X Rite (XRIT) 10-Q 2008 Q3 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 September 27, 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 filer  x
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 November 1, 2008, the number of outstanding shares of the registrant’s common stock, par value $.10 per share, was 77,317,883.

X-RITE, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

	September 27, 2008			December 29, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	50,135		$	20,300
Accounts receivable, less allowance of $2,450 in 2008 and $2,328 in 2007		37,974			47,050
Inventories		44,811			61,839
Deferred income taxes		2,430			2,571
Assets held for sale		7,614			7,614
Deferred equity costs		4,330			—
Prepaid expenses and other current assets		8,250			6,318
		155,544			145,692
Property plant and equipment:
Land		2,796			2,796
Buildings and improvements		26,038			25,723
Machinery and equipment		28,137			27,250
Furniture and office equipment		24,001			22,596
Construction in progress		2,699			1,614
		83,671			79,979
Less accumulated depreciation		(37,997	)		(32,619	)
		45,674			47,360
Other assets:
Goodwill		292,453			288,208
Other intangibles, net		107,300			123,314
Cash surrender values of founders’ life insurance		8,870			21,168
Capitalized software, net of accumulated amortization of $8,628 in 2008 and $6,121 in 2007		8,076			7,805
Deferred financing costs, net of accumulated amortization of $2,816 in 2008 and $527 in 2007		15,873			15,786
Deferred income taxes		30			2,428
Other noncurrent assets		2,916			3,063
		435,518			461,772
	$	636,736		$	654,824

The accompanying notes are an integral part of these statements.

2

X-RITE, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) – Continued

(in thousands)

	September 27, 2008		December 29, 2007
LIABILITIES AND SHAREHOLDERS’ INVESTMENT
Current liabilities:
Short-term borrowings	$	8,680	$	8,680
Current portion of long-term debt		396,312		2,700
Accounts payable		13,788		17,724
Accrued liabilities:
Payroll and employee benefits		14,034		17,019
Restructuring		2,238		2,134
Income taxes		8,897		5,928
Deferred income taxes		6,297		6,090
Derivative financial instruments		12,324		81
Interest		10,015		1,368
Other		10,657		10,740
		483,242		72,464
Long-term liabilities:
Long-term debt, less current portion		—		378,300
Restructuring		987		2,232
Long-term compensation and benefits		1,276		1,541
Derivative financial instruments		—		4,862
Deferred income taxes		15,009		8,839
Accrued income taxes		5,925		1,713
Other		917		569
		24,114		398,056
Shareholders’ investment:
Common stock		2,917		2,903
Additional paid-in capital		113,225		109,439
Retained earnings		13,141		66,314
Accumulated other comprehensive income		97		5,648
		129,380		184,304
	$	636,736	$	654,824

The accompanying notes are an integral part of these statements.

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X-RITE, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share data)

	Three Months Ended						Nine Months Ended
	September 27, 2008			September 29, 2007			September 27, 2008			September 29, 2007
Net Sales	$	61,283		$	55,561		$	200,663		$	174,023
Cost of sales:
Products sold		25,930			24,678			83,518			70,470
Inventory valuation adjustment		3,845			—			11,536			—
Restructuring and other related charges		22			25			369			162
		29,797			24,703			95,423			70,632
Gross profit		31,486			30,858			105,240			103,391
Operating expenses:
Selling and marketing		15,486			13,961			50,482			41,935
Research, development and engineering		6,868			8,357			23,239			26,682
General and administrative		9,037			6,350			27,183			17,909
Restructuring and other related charges		(162	)		1,747			5,602			4,771
		31,229			30,415			106,506			91,297
Operating income (loss)		257			443			(1,266	)		12,094
Interest expense		(12,377	)		(4,275	)		(35,597	)		(13,245	)
Gain (loss) on sale of investment		—			—			(62	)		837
Other, net		896			(982	)		13			(672	)
Loss before income taxes		(11,224	)		(4,814	)		(36,912	)		(986	)
Income taxes (benefit)		4,243			(1,952	)		16,260			(445	)
Net loss from continuing operations		(15,467	)		(2,862	)		(53,172	)		(541	)
Discontinued operations
Net loss from operations		—			—			—			(39	)
Net gain on disposal		—			—			—			7,596
		—			—			—			7,557
Net income (loss)	$	(15,467	)	$	(2,862	)	$	(53,172	)	$	7,016
Basic and diluted net income (loss) per share:
Loss from continuing operations	$	(0.53	)	$	(0.10	)	$	(1.83	)	$	(0.02	)
Discontinued operations
Net gain on disposal		—			—			—			0.26
Net income (loss)	$	(0.53	)	$	(0.10	)	$	(1.83	)	$	0.24

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)

	Nine Months Ended
	September 27, 2008			September 29, 2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(53,172	)	$	7,016
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		5,840			4,963
Amortization of intangible assets		15,893			11,237
Amortization of deferred financing costs		2,289			936
Allowance for doubtful accounts		197			378
Deferred income taxes (credit)		4,167			(1,042	)
Gain on sale of property and equipment		(17	)
Gain on sale of business, excluding income tax benefit		—			(6,367	)
(Gain) loss on sale of investment		62			(837	)
Share-based compensation		2,968			2,652
Excess tax benefit from stock-based compensation		—			(163	)
Tax benefit from stock options exercised		—			409
Restructuring (including amortization expense of $0 in 2008 and $109 in 2007)		290			2,383
Inventory valuation adjustment		11,536			—
Interest rate swap expense		4,411			—
Other		39			(59	)
Changes in operating assets and liabilities, net of effects from from acquisitions:
Accounts receivable		9,531			5,561
Inventories		4,687			(7,020	)
Prepaid expenses and other current assets		(1,883	)		(4,095	)
Accounts payable		(4,237	)		(591	)
Income taxes		8,120			(134	)
Other current and non-current liabilities		4,404			(7,718	)
Net cash provided by operating activities		15,125			7,509
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(3,674	)		(6,158	)
Investment in Founders’ life insurance, net		1,635			(246	)
Increase in other assets		(3,036	)		(2,427	)
Proceeds from sales of property and equipment		3			4,200
Proceeds from sale of business		—			14,314
Proceeds from surrender of life insurance policies		10,663
Acquisitions, net of cash acquired		249			(600	)
Other		—			81
Net cash provided by investing activities		5,840			9,164
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt		20,500			2,500
Payment of long-term debt		(5,188	)		(18,785	)
Debt issuance costs		—			(100	)
Debt amendment costs		(2,376	)		—
Equity issuance costs		(3,139	)		—
Issuance of common stock		133			3,319
Excess tax benefit from stock-based compensation		—			163
Net cash provided by (used for) financing activities		9,930			(12,903	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		(1,060	)		648
NET INCREASE IN CASH AND CASH EQUIVALENTS		29,835			4,418
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		20,300			12,876
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	50,135		$	17,294

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 September 27, 2008 and the results of its operations and its cash flows for the three and nine month periods ended September 27, 2008 and September 29, 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 September 27, 2008 and December 29, 2007 the Company recognized a liability of $12.3 million and $4.9 million, respectively, for the fair value of the derivative financial instruments related to interest rate swap agreements. 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

(Unaudited)

NOTE 2—NEW ACCOUNTING STANDARDS – continued

Effective at the beginning of fiscal year ending January 3, 2009, we will adopt 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

(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					Nine Months Ended
	September 27, 2008			September 29, 2007		September 27, 2008			September 29, 2007
Net Sales:
Color Measurement	$	51,174		$	55,561	$	167,108		$	174,023
Color Standards		10,109			—		33,555			—
Total	$	61,283		$	55,561	$	200,663		$	174,023
Depreciation and Amortization:
Color Measurement	$	5,620		$	5,325	$	16,490		$	16,200
Color Standards		1,957			—		5,243			—
Total	$	7,577		$	5,325	$	21,733		$	16,200
Operating Income (Loss):
Color Measurement	$	2,146		$	443	$	3,051		$	12,094
Color Standards		(1,889	)		—		(4,317	)		—
Total	$	257		$	443	$	(1,266	)	$	12,094
Capital Expenditures:
Color Measurement	$	1,402		$	1,672	$	3,340		$	6,158
Color Standards		142			—		334			—
Total	$	1,544		$	1,672	$	3,674		$	6,158
	September 27, 2008			December 29, 2007
Total Assets:
Color Measurement	$	460,356		$	468,609
Color Standards		176,380			186,215
Total	$	636,736		$	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):

	September 27, 2008		December 29, 2007
Raw materials	$	14,376	$	16,418
Work in process		15,958		28,532
Finished goods		14,477		16,889
Total	$	44,811	$	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 is recognized in cost of sales ratably as the inventory is sold. As of September 27, 2008 and December 29, 2007 the unrecognized balance of the inventory write-up was $1.3 million and $12.8 million, respectively.

NOTE 5—ACQUISITIONS

Pantone, Inc.

On October 24, 2007, the Company completed its acquisition of Pantone for an initial 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		1,738
Total acquisition consideration	$	175,868

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 was finalized during the third quarter of 2008 and a final determination of all purchase accounting adjustments was made upon finalization of asset valuations and acquisition costs.

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		$	32,143
Property, plant and equipment			2,319
Goodwill			90,740
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)	9,000
Total intangible assets			69,290
Other assets			130
Total assets acquired			194,622
Current liabilities			(13,923	)
Long-term liabilities			(4,831	)
Total liabilities assumed			(18,754	)
Net assets acquired		$	175,868

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. This adjustment is being recognized in cost of sales ratably as the inventory is sold. As of September 27, 2008, the Company has recognized $14.1 million related to the fair value valuation of Pantone’s inventory. During the three and nine months ended September 27, 2008 the Company recognized $3.9 and $11.6 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 September 29, 2007			Nine months ended September 29, 2007
Net sales	$	67,327		$	207,247
Net loss		(13,267	)		(20,989	)
Basic and diluted net loss per share	$	(0.46	)	$	(0.73	)

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 were 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
Charges incurred		(352	)		—			—			—			(352	)
Amounts paid or utilized		(713	)		—			—			—			(713	)
Balance at September 27, 2008	$	2,517		$	—		$	—		$	—		$	2,517

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 100 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			Asset Write Downs			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
Charges incurred		44			21			(79	)		(14	)
Amounts paid or utilized		(535	)		(21	)		(617	)		(1,173	)
Balance at September 27, 2008	$	444		$	—		$	86		$	530

October 2008 Restructuring Plan

On October 30, 2008, the Company announced that it will consolidate its global manufacturing facilities through the closure of the Company’s Brixen, Italy facility (October 2008 restructuring plan). The October 2008 restructuring plan includes 22 headcount reductions, elimination of product lines, as well as additional cost of sales and operating cost reductions. As part of the October 2008 restructuring plan the Company is relocating the manufacturing of several product lines from Italy to Grand Rapids, Michigan. Prior to September 27, 2008, certain individuals signed severance agreements in connection with this restructuring plan that represented legal obligations of the Company. The following table summarizes the severance accrual balances related to these restructuring actions (in thousands):

	Severance		Other			Total
Balance at June 28, 2008	$	—	$	—		$	—
Charges incurred		178		32			210
Amounts paid or utilized		—		(32	)		(32	)
Balance at September 27, 2008	$	178	$	—		$	178

Included in the purchase accounting for the Amazys acquisition was $0.6 million in accruals related to the closure of this facility which have been fully utilized in connection with this restructuring plan as of September 27, 2008.

Other Related Charges

Incremental costs have been 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. 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. Other related charges were nominal for the three months ended September 27, 2008 and totaled $0.5 million for the nine months ended September 27, 2008. For the three and nine month periods ended September 29, 2007, other related charges totaled $1.3 million and $2.6 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 Company did not incur any charges related to discontinued operations for the three months ended September 29, 2007. The components of the income (loss) from discontinued operations for the nine months ended September 29, 2007 are presented below (in thousands):

	Nine Months Ended September 29, 2007
Net sales	$	793
Loss from operations before income taxes	$	(52	)
Income tax benefit		13
Loss from operations before income taxes	$	(39	)
Gain on disposal	$	6,367
Income tax benefit on disposal		1,229
Net gain on disposal	$	7,596

There were no assets or liabilities of discontinued operations reported in the Condensed Consolidated Balance Sheets as of September 27, 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 nine months ended September 27, 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	)		8,291		4,355
Foreign currency adjustments		(109	)		—		(109	)
September 27, 2008	$	201,714		$	90,740	$	292,453

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 income tax assets acquired in the Amazys acquisition which increased goodwill. During the second quarter ended June 28, 2008, the Company finalized the tax contingencies associated with these deferred income tax assets, and accordingly, reduced goodwill by $3.9 million. In connection with the Pantone acquisition in October 2007, the Company recorded $90.7 million of goodwill and $69.3 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 nine months ended September 27, 2008 (in thousands):

	December 29, 2007		Additions		Amortization			Change in Preliminary Valuation Assumptions			Foreign Currency Adjustments			September 27, 2008
Technology and patents	$	49,259	$	—	$	(5,870	)	$	(6,200	)	$	—		$	37,189
Customer relationships		37,881		—		(3,194	)		4,100			—			38,787
Trademarks and trade names		23,507		—		(733	)		3,610			1			26,385
Covenants not to compete		12,667		—		(3,324	)		(4,400	)		(4	)		4,939
Total	$	123,314	$	—	$	(13,121	)	$	(2,890	)	$	(3	)	$	107,300

Included in intangible assets are $19.7 million in Trademarks and trade names with an indefinite life. Estimated amortization expense for the remaining intangible assets as of September 27, 2008, for each of the succeeding years is as follows (in thousands):

Remaining 2008	$	4,290
2009		15,912
2010		11,959
2011		11,793
2012		11,793
Thereafter		31,853

14

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

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

Mortgage Loan

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 August 2008, the mortgage agreement was amended and extended again. Under the terms of the new amendment, the Company is required to reduce the outstanding principal of $8.7 million to $5.2 million, a reduction of $3.5 million, by December 31, 2008, with the remaining outstanding principal balance due in full on October 24, 2012. The Company will fund the December payment with proceeds from the equity capital raised on October 28, 2008 (see Note 19 Subsequent Events for further discussion). The amendment also changed the monthly interest payment from LIBOR plus 2.5 percent to LIBOR plus 4.0 percent.

In July 2008, the Company entered into a definitive purchase agreement to sell the property for $10.0 million. The purchase agreement provided for a 90 day due diligence period for the buyer to evaluate the related property. The sale was conditional upon zonings and finding lessees, during the third quarter of 2008 the buyer executed its right to terminate the agreement and forfeited $0.05 million of the earnest money deposit to the Company. On October 28, 2008, the Company entered into a non-binding Letter of Intent (LOI) to sell this property for $7.25 million. The LOI provides for a 60 day due diligence period to evaluate the property and includes an initial earnest money deposit of $0.05 million that will be applied to the purchase price upon closing. Final closing on the sale will be based on completion of the Buyer’s inspection and due diligence process, and is expected to occur during the first quarter of 2009.

First and Second Lien Term Loans

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. In connection with the Pantone acquisition in October 2007, the Company entered into new secured senior credit facilities which initially provided for aggregate principal borrowings of up to $415 million and replaced the Company’s previous credit facilities established with the Amazys acquisition. The credit facilities initially consisted of a $310 million first lien loan, which was 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.

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. As a result of the defaults, borrowings on the Company’s revolving line of credit were frozen and default interest was charged on the first lien. On August 20, 2008 the Company entered into forbearance and amendment agreements with the first and second lien lender groups, that provided for forbearance on the defaults through the closing of the Company’s recapitalization, at which time the lenders agreed to amend the credit facilities to provide new financial covenants and interest rates, with the amendments effective on the date of closing of the recapitalization. The Company was in compliance with the new debt covenants upon closing of the recapitalization transaction (see Note 19 Subsequent Events for further discussion).

During the first quarter of 2008, the Company selected 3-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 above, an interest penalty of 2.0 percent was incurred and expensed 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. During the forbearance period, which began August 20, 2008, the interest rates on the first lien must remain at prime plus 4.5 percent, which includes the 2.0 percent default penalty, and interest rates on the second lien may be selected from LIBOR plus 9.5 percent or prime plus 8.5 percent. As of September 27, 2008 the prime rate was 5.0 percent.

15

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

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

The forbearance agreements also allowed the Company to draw an additional $10 million on its existing revolving line of credit. This amount was drawn by the Company in September 2008. As of September 27, 2008, the Company had drawn $26.5 million against the revolving line of credit. As of September 27, 2008, further draws on the line of credit were not allowed under the terms of the forbearance and amendment agreements. Upon the subsequent closing of the recapitalization and effectiveness of the amendments further draws on the line became available, but the total available funds will be reduced by the outstanding balance on the Company’s mortgage loan.

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.

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.

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). Payment terms have been negotiated 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 and paid the outstanding balance upon closing of the Company’s recapitalization transaction (see Note 19 Subsequent Events for further information on the recapitalization). The swap liability continued to accrue interest through September 27, 2008 and until subsequent closing of the recapitalization, 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 $0.2 million through September 27, 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 original hedged cash flows (which extends through 2012). Interest expense recorded related to the terminated swaps during the nine months ended September 27, 2008 totaled $4.7 million, which includes interest accrued on the terminated swap liability of $0.2 million.

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 did not grant any stock options or restricted stock awards during the three months ended September 27, 2008. The Company used the following assumptions in valuing employee options granted during the nine months ended September 27, 2008 and the three and nine months ended September 29, 2007:

	Three Months Ended September 29, 2007		Nine Months Ended
			September 27, 2008		September 29, 2007
Dividend yield	0	%	0	%	0	%
Volatility	52	%	48 -55	%	52 -54	%
Risk-free interest rates	4.7		2.7 -3.6	%	4.5 -4.8	%
Expected term of options	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 nine months ended September 27, 2008 and September 29, 2007 was as follows (in thousands):

	Three Months Ended					Nine Months Ended
	September 27, 2008		September 29, 2007			September 27, 2008		September 29, 2007
Stock options	$	366	$	564		$	1,303	$	1,461
Restricted stock		430		448			1,602		1,061
Employee stock purchase plan		8		12			23		35
Cash bonus conversion plan		—		32			—		94
		804		1,056			2,928		2,651
Vesting related to restructuring activities		90		(7	)		40		597
Total share-based compensation expense	$	894	$	1,049		$	2,968	$	3,248

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 September 27, 2008, there was unrecognized compensation cost for non-vested share-based compensation of $2.5 million related to options and $2.0 million related to restricted share awards. These costs are expected to be recognized over remaining weighted average periods of 1.78 and 1.44 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 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						Nine Months Ended
	September 27, 2008			September 29, 2007			September 27, 2008			September 29, 2007
Service cost	$	670		$	566		$	2,241		$	1,698
Interest		206			165			616			495
Expected return on plan assets		(275	)		(262	)		(823	)		(786	)
Less contributions paid by employees		(235	)		(191	)		(745	)		(573	)
Net periodic pension cost	$	366		$	278		$	1,289		$	834

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						Nine Months Ended
	September 27, 2008			September 29, 2007			September 27, 2008			September 29, 2007
Net Income (Loss)
Loss from continuing operations	$	(15,467	)	$	(2,862	)	$	(53,172	)	$	(541	)
Discontinued operations
Net loss from operations		—			—			—			(39	)
Net gain on disposal		—			—			—			7,596
Net income (loss)	$	(15,467	)	$	(2,862	)	$	(53,172	)	$	7,016
Weighted-Average Common Shares Outstanding
Basic and diluted		29,160			28,953			29,103			28,819
Basic and Diluted Earnings (Loss) Per Share
Loss from continuing operations	$	(0.53	)	$	(0.10	)	$	(1.83	)	$	(0.02	)
Discontinued operations
Net loss from operations		—			—			—			—
Net gain on disposal		—			—			—			0.26
Net income (loss)	$	(0.53	)	$	(0.10	)	$	(1.83	)	$	0.24

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 3,057,000 and 2,861,000, respectively, for the three month and nine month periods ended September 27, 2008 and 1,364,000 and 1,292,000, respectively, for the three and nine month periods ended September 29, 2007.

NOTE 14—INCOME TAXES

The Company recorded a tax provision of $4.3 million and $16.3 million against pre-tax losses of $11.2 million and $36.9 million, for the three and nine month periods ended September 27, 2008, respectively. The effective tax rate for the quarter and year to date provisions was (38.4) and (44.1) percent, respectively. The income tax provision primarily relates to charges for additional reserves associated with tax contingencies, additional valuation allowances recorded against net deferred tax assets in the U.S. and the tax consequence assosicated with liquidation of certain investments.

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.

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. For the three and nine month periods ended September 27, 2008, the Company accrued interest and penalties of $0.3 and $1.0 million respectively, net of associated tax benefits. For the three and nine month periods ended September 29, 2007, the Company accrued interest and penalties of $0.1 and $0.3 million respectively, net of associated tax benefits.

19

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 14—INCOME TAXES – continued

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 $2.0 million and $0.4 million against pre-tax income from continuing operations of $4.8 million and $1.0 million, for the three and nine month periods ended September 29, 2007, respectively. The effective tax rate for the quarter and year to date provisions was 40.5 and 45.1 percent, respectively. The Company’s effective tax rates were impacted in the third quarter of 2007 by the effect of non-deductible charges related to equity-based compensation and losses attributable to certain foreign and domestic subsidiaries for which tax benefits are not currently available.

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, pension assets, and short-term investments. Comprehensive income (loss) was $(18.0) and $(58.7) million, respectively, for the three month and nine month periods ended September 27, 2008 and $(3.0) and $9.4 million, respectively, for the three and nine month periods ended September 29, 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.

In September 2008, the Company surrendered seven life insurance policies with a total face value of $75.0 million and received a total surrender value of $10.7 million, of which $7.5 million was required to be held in escrow under the Company’s forebearance agreement and was released for use by the Company for general corporate purposes upon closing of the Company’s recapitalization effort (see Note 19 for further discussion). The remaining $3.2 million was used to pay first lien debt. At September 27, 2008, the Company’s remaining life insurance portfolio consisted of four policies with a face value of $55.0 million and a total cash surrender value of $8.9 million.

During October 2008, the Company sold and surrendered three of the four remaining life insurance policies. The total proceeds were $7.1 million. A sale has been agreed upon for the last policy and payment is pending.

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 $1.4 million per year. The Company elected not to make these premium payments for 2007 and no payments have been made through September 27, 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.

20

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

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 September 27, 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. The acquisition of shares in the recapitalization discussed in Note 19 was exempted from triggering the plan.

NOTE 19—SUBSEQUENT EVENTS

On October 28, 2008, shareholders approved a financing initiative to raise $155 million in capital. Proceeds from the capital raise and the sale and surrender of the life insurance policies were used to repay indebtedness under the Company’s First and Second Lien Credit Agreements, settle amounts payable by the Company pursuant to certain interest rate swap agreements, prepay certain amounts of outstanding debt, pay transaction fees and expenses, as well as funding ongoing operations. Under the terms of the capital raise, the Company issued 28.6 million, 9.2 million, and 9.1 million, or a total of 46.9 million shares, of common stock to the three parties involved. As indicated in Note 9, the secured credit facilities amendment became effective upon the recapitalization as well. After giving effect to the amendments to the credit facilities and associated repayments, on October 28, 2008, the Company had approximately $273 million in aggregate principal amount of loans outstanding under its first lien credit agreement, consisting of $179 million of first lien term loans and $27 million of first lien revolving loans, and had $68 million in aggregate principal amount of term loans outstanding under its second lien credit agreement. The obligations in respect of the terminated swap arrangements were paid in full with the proceeds of the recapitalization, and the outstanding principal of the mortgage loan was reduced to $5.2 million. Upon effectiveness of the amendment, the margin above LIBOR for first lien loans is initially 5 percent per annum (which will be subject to adjustment based on the Company’s leverage ratio following the quarter ending March 31, 2009) and for second lien loans is 11.75 percent per annum, of which the Company may elect to pay up to 2.5 percent per annum as PIK interest.

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.

Third Quarter Highlights:

• Achieved third quarter net sales of $61.3 million, a 10.3 percent increase over the third quarter of 2007, as a result of the acquisition of Pantone, Inc.

• Operating expenses, declined by 13.2 percent and 5.9 percent in the third quarter versus the first and second quarters of 2008 respectively, excluding restructuring and other related charges

• Third quarter ending cash and equivalents increased 76.9 percent to $50.1 million as compared to the second quarter 2008

• A $155 million capital raise was announced and successfully completed, along with new lender agreements, on October 28, 2008

22

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Year-to-Date Results

Year to date net sales were $200.7 million, versus $174.0 million for the same period of 2007. Gross margins were 52.4 percent, and included $0.4 million of restructuring charges and $11.6 million related to inventory valuation adjustments made as a result of the acquisition of Pantone, Inc. in the third quarter of 2007 (Pantone). Operating losses totaled $1.3 million and included $5.6 million in restructuring and other related charges. The Company reported a net loss of $53.2 million, or $(1.83) per share, versus net income of $7.0 million, or $0.24 per share, for the same period in 2007, which included a $7.6 million gain associated with discontinued operations.

RESULTS OF OPERATIONS

The following discussion of the Company’s three and nine 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 nine month periods ended September 27, 2008, and September 29, 2007 (in millions):

	Three Months Ended										Nine Months Ended
	September 27, 2008					September 29, 2007					September 27, 2008					September 29, 2007
Net sales	$	61.3		100.0	%	$	55.6		100.0	%	$	200.7		100.0	%	$	174.0		100.0	%
Cost of sales:
Products sold		25.9		42.2	%		24.7		44.4	%		83.5		41.6	%		70.5		40.5	%
Inventory valuation adjustment		3.9		6.4	%		—		0.0	%		11.6		5.8	%		—		0.0	%
Restructuring charges		—		0.0	%		—		0.0	%		0.4		0.2	%		0.1		0.1	%
Gross profit		31.5		51.4	%		30.9		55.6	%		105.2		52.4	%		103.4		59.4	%
Operating expenses		31.2		50.9	%		30.4		54.7	%		106.5		53.1	%		91.3		52.5	%
Operating income (loss)		0.3		0.5	%		0.5		0.9	%		(1.3	)	(0.7	)%		12.1		6.9	%
Interest expense		(12.4	)	(20.2	)%		(4.3	)	(7.7	)%		(35.6	)	(17.7	)%		(13.2	)	(7.6	)%
Other, net		0.9		1.4	%		(1.0	)	(1.8	)%		—		0.0	%		0.1		0.1	%
Income (loss) before taxes		(11.2	)	(18.3	)%		(4.8	)	(8.6	)%		(36.9	)	(18.4	)%		(1.0	)	(0.6	)%
Income taxes		4.3		7.0	%		(1.9	)	(3.4	)%		16.3		8.1	%		(0.4	)	(0.2	)%
Income (loss) from continuing operations		(15.5	)	(25.3	)%		(2.9	)	(5.2	)%		(53.2	)	(26.5	)%		(0.6	)	(0.4	)%
Discontinued operations
Net loss from operations		—		0.0	%		—		0.0	%		—		0.0	%		—		0.0	%
Net gain on disposal		—		0.0	%		—		0.0	%		—		0.0	%		7.6		4.4	%
Net income (loss)		(15.5	)	(25.3	)%		(2.9	)	(5.2	)%		(53.2	)	(26.5	)%		7.0		4.0	%

23

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

Net Sales

Net Sales By Business Unit

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 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 business unit for the three and nine months ended September 27, 2008 and September 29, 2007 (in millions):

	Three Months Ended								Nine Months Ended
	September 27, 2008				September 29, 2007				September 27, 2008				September 29, 2007
Imaging and Media	$	25.9	42.3	%	$	28.1	50.5	%	$	86.1	42.9	%	$	92.1	52.9	%
Industrial		10.0	16.3	%		11.3	20.3	%		33.7	16.8	%		34.4	19.8	%
Retail		4.3	7.0	%		5.2	9.4	%		14.3	7.1	%		16.2	9.3	%
Color Support Services		7.2	11.7	%		6.8	12.2	%		22.3	11.1	%		20.0	11.5	%
Other		3.8	6.2	%		4.2	7.6	%		10.8	5.4	%		11.3	6.5	%
Total Color Measurement		51.2	83.5	%		55.6	100.0	%		167.2	83.3	%		174.0	100.0	%
Color Standards		10.1	16.5	%		—	—			33.5	16.7	%		—	—
Total	$	61.3	100.0	%	$	55.6	100.0	%	$	200.7	100.0	%	$	174.0	100.0	%

Consolidated

Net sales for the three and nine month periods ended September 27, 2008 were $61.3 million and $200.7 million, respectively, an increase of $5.7 million and $26.7 million, respectively, as compared to the same periods in 2007. On a percentage basis the three and nine month net sales increased 10.3 and 15.3 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 results as of the acquisition date, October 24, 2007. The Color Standards segment accounted for approximately $10.1 and $33.5 million in net sales for the three and nine month periods ended September 27, 2008, respectively. The Color Measurement segment’s net sales decreased by $4.4 million and $6.8 million for the three and nine months ended September 27, 2008, respectively, as compared to the same periods in 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 nine month periods ended September 27, 2008, increased $0.8 million and $8.4 million, respectively, or 3.7 percent and 13.5 percent, versus comparable periods in 2007. Net sales in Europe for the three and nine month periods ended September 27, 2008, increased $3.4 million and $13.6 million, respectively, or 14.8 percent and 18.4 percent, respectively, as compared to the same periods in 2007. Net sales in Asia Pacific for the three and nine month periods ended September 27, 2008, increased $1.3 million and $4.6 million, or 11.6 percent and 13.7 percent, respectively, versus comparable periods in 2007. Net sales in Latin America for the three months ended September 27, 2008 increased $0.3 million, or 24.3 percent, versus the same period a year ago, but decreased by a nominal amount for the nine months ended compared to the same period 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 $0.7 million, or 1.0 percent, favorable effect on third quarter 2008 net sales, and a $8.9 million, or 4.3 percent, favorable effect on year to date sales for the period ending September 27, 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, photographic, graphic design and pre-press service bureaus in the imaging industries. The year-over-year sales comparison for Imaging and Media has been impacted by the reclassification of Pantone sales. Prior to the Pantone acquisition, Pantone was an X-Rite distributor whose sales were included in the Imaging and Media business, since the acquisition their sales have been included in the Color Standards Segment and excluded from Imaging and Media business unit. For the three months ended September 27, 2008, the Imaging and Media business recorded a decrease in net sales of $2.2 million, or 7.8 percent, compared with the third quarter of 2007. The decrease was predominiately driven by a decline in OEM business. For the nine month period ended September 27, 2008, Imaging and Media net sales decreased $6.0 million, or 6.5 percent, compared with the similar period in 2007. Included in the 2007 sales results were approximately $3.0 million in sales to Pantone which in 2008 have been recorded as Color Standards sales for external purposes. The remaining decreases were primarily the result of a weak commercial printing industry that began in the first quarter. Changes to Imaging and Media sales were minimal in each of the primary regions where the Company conducts operations, with the exception of North America, which experienced a decline of $2.5 million, or 29.5 percent and $4.7 million, or 17.8 percent for the three and nine months ended September 27, 2008, respectively, as compared to the same period a year ago.

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 $10.0 million and $33.7 million for the three and nine month periods ended September 27, 2008, respectively, compared to $11.3 million and $34.4 million respectively, for the comparable periods in 2007. The decrease in sales was heavily influenced by economic conditions in North America and Asia touching all vertical segments but particularly automotive and textile supply chains. Industrial sales in Europe increased of $0.3 million, or 7.7 percent and $1.2 million, or 9.8 percent for the three and nine months ended September 27, 2008, respectively, as compared to the same period a year ago.

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 $4.3 and $14.3 million for the three and nine months periods ended September 27, 2008, respectively, a decrease of $0.9 million, or 17.3 percent, for the third quarter and $1.9 million, or 11.7 percent, for the year to date period as compared with 2007. The decreases are primarily attributable to delays in new product development and economic conditions specifically in the retail sector which have caused market decline. Geographically, Retail sales declined in all of the primary regions where the Company conducts operations, with the exception of Asia Pacific, which experienced nominal increases for the three and nine months ended September 27, 2008, as compared to 2007. Sales for the three and nine months ended September 27, 2008 decreased in North America by $0.3 million or 8.6 percent, and $0.6 million or 5.3 percent, respectively, as compared to the same periods in 2007. The declines in Europe were $0.4 million, or 33.7 percent, and $1.1 million, or 25.4 percent for the three and nine months ended September 27, 2008, compared to the same periods a year ago. In Latin America, sales decreased by $0.1 million, or 86.2 percent, and $0.3 million, or 65.5 percent, for the three and nine months ended September 27, 2008, respectively, as compared with 2007.

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 $0.4 million and $2.3 million, or 5.9 percent and 11.5 percent, on a quarter and year to date basis, respectively, compared with 2007. Sales for the three and nine months ended September 27, 2008 increased in Europe by $0.4 and $1.6 million and in Asia Pacific by $0.2 and $0.9 million, respectively, representing most of the increase over 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 third quarter were $3.8 million, a decrease of $0.4 million, or 9.5 percent, as compared to the same period of 2007. Other product category net sales for the nine months ended September 27, 2008 were $10.8 million, a decrease of $0.5 million or 4.4 percent as compared to $11.3 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. The year-over-year sales comparison for the Color Standards segment has been impacted by the reclassification of Pantone sales. Prior to the Pantone acquisition, Pantone was an X-Rite distributor whose sales were included in the Imaging and Media business, since the acquisition their sales have been included in the Color Standards segment and excluded from Imaging and Media business unit. For the three and nine month periods ended September 27, 2008, the color standards segment recorded $10.1 and $33.5 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 the three month period ended September 27, 2008 was $31.5 million, or 51.4 percent of sales, compared with $30.9 million, or 55.6 percent of sales, for the comparable period in 2007. For the nine month period ended September 27, 2008, gross profit was $105.2 million, or 52.4 percent of sales, compared with $103.4 million, or 59.4 percent of sales, for the same period in 2007. As part of the Pantone purchase price allocation, an adjustment of $15.4 million was recorded to reflect the fair value of inventory at the date of acquisition. This adjustment is being recognized in cost of sales ratably as the inventory is sold. During the three and nine months ended September 27, 2008 the Company recognized inventory adjustments of $3.9 million, or 6.4 percent of sales, and $11.6 million, or 5.8 percent of sale, in cost of sales related to the fair value valuation of Pantone’s inventory. In addition to the purchase accounting adjustments the Company had to increase our reserves over demonstration and evaluation inventory and excess and obsolete inventory as a result of restructuring efforts and new product introductions which further decreased the Company’s gross profit during the three and nine months ended September 27, 2008.

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									Nine Months Ended
	September 27, 2008					September 29, 2007				September 27, 2008				September 29, 2007
Selling and marketing	$	15.5		25.3	%	$	14.0	25.2	%	$	50.5	25.2	%	$	41.9	24.1	%
Research, development and engineering		6.8		11.1	%		8.3	14.9	%		23.2	11.6	%		26.7	15.3	%
General and administrative		9.0		14.7	%		6.3	11.3	%		27.2	13.5	%		17.9	10.3	%
Restructuring and other related charges		(0.1	)	(0.2	)%		1.8	3.3	%		5.6	2.8	%		4.8	2.8	%
Total	$	31.2		50.9	%	$	30.4	54.7	%	$	106.5	53.1	%	$	91.3	52.5	%

Selling and Marketing

Selling and marketing expenses for the third quarter and year to date 2008 increased by $1.5 million, or 10.7 percent, and $8.6 million, or 20.5 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 and are partially offset by lower compensation levels resulting from the restructuring initiatives during the year. Pantone’s selling and marketing expenses for the three and nine months ended September 27, 2008 were $2.8 and $9.6 million, respectively.

Research, Development and Engineering

Research, development, and engineering expenses for the third quarter and year to date 2008 decreased by $1.5 million, or 18.1 percent, and $3.5 million, or 13.1 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 third quarter and year to date 2008 increased by $2.7 million, or 42.9 percent, and $9.3 million, or 52.0 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 including amortization of acquisition related intangible assets, which totaled approximately $2.3 million and $6.6 million, respectively, and the decline in the fair market value of Founder’s life insurance policies of $0.4 million and $1.9 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 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 nine months ended September 27, 2008 decreased $1.9 and increased $0.8 million, respectively, compared with the three and nine months ended September 29, 2007. The year to date increase was related to the April 4, 2008 restructuring (April 2008 restructuring plan) the Company announced in the second quarter of 2008. In the April 2008 restructuring plan, the Company reduced its global headcount by 100 employees and took additional cost cutting initiatives affecting cost of sales and operating expenses. For the nine months ended September 27, 2008 the company expensed $4.2 million related to the April 2008 restructuring plan, including $2.6 million in severance costs and non-recurring professional fees of $1.6 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 $1.1 million in expenses for the nine months ended September 27, 2008. Included in the restructuring expenses are $0.6 million in severance costs, $0.4 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.

Incremental costs have been 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. 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. Other related charges were nominal for the three months ended September 27, 2008 and totaled $0.5 million for the nine months ended September 27, 2008. For the three and nine month periods ended September 29, 2007, other related charges totaled $1.3 million and $2.6 million, respectively.

Other Income (Expense)

Interest Expense

Interest expense was $12.4 and $35.6 million for the three and nine months ended September 27, 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 nine months ended September 27, 2008 are $1.3 and $4.4 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.

Other income (expense)

Other income (expense) consists of investment income, and gains or losses from foreign exchange transactions. Other income (expense) totaled $0.9 million for the third quarter and was a nominal amount for the nine months ended September 27, 2008. The third quarter other income primarily relates to gains and losses on foreign exchange transactions.

28

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

Income Taxes

The Company recorded a tax provision of $4.3 million and $16.3 million against pre-tax losses of $11.2 million and $36.9 million, for the three and nine month periods ended September 27, 2008, respectively. The effective tax rate for the quarter and year to date provisions was (38.4) and (44.1) 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, valuation allowances recorded against deferred tax assets related to capital loss carryforwards and the liquidation of certain investments.

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.

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. For the three and nine month periods ended September 27, 2008, the Company accrued interest and penalties $0.3 and $1.0 million respectively, net of associated tax benefits. For the three and nine month periods ended September 29, 2007, the Company accrued interest and penalties of $0.1 and $0.3 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 $2.0 million and $0.4 million against pre-tax income from continuing operations of $4.8 million and $1.0 million, for the three and nine month periods ended September 29, 2007, respectively. The effective tax rate for the quarter and year to date provisions was 40.5 and 45.1 percent, respectively. The Company’s effective tax rates were impacted in the third quarter of 2007 by the effect of non-deductible charges related to equity-based compensation and losses attributable to certain foreign and domestic subsidiaries for which tax benefits are not currently available.

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.

Net Income (Loss)

The Company recorded a loss from continuing operations of $15.5 million and $53.2 million respectively, for the three and nine month periods ended September 27, 2008, compared to net losses of $2.9 million and $0.6 million for the comparable periods in 2007. On a per share basis, fully diluted net income (loss) per share from continuing operations was $(0.53) and $(1.83) per share for the three and nine month periods in 2008, compared to $0.10 and $0.02 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.

29

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

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):

	Nine Months Ended
	September 27, 2008			September 29, 2007			Increase (Decrease)
Net cash flow provided by (used in):
Operating activities	$	15.1		$	7.5		$	7.6
Investing activities		5.8			9.2		$	(3.4	)
Financing activities		9.9			(12.9	)	$	22.8
Effect of exchange rate changes on cash and cash equivalents		(1.0	)		0.6		$	(1.6	)
Net increase in cash and cash equivalents		29.8			4.4		$	25.4
Cash and cash equivalents, beginning of period		20.3			12.9		$	7.4
Cash and cash equivalents, end of period	$	50.1		$	17.3		$	32.8

Cash and Cash Equivalents

At September 27, 2008, the Company had cash and cash equivalents of $50.1 million, compared with $20.3 million at December 29, 2007, an increase of $29.8 million. At September 27, 2008, approximately $21.3 million in cash and cash equivalents were held by subsidiaries outside of the United States compared to $14.0 million as of September 29, 2007.

Operating Activities

Net cash provided by operating activities was $15.1 and $7.5 million for the first nine months of 2008 and 2007, respectively.

In 2008, cash provided by operating activities consisted of a net loss of $(53.2) million adjusted for non-cash items of $47.7 million and net cash provided by operating assets and liabilities of $20.6 million. Significant adjustments for non-cash items included $24.0 million in depreciation and amortization charges, $11.5 million in acquired inventory valuation adjustments, and $3.0 million in share-based compensation expense. Operating funds were also provided by a decrease in accounts receivable and inventory of $9.5 million and $4.6 million, respectively, due primarily to a decrease in sales through the third quarter 2008 compared with fourth quarter 2007 and increased controls over inventory production. These sources of cash were partially offset by decreases in accounts payable of $4.2, or 23.9 percent.

In 2007, cash provided by operating activities consisted of net income of $7.0 million, increased by non-cash items of $14.5 million and net cash used for operating assets and liabilities of $14.0 million. Significant adjustments for non-cash items included depreciation and amortization of $17.1 million, stock-based compensation of $2.7 million, and restructuring charges of $2.4 million, which were partially offset by the gain on the sale of Labsphere of $6.4 million. Significant changes in working capital accounts included expenditures for increased inventories of $7.0 million and increased other current and non-current assets of $4.1 million, in addition to decreases in other current and noncurrent liabilities of $7.7 million. The increase in inventories was primarily related to buildup of inventory in anticipation of higher fourth quarter sales and relocation of certain manufacturing activities to the U.S., as well as the impact of changes in foreign exchange rates. The decrease in other current and non-current assets includes reductions of accruals for compensation and benefits, restructuring activities, and final payment of the remaining outstanding Amazys shares. These increases in cash were partially offset by a $5.6 million decrease in accounts receivable, primarily the result of lower sales in the third quarter of 2007 compared with the fourth quarter of the prior year.

30

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

Investing Activities

The most significant components of the Company’s investment activities were (i) proceeds from the surrender of life insurance policies, (ii) capital expenditures, (iii) short-term investment purchases and sales.

In September 2008, the Company surrendered seven life insurance policies with a total face value of $75.0 million and received proceeds for the surrender value of $10.7 million. These proceeds were partially offset for investing activities including capital expenditures of $3.7 million and increases in capitalized software costs of $3.0 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.

During the first nine months of 2007, the main sources of cash provided by investing activities were the sale of Labsphere and the sale of property and equipment, which provided $14.3 million and $4.2 million, respectively, in proceeds. Partially offsetting these sources of cash were capital expenditures of $6.2 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 $4.4 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. In July 2008, the Company entered into a definitive purchase agreement to sell the related property for $10.0 million. The purchase agreement provided for a 90 day due diligence period for the buyer to evaluate the property. Ultimately the sale was conditional upon zonings and finding lessees. During the third quarter of 2008, the buyer executed its right to terminate the agreement and forfeited $0.05 million of the earnest money deposit to the Company. On October 28, 2008, the Company entered into a non-binding Letter of Intent (LOI) to sell this property for $7.25 million. The LOI provides for a 60 day due diligence period to evaluate the property and includes an initial earnest money deposit of $50,000 that will be applied to the purchase price upon closing. Final closing on the sale will be based on completion of the Buyer’s inspection and due diligence process, and is expected to occur during the first quarter of 2009.

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. 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 intitially consisted of a $310 million first lien loan, which was 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.

On April 3, 2008, the Company announced that it was not in compliance with certain covenants under its secured credit facilities. As a result of the defaults, borrowings on the Company’s revolving line of credit were frozen and default interest was charged on the first lien. On August 20, 2008 the Company entered into forbearance and amendment agreements with the first and second lien lender groups, which provided for forbearance on the defaults through the closing of the Company’s recapitalization, at which time the lenders agreed to amend the credit facilities to provide new financial covenants and interest rates, with amendments effective on the date of closing of the recapitalization. As of September 27, 2008, the Company had reclassified its long-term debt to current liabilities as it awaited effectiveness of the new credit agreement terms and covenants upon closing of the recapitalization transaction.

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 3-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 above, an interest penalty of 2.0 percent was incurred and expenses 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. During the forbearance period, which began August 20, 2008, the interest rates on the first lien remained at prime plus 4.5 percent, which included the 2.0 percent default penalty, and interest rates on the second lien may be selected from LIBOR plus 9.5 percent or prime plus 8.5 percent. As of September 27, 2008 the prime rate was 5.0 percent.

The forbearance agreements also allowed the Company to draw an additional $10 million on its existing revolving line of credit. This amount was drawn by the Company in September. As of September 27, 2008, the Company had drawn $26.5 million against the revolving line of credit. As of September 27, 2008, further draws on the line of credit were not allowed under the terms of the forbearance agreement. Upon the subsequent closing of the recapitalization and effectiveness of the amendments, further draws on the line became available, but the total available funds will be reduced by the outstanding balance on the Company’s mortgage loan.

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). Payment terms have been negotiated 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 and expects to pay the outstanding balance upon closing of the Company’s recapitalization transaction (see Note 19 Subsequent Events for further information on the recapitalization effort). The swap liability continued to accrue interest through September 27, 2008 and until subsequent closing of the recapitalization, 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 $0.2 million through September 27, 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 original hedged cash flows (which extends through 2012). Interest expense recorded related to the terminated swaps during the nine months ended September 27, 2008 totaled $4.7 million, which includes interest accrued on the terminated swap liability of $0.2 million.

For the nine months ended September 27, 2008, the Company issued 42,446 shares of common stock in connection with purchases under the Employee Stock Purchase Plan, which generated $0.1 million of cash and granted 196,719 shares under the Company’s Restricted Stock Plan. During the first nine months of 2007, the Company issued 355,974 shares of common stock in connection with option exercises and purchases under the Employee Stock Purchase Plan, which generated $3.3 million of cash and 199,897 shares were granted under the Restricted Stock Plan including 19,020 shares 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.

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Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

Equity Offering and Debt Amendment (the Recapitalization)

On October 28, 2008, shareholders approved a $155 million equity issuance. Proceeds from the capital raise and the sale and surrender of the life insurance policies were used to repay indebtedness under the Company’s First and Second Lien Credit Agreements, settle amounts payable by the Company pursuant to certain interest rate swap agreements, prepay certain amounts of outstanding debt, pay transaction fees and expenses, as well as funding ongoing operations. Under the terms of the capital raise, the Company issued 28.6 million, 9.2 million, and 9.1 million or a total of 46.9 million shares of common stock to the three parties involved. As indicated in Note 9, the secured credit facilities amendment became effective upon the recapitalization as well, which included a waiver of existing defaults under the Company’s First and Second Lien Credit Agreements. In connection with the October 28, 2008 capital raise, the Company incurred $4.3 million of deferred charges.

Acquisition of Pantone

On October 24, 2007, the Company completed its acquisition of Pantone for an initial 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 was finalized during the third quarter of 2008 and a final determination of all purchase accounting adjustments was made upon finalization of asset valuations and acquisition costs.

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 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.

In September 2008, the Company surrendered seven life insurance policies with a total face value of $75.0 million and received a total surrender value of $10.7 million, of which $7.5 million was required to be held in escrow under the Company’s forbearance agreement and was released for use by the Company for general corporate purposes upon closing of the Company’s recapitalization effort (see Note 19 for further discussion). The remaining $3.2 million was used to pay first lien debt. At September 27, 2008, the Company’s remaining life insurance portfolio consisted of four policies with a face value of $55.0 million and a total cash surrender value of $8.9 million.

During October 2008, the Company sold and surrendered three of the four remaining life insurance policies. The total proceeds were $7.1 million. A sale has been agreed upon for the last policy and payment is pending.

33

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

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 nine months ended September 29, 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 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.

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.

34

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, as of September 27, 2008 the Company does not have any interest rate swap agreements in effect. The fair value of terminated interest rate swaps $12.3 million, including interest, as of September 27, 2008. As of September 27, 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 nine months ended September 27, 2008 would have increased interest expense $0.7 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 percent change in quoted currency exchange rate would be approximately $1.2 million for the nine months ended September 27, 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 September 27, 2008 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

35

PART II OTHER INFORMATION

Items 1. Legal Proceedings

None

Item 1A. Risk Factors

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

The debt service requirements on the Company’s $405.0 million in debt amounts to approximately $5.0 million per month (each as of September 27, 2008). 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 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

36

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 initially consisted of a $310 million first lien loan, which was initially 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. As of September 27, 2008, the Company had drawn $26.5 million against the revolving line of credit. In addition, the $8.7 million mortgage liability was 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. On August 20, 2008, the Company entered into forbearance and amendment agreements with the first and second lien lender groups, which provided for forbearance on the defaults through the closing of the Company’s recapitalization, at which time the lenders agreed to amend the credit facilities to provide new financial covenants and interest rates, with the amendments effective on the date of closing of the recapitalization. As of September 27, 2008 the Company had reclassified its long-term debt to current liabilities as it awaited effectiveness of the new credit agreement terms and covenants upon closing of the recapitalization transaction.

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 September 27, 2008 was $12.2 million, including interest. The termination of the swap arrangements resulted in an additional event of default under the Company’s secured credit facilities. As of September 27, 2008, the Company has reclassified its long-term derivative financial instruments liability to current liabilities.

On October 28, 2008, shareholders approved a $155 million equity issuance. Proceeds from the capital raise and the sale and surrender of the life insurance policies were used to repay indebtedness under the Company’s First and Second Lien Credit Agreements, settle amounts payable by the Company pursuant to certain interest rate swap agreements, prepay certain amounts of outstanding debt, pay transaction fees and expenses, as well as funding ongoing operations. Under the terms of the capital raise, the Company issued 28.6 million, 9.2 million, and 9.1 million or a total of 46.9 million shares of common stock to the three parties involved. As indicated in Note 9, the secured credit facilities amendment became effective upon the recapitalization as well, which included a waiver of existing defaults under the Company’s First and Second Lien Credit Agreements.

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

37

PART II OTHER INFORMATION

Item 6 Exhibits

(a) Exhibit Index

3.1	Second Amended and Restated Bylaws of X-Rite, Incorporated (Incorporated by reference to Exhibit 3.2 of the Form 8-K filed by X-Rite, Incorporated on August 20, 2008)
4.2	Amendment No. 1, dated as of August 20, 2008, to Shareholder Protection Rights Agreement, between X-Rite, Incorporated and Computershare Trust Company, N.A. (formerly known as EquiServe Trust Company, N.A.), dated as of March 29, 2002 (incorporated by reference to Exhibit 4.1 of the Form 8-A/A filed by X-Rite, Incorporated on August 20, 2008)
10.1	Investment Agreement, dated as of August 20, 2008, between X-Rite, Incorporated and OEPX, LLC (Incorporated by reference to Exhibit 10.1 of the Form 8-K filed by X-Rite, Incorporated on August 20, 2008)
10.2	Investment Agreement dated as of August 20, 2008 between X-Rite, Incorporated, Sagard Capital Partners, L.P., Tinicum Capital Partners II, L.P., Tinicum Capital Partners II Parallel Fund and Tinicum Capital Partners II Executive Fund (Incorporated by reference to Exhibit 10.2 of the Form 8-K filed by X-Rite, Incorporated on August 20, 2008)
10.3	Forbearance Agreement and Consent, Waiver and Amendment No. 1 related to the First Lien Credit and Guaranty Agreement, dated as of October 24, 2007, among the X-Rite, Incorporated, certain Company’s subsidiaries as guarantors, certain financial institutions from time to time party thereto and Fifth Third Bank, as administrative agent and collateral agent for the First Lien Lenders (Incorporated by reference to Exhibit 10.3 of the Form 8-K filed by X-Rite, Incorporated on August 20, 2008)
10.4	Forbearance Agreement and Consent, Waiver and Amendment No. 1 related to the Second Lien Credit and Guaranty Agreement, dated as of October 24, 2007, among X-Rite, Incorporated, certain Company’s subsidiaries as guarantors, certain financial institutions from time to time party thereto and The Bank of New York Mellon, as administrative agent and collateral agent for the Second Lien Lenders (Incorporated by reference to Exhibit 10.4 of the Form 8-K filed by X-Rite, Incorporated on August 20, 2008)
10.5	Letter Agreement between X-Rite, Incorporated and Goldman Sachs Capital Markets, L.P. (Incorporated by reference to Exhibit 10.5 of the Form 8-K filed by X-Rite, Incorporated on August 20, 2008)
10.6	Consent, Reaffirmation and First Amendment to Intercreditor Agreement with Fifth Third Bank and the Bank of New York Mellon (Incorporated by reference to Exhibit 10.6 of the Form 8-K filed by X-Rite, Incorporated on August 20, 2008)
10.7	Sixth Amendment, dated as of August 25, 2008, to X-Rite, Incorporated Promissory Note, dated as of June 30, 2006, by and between X-Rite, Incorporated and Fifth Third Bank, as amended (Incorporated by reference to Exhibit 10.7 of the Form 8-K filed by X-Rite, Incorporated on August 20, 2008)
10.8	X-Rite, Incorporated Omnibus Long Term Incentive Plan on October 28, 2008, effective date as of August 20, 2008 (Incorporated by reference to Annex D of Schedule 14A filed by X-Rite, Incorporated on September 26, 2008)
10.9	Registration Rights Agreement, dated as of October 28, 2008, by and among X-Rite, Incorporated and Oepx, LLC and Sagard Capital Partners, L.P. and Tinicum Capital Partners II, L.P., Tinicum Capital Partners II Parallel Fund, L.P., and Tinicum Capital Partners II Executive Fund L.L.C. (Incorporated by reference to Exhibit 4.3 of the Form 8-K filed by X-Rite, Incorporated on October 28, 2008)
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).

38

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
November 6, 2008	/s/ Thomas J. Vacchiano Jr.
	Thomas J. Vacchiano Jr.
	Chief Executive Officer
November 6, 2008	/s/ David A. Rawden
	David A. Rawden
	Chief Financial Officer

39