into new secured senior credit facilities which provide for aggregate principal borrowings of up to $415 million and replaced the Company’s previous credit facilities established with the Amazys acquisition. The new credit facilities consist of a $310 million first lien loan, which is comprised of a $270 million five-year term loan and a $40 million five-year revolving line of credit, and a $105 million six-year term second lien loan. Obligations under these credit facilities are secured by essentially all of the tangible and intangible assets of the Company. Both facilities provide variable interest rate options from which the Company selected for interest calculations. The unused portion of the revolving credit facility is subject to a fee of 0.5% per annum.

–31–

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

During the first quarter of 2008, the Company selected the three month LIBOR plus 3.5 percent and 7.5 percent for most of the first and second lien facilities, respectively, as its primary interest rate index. Interest payments on LIBOR based loans are payable on the last day of each interest period, not to exceed three months. As a result of the covenant defaults described below, an interest penalty of 2.0 percent was incurred on all first lien balances, including the unused revolver, beginning in March and interest rates on the first lien debt automatically reset to prime plus 2.5 percent as of the March 2008 reset dates. Interest payments on loans linked to the prime rate are required to be paid on a scheduled quarterly basis. As of June 28, 2008, the Company had drawn $16.5 million against the revolving line of credit. Further draws on the line of credit are currently not allowed due to the Company’s default situation. Should further draws on the line become available the total available funds will be reduced by the outstanding balance on the Company’s mortgage loan.

The credit facilities contain certain operational and financial covenants regarding the Company’s ability to create liens, incur indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates, incur capital expenditures beyond prescribed limits, deliver certain reports and information, and meet certain financial ratios. On April 4, 2008, the Company announced that it was not in compliance with certain covenants under its secured credit facilities. The Company is actively engaged in discussions with the lenders to amend certain terms of its credit arrangements to allow for greater operating flexibility. The Company has reclassified its long-term debt to current liabilities until such time as new credit agreement terms and covenants are established. Further draws on the Company’s revolving line of credit would require the approval of the first lien lenders.

During the first quarter of 2008, the Company utilized interest rate swap agreements designated as cash flow hedges of the outstanding variable rate borrowings of the Company. These agreements resulted in the Company paying or receiving the difference between three month LIBOR and fixed interest rates at specified intervals, calculated based on the notional amounts. The interest rate differential to be paid or received was accrued as interest rates changed and was recorded as interest income or expense. Under SFAS 133, these swap transactions were designated as cash flow hedges, therefore the effective portion of the derivative’s gain or loss was initially recorded as a component of accumulated other comprehensive income, net of taxes, and subsequently reclassified into earnings when the hedged interest expense affected earnings.

On April 21, 2008, these interest rate swap agreements were terminated by the Company. The fair value of the swap arrangements as of the termination date was a liability of $12.1 million (the Settlement Amount). The Company is currently in negotiations regarding payment terms for the Settlement Amount. The termination of the swap arrangements resulted in an additional event of default under the Company’s secured credit facilities. The Company has reclassified its long-term derivative financial instruments liability to current liabilities until payment terms are established. The swap liability is accruing interest, which has been included in the derivative financial instruments line on the Company’s Condensed Consolidated Balance Sheet. Interest related to the swap liability totaled $0.1 million through June 28, 2008.

During the quarter ended March 29, 2008, the Company paid net interest settlements of $0.2 million. Portions of these interest rate swaps became ineffective during the first quarter of 2008 due to an interest rate floor on a portion of the Company’s debt that restricted the interest rate on the debt from floating to LIBOR. Losses on the ineffective portion of these hedges were reclassified from other comprehensive income to interest expense during the first quarter. No cash settlements were made during the second quarter of 2008. Due to termination of the swap contracts in April, related accumulated other comprehensive income balances have been frozen and will be recognized as interest expense over the period of the hedged cash flows. Interest expense recorded related to the terminated swaps during the six months ended June 28, 2008 totaled $3.2 million, which included first quarter cash payments of $0.2 million, accrued interest on the swap liability of $0.1 million, as well as $2.9 million of accumulated other comprehensive income recognized as interest expense related to ineffectiveness and post-termination reclassifications of second quarter accumulated other comprehensive income balances.

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Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

For the six months ended June 28, 2008, the Company issued 27,343 shares of common stock in connection with purchases under the Employee Stock Purchase Plan, which generated $0.09 million of cash and granted 196,719 shares under the Company’s Restricted Stock Plan. During the first six months of 2007, the Company issued 270,127 shares of common stock in connection with option exercises and purchases under the Employee Stock Purchase Plan, which generated $2.8 million of cash. In addition, 196,626 shares were granted under the 2006 Omnibus Stock Plan and 19,020 shares were issued in connection with the completion of the Amazys acquisition.

On January 8, 2007, the Company announced the Board of Directors decision to suspend payment of its quarterly dividend of $.025 effective immediately. This decision was made to create additional liquidity to speed repayment of borrowings related to the Amazys acquisition and help fund future product development initiatives. Although the Board does not anticipate reinstating the dividend payment it will continue to reevaluate the policy on an on-going basis.

The Company is in discussions and negotiations with its lenders regarding its covenant non-compliance under its secured credit facilities. The Company is in covenant default and does not have a forbearance agreement in place. Further draws on the Company’s revolving line of credit require the approval of the lenders under these facilities.

Acquisition of Pantone

On October 24, 2007, the Company completed its acquisition of Pantone for a purchase price of $174.4 million plus transaction costs. A working capital adjustment of $0.3 million was made in the second quarter of 2008, decreasing the cash consideration amount to $174.1 million.

The following table summarizes the aggregate consideration paid for the acquisition (in thousands):

Cash consideration	$	174.1
Transaction costs		1.8
Total acquisition consideration	$	175.9

The transaction was funded with cash, financed through new borrowings. Total cash acquired with the Pantone purchase was $0.7 million.

Assets acquired and liabilities assumed in the acquisition were recorded on the Company’s Consolidated Balance Sheets based on their estimated fair values as of the date of the acquisition. Results of operations have been included in the Company’s Consolidated Statements of Operations since the date of the acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed was allocated to goodwill. Pantone is included in the Company’s Color Standards segment; therefore all of the Goodwill recorded in the acquisition has been allocated to that segment. The purchase price allocation is preliminary and a final determination of required purchase accounting adjustments will be made upon finalization of working capital adjustments, asset valuations and tax structuring decisions, as well as the completion of the integration process. Revisions to the fair values, which may be significant, will be recorded by the Company as further adjustments to the purchase price allocation.

–33–

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

Founders’ Shares Redemption Program and Life Insurance Policies

During 1998, the Company entered into agreements with its founding shareholders for the future repurchase of 4.5 million shares of the Company’s outstanding stock. The agreements were terminated in November 2004. At that time, 3.4 million shares remained subject to repurchase. Prior to their termination, the agreements required stock repurchases following the later of the death of each founder or his spouse. The cost of the repurchase agreements was to be funded by $160.0 million of proceeds from life insurance policies the Company purchased on the lives of certain of these individuals.

In June 2005, the Company entered into agreements with two life settlement providers for the sale of three life insurance policies owned by the Company with a total face value of $30.0 million. The Company received proceeds of $6.5 million, net of closing costs, from the sale of these policies. At June 28, 2008, the Company’s remaining life insurance portfolio consisted of eleven policies with a face value of $130.0 million.

Under provisions of the life insurance policies originally purchased to fund the Founders’ Shares Redemption Program, the Company is allowed to determine the timing and amount of premium payments. Premiums on the remaining policies total $3.5 million per year. The Company elected not to make these premium payments for 2007 and no payments have been made through June 28, 2008. This election has not materially impacted the cash surrender values during this time, nor is it expected to affect payment of future benefits under the policies. The Company continues to review its options with regard to the future of the remaining policies.

Corporate Headquarters

On February 14, 2006, the Company completed the purchase of its new corporate headquarters and manufacturing facility in Grand Rapids, Michigan, for $13.4 million. Funds for the purchase were drawn from the Company’s revolving line of credit which was subsequently refinanced with a mortgage loan on the Company’s prior corporate headquarters in Grandville. This facility is approximately 375,000 square feet and is located ten miles from the Company’s former headquarters. The Company relocated its headquarters to the facility in Grand Rapids during the first quarter of 2007.

In July 2008, the Company entered into a definitive purchase agreement to sell the Grandville property for $10.0 million.

Discontinued Operations

On February 7, 2007, the Company completed the sale of its Labsphere subsidiary to Halma Holdings plc (Halma). Labsphere, which is based in North Sutton, New Hampshire, provides integrated spheres and systems as well as reflectance materials to the light measurement markets. This divestiture is part of the Company’s ongoing strategy to focus resources on its core color-related businesses. Under the terms of the agreement, Halma acquired all of the outstanding Labsphere stock for $14.3 million in cash, subject to certain closing adjustments. Proceeds from the sale were used to reduce the principal balance of the Company’s first lien credit facility.

The Company recorded a net gain on the sale of $7.6 million during the six months ended June 28, 2008, which is presented as a gain on sale of discontinued operations in the Condensed Consolidated Statement of Operations. The results of operations for the Labsphere subsidiary through the date of sale were reported within discontinued operations in the accompanying statements of operations. In accordance with SFAS 144,Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), the Company has also reclassified the prior year statement of operations to present the results of Labsphere within discontinued operations.

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Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company strives to report its financial results in a clear and understandable manner. It follows accounting principles generally accepted in the United States in preparing its consolidated financial statements, which requires management to make certain estimates and apply judgments that affect its financial position and results of operations. There have been no material changes in the Company’s policies or estimates since December 29, 2007.

The preparation of financial statements in accordance with generally accepted accounting principles in the United States requires management to adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In some instances, there may be alternative policies or estimation techniques that could be used. Management maintains a thorough process to review the application of accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information.

NEW ACCOUNTING STANDARDS

See Note 2 for Recent accounting pronouncements and their expected impact on the Company’s consolidated financial statements.

OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

The Company has no significant off balance sheet transactions other than operating leases for equipment, real estate, and vehicles.

Management has discussed the development and selection of the Company’s accounting policies with the Audit Committee of the Board of Directors

–35–

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to a variety of risks including foreign currency exchange fluctuations, and market volatility in its derivative and insurance portfolios. In the normal course of business, the Company employs established procedures to evaluate its risks and take corrective actions when necessary to manage these exposures.

The Company does not trade in financial instruments for speculative purposes.

Interest Rates

The Company is subject to interest rate risk principally in relation to variable-rate debt. The Company previously utilized interest rate swap contracts to manage the potential variability in interest rates associated with debt incurred in connection with the acquisitions of Pantone and Amazys. As of March 29, 2008, the combined notional amount of outstanding swap agreements was $336.1 million. These agreements were terminated by the Company on April 21, 2008. These swap agreements have not been replaced and, as a result, the Company does not have any interest rate swap agreements in effect. The fair value of terminated interest rate swaps $12.2 million, including interest, as of June 28, 2008. As of June 28, 2008, the fair value of the derivative financial instruments was recorded in current accrued liabilities.

A hypothetical 25 basis point increase in interest rates during the six months ended June 28, 2008 would have increased interest expense $0.5 million as reported in the consolidated financial statements.

Foreign Exchange

Foreign currency exchange risks arise from transactions denominated in a currency other than the entity’s functional currency and from foreign denominated transactions translated into U.S. dollars. The Company’s largest exposures are to the Euro and Swiss Franc. As these currencies fluctuate relative to the dollar, it may cause profitability to increase or decrease accordingly. The hypothetical effect on net income caused by a 10% change in quoted currency exchange rate would be approximately $0.8 million for the six months ended June 28, 2008.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s senior management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this quarterly report (the Evaluation Date). Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that the Company’s disclosure controls and procedures were effective such that the information relating to the Company, including consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (SEC) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting that occurred during the quarter ended June 28, 2008 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II OTHER INFORMATION

Items 1. Legal Proceedings

None

Item 1A. Risk Factors

The Company has defaulted on its credit facilities and does not have a forbearance agreement in place.

The Company finances its operations through borrowings under its revolving credit facilities and also through cash generated by operating activities. The Company’s credit facilities contain certain operational and financial covenants regarding its ability to create liens, incur indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates, incur capital expenditures beyond prescribed limits, deliver certain reports and information, and meet certain financial ratios. On April 4, 2008, the Company announced that it was not in compliance with certain covenants under its credit facilities, and was actively engaged in discussions with the lenders to amend certain terms of its credit arrangements to allow for greater operating flexibility. The Company is still in discussions with its lenders and currently does not have a forbearance agreement in place. The Company can provide no assurance that current discussions will result in a forbearance agreement or any amendments to the credit agreements. The Company’s lenders could accelerate the Company’s indebtedness and exercise any available rights and remedies. If the Company were able to successfully negotiate a forbearance agreement, it may be required to pay significant amounts to its lenders to obtain their agreement to forbear exercising their rights and remedies. In addition, any forbearance agreement would have a limited duration and any future failures to comply with the covenants under the Company’s credit facilities could result in further events of default which, if not cured or waived, could trigger prepayment obligations.

The Company’s planned operations require additional liquidity that may not be available, which could have a negative effect on the Company’s business, its results of operations and financial condition.

The Company’s planned operations require additional liquidity that may not be available. Further draws on the Company’s revolving line of credit requires the approval of the lenders under these facilities. If the Company’s lenders accelerate its obligations, the Company would be unable to repay its obligations under its credit facilities. If the Company is unable to obtain favorable amendments to its credit facilities, it will seek to refinance its credit facilities but it cannot give any assurance that it will be successful in obtaining such financing or obtaining it on acceptable terms. If the Company’s debt cannot be refinanced or restructured, the Company’s lenders could pursue remedies, including: (1) penalty rates of interest; (2) demand for immediate repayment of the debt; and/or (3) the foreclosure on any of the Company’s assets securing the debt. If this were to happen and the Company were liquidated or reorganized after payment to the Company’s creditors, there may not be sufficient assets remaining for any distribution to the Company’s stockholders.

The Company might require additional capital to support business growth or to reduce its leverage. Such capital could be expensive or result in dilution to the Company’s security holders. If the Company is not able to obtain such capital, there may be a material adverse effect on its business and financial results.

The Company intends to continue to make investments to support its business growth and may require additional funds to respond to business challenges or opportunities, including the need to develop new products and technologies. In addition, the Company may engage in equity financings to reduce its leverage. If the Company raises additional funds through further issuances of equity or other securities evidencing the right to acquire equity, its existing security holders could suffer significant dilution, and any new equity securities the Company issues could have rights, preferences and privileges superior to those of holders of its common stock. Due to restrictive covenants in its current credit agreements and the seniority of the security interests granted to the lenders, the Company may not be able to obtain additional financing on acceptable terms, if at all. If the Company is unable to obtain adequate financing or financing on terms satisfactory to it, when the Company requires it, the Company’s ability to continue to support its business growth and to respond to business challenges could be significantly limited.

–37–

Item 1A. Risk Factors - continued

Any debt financing secured by the Company in the future could involve additional restrictive covenants relating to its capital raising activities and other financial and operational matters, which may make it more difficult for it to obtain additional capital and to pursue business opportunities.

The Company’s liquidity position imposes significant risks to its operations.

The Company’s liquidity position may adversely affect its relationships with its creditors, suppliers, customers and employees. Because of the public disclosure of the Company’s liquidity constraints, its ability to maintain normal credit terms with its suppliers may become impaired. Customers’ perception of the Company’s financial position may adversely affect their business dealings with the Company. The Company may also have difficulty maintaining its ability to attract, motivate and retain management and other key employees. Failure to maintain any of these important relationships could adversely affect the Company’s business, financial condition and results of operations.

The Company has a high degree of leverage and significant debt service obligations.

The debt service requirements on the Company’s $400.0 million in debt amounts to approximately $3.0 million per month. The Company’s high level of debt and debt service requirements have several effects on its current and future operations, including the following: (i) the Company will need to devote a significant portion of its cash flow to service debt, reducing funds available for operations and future business opportunities and increasing its vulnerability to adverse economic and industry conditions and competition; (ii) the Company’s leveraged position increases its vulnerability to competitive pressures; (iii) the covenants and restrictions contained in the Company’s credit agreements restricts it ability to borrow additional funds, dispose of assets, issue additional equity or pay dividends on or repurchase common stock; and (iv) funds available for working capital, capital expenditures, acquisitions and general corporate purposes are limited. Any additional default under the Company’s credit agreements could have a significant adverse effect on its business and the market value of its common stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

–38–

Item 3. Defaults Upon Senior Securities

In connection with the October 24, 2007 acquisition of Pantone, Inc. (the Acquisition), the Company entered into secured senior credit facilities which provide for aggregate principal borrowings of up to $415 million and replace the Company’s previous credit facilities established with the Amazys acquisition. The credit facilities consist of a $310 million first lien loan, which is comprised of a $270 million five-year term loan and a $40 million five-year revolving line of credit, and a $105 million six-year term second lien loan. Obligations under these credit facilities are secured by essentially all of the tangible and intangible assets of the Company. Both facilities provide variable indices from which the Company may select for interest calculations. As of March 29, 2008, the Company had selected the three month LIBOR plus 350 and 750 basis points for most of the first and second lien facilities, respectively, as its primary interest rate index. Interest payments on LIBOR based loans are payable on the last day of each interest period, not to exceed three months. A small portion of the credit facilities are tied to the prime rate and require interest payments on a scheduled quarterly basis. As a result of the defaults described below, the lenders under the first and second lien facilities may require that interest accrue on the outstanding loans at the prime rate plus 250 and 650 basis points for all or a portion of the first and second lien facilities, respectively, and/or require an additional 200 basis points under each facility as default interest. Alternatively, the lenders may limit the interest periods available for LIBOR based loans. The unused portion of the revolving credit facility is subject to a fee of 0.5% per annum. As of June 28, 2008, the Company had drawn $16.5 million against the revolving line of credit. In addition, the $8.7 million mortgage liability is treated as a use of the $40 million line of credit.

The credit facilities contain certain operational and financial covenants regarding the Company’s ability to create liens, incur indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates, incur capital expenditures beyond prescribed limits, delivery of certain reports and information, and meet certain financial ratios. On April 4, 2008, the Company announced that it was not in compliance with certain covenants under its secured credit facilities, and was engaged in discussions with the lenders to amend certain terms of its credit arrangements to allow for greater operating flexibility. Further draws on the Company’s revolving line of credit would require the approval of the first lien lender. The Company has reclassified its long-term debt to current liabilities until such time as new credit agreement terms and covenants are established.

The Company utilizes interest rate swap contracts to manage the potential variability in interest rates associated with debt incurred in connection with the Acquisition. As of March 29, 2008, the combined notional amount of outstanding swap agreements was $336.1 million. These agreements were terminated by the Company on April 21, 2008. The fair value of outstanding interest rate swaps as of June 28, 2008 was $12.2 million, including interest (the Settlement Amount). The Company is currently in negotiations regarding payment terms for the Settlement Amount. The termination of the swap arrangements results in an additional event of default under the Company’s secured credit facilities. As of June 28, 2008, the Company has reclassified its long-term derivative financial instruments liability to current liabilities until discrete payment terms are established.

Item 5. Other Information

None

–39–

Item 4 Submission of Matters to a Vote of Security Holders

On May 28, 2008, the Company held the annual meeting of its Shareholders to vote on the election of directors and proposed amendment to the Company’s articles of incorporation to increase the authorized common shares from 50,000,000 to 100,000,000. The results of the voting were as follows:

1. Election of the following directors to three-year terms expiring in 2011:

Term to Expire in 2011	Affirmative Votes	Votes Withheld
Stanley W. Cheff	17,050,933	6,283,841
Dr. Massimo S. Lattmann	17,097,560	6,237,214
John E. Utley	18,069,248	5,265,526

2. Approval of increase in authorized common stock from 50,000,000 to 100,000,000 shares

	For	Against
Total Shares Voted	17,624,642	5,642,223

–40–

PART II OTHER INFORMATION

Item 6 Exhibits

(a) Exhibit Index

10(35)	Amendment Mortgage and Security Agreement, dated June 30, 2006, between X-Rite, Incorporated and Fifth Third Bank for the quarter ended June 28, 2008 (Commission File No. 0-14800)
31.1	Certification of the Chief Executive Officer and President of X-Rite, Incorporated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
31.2	Certification of the Chief Financial Officer of X-Rite, Incorporated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

	X-RITE, INCORPORATED
August 7, 2008	/s/ Thomas J. Vacchiano Jr.
	Thomas J. Vacchiano Jr.
	Chief Executive Officer
August 7, 2008	/s/ David A. Rawden
	David A. Rawden
	Chief Financial Officer

–41–