X Rite (XRIT) 10-Q 2009 Q2 Quarterly report

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For The Quarterly Period Ended July 4, 2009

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 checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    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
Smaller reporting company  ¨	Non-accelerated filer    ¨

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

On August 1, 2009, the number of outstanding shares of the registrant’s common stock, par value $.10 per share, was 77,699,550.

X-RITE, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

	July 4, 2009			January 3, 2009
ASSETS
Current assets:
Cash	$	33,839		$	50,835
Accounts receivable, less allowance of $3,277 in 2009 and $3,391 in 2008		27,194			36,849
Inventories		35,158			39,936
Deferred income taxes		2,184			2,184
Assets held for sale		—			7,250
Prepaid expenses and other current assets		6,246			5,900
		104,621			142,954
Property plant and equipment:
Land		2,796			2,796
Buildings and improvements		26,032			25,879
Machinery and equipment		29,503			30,095
Furniture and office equipment		23,990			23,856
Construction in progress		3,055			1,697
		85,376			84,323
Less accumulated depreciation		(41,745	)		(39,413	)
		43,631			44,910
Other assets:
Goodwill and indefinite-lived intangibles		247,826			247,703
Other intangibles, net		74,768			83,310
Capitalized software, net of accumulated amortization of $8,443 in 2009 and $6,821 in 2008		8,647			8,031
Deferred financing costs, net of accumulated amortization of $1,998 in 2009 and $3,579 in 2008		10,745			12,273
Deferred income taxes		360			41
Derivative financial instruments		1,515			1,636
Other noncurrent assets		2,402			3,596
		346,263			356,590
	$	494,515		$	544,454

The accompanying notes are an integral part of these statements.

2

X-RITE, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) – Continued

(in thousands)

	July 4, 2009			January 3, 2009
LIABILITIES AND SHAREHOLDERS’ INVESTMENT
Current liabilities:
Current portion of long-term debt	$	1,719		$	6,917
Accounts payable		6,631			11,605
Accrued liabilities:
Payroll and employee benefits		8,783			10,449
Restructuring		1,815			1,406
Income taxes		6,494			6,528
Interest		5,720			266
Other		9,818			11,956
		40,980			49,127
Long-term liabilities:
Long-term debt, less current portion		234,936			264,017
Restructuring		233			658
Long-term compensation and benefits		1,195			1,182
Deferred income taxes		12,271			12,342
Accrued income taxes		7,557			7,457
Other		266			379
		256,458			286,035
Shareholders’ investment:
Common stock		7,655			7,642
Additional paid-in capital		253,170			251,199
Retained deficit		(67,845	)		(51,510	)
Accumulated other comprehensive income		4,097			1,961
		197,077			209,292
	$	494,515		$	544,454

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						Six Months Ended
	July 4, 2009			June 28, 2008			July 4, 2009			June 28, 2008
Net Sales	$	49,362		$	73,461		$	95,980		$	139,380
Cost of sales:
Products sold		19,724			31,080			39,497			57,588
Inventory valuation adjustment		—			3,845			—			7,690
Restructuring and other related charges		—			117			—			349
		19,724			35,042			39,497			65,627
Gross profit		29,638			38,419			56,483			73,753
Operating expenses:
Selling and marketing		13,060			17,342			26,672			34,995
Research, development and engineering		5,735			7,734			11,672			16,371
General and administrative		7,014			8,282			14,300			18,146
Restructuring and other related charges		1,368			4,606			3,165			5,764
		27,177			37,964			55,809			75,276
Operating income (loss)		2,461			455			674			(1,523	)
Interest expense		(8,729	)		(11,220	)		(17,245	)		(23,220	)
Other income (expense), net		(959	)		205			698			(946	)
Loss before income taxes		(7,227	)		(10,560	)		(15,873	)		(25,689	)
Income tax expense		377			10,349			462			12,017
Net loss	$	(7,604	)	$	(20,909	)	$	(16,335	)	$	(37,706	)
Basic and diluted net loss per share	$	(0.10	)	$	(0.72	)	$	(0.21	)	$	(1.30	)

The accompanying notes are an integral part of these statements.

4

X-RITE, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

	Six Months Ended
	July 4, 2009			June 28, 2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(16,335	)	$	(37,706	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		3,285			3,577
Amortization		10,753			10,579
Amortization of deferred financing costs		1,484			1,523
Deferred income taxes (benefit)		(390	)		1,023
Share-based compensation		1,964			2,125
Gain on sale of assets		176			62
Restructuring		3,164			6,113
Derivative fair value adjustments and charges		3,147			3,078
Other		46			22
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable		9,138			4,367
Inventories		3,589			11,251
Prepaid expenses and other current assets		(318	)		299
Accounts payable		(4,846	)		(6,996	)
Income taxes		211			8,112
Other current and non-current liabilities		1,453			(6,774	)
Net cash provided by operating activities		16,521			655
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(2,363	)		(2,130	)
Investment in Founders' life insurance, net		—			1,146
Increase in other assets		(2,299	)		(2,164	)
Proceeds from sales of assets		7,309			—
Acquisitions, net of cash acquired		—			249
Net cash provided by (used for) investing activities		2,647			(2,899	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt		—			10,500
Payment of debt		(34,279	)		(1,350	)
Equity issuance costs		(32	)		—
Issuance of common stock		52			85
Purchase of interest rate cap instrument		(1,565	)		—
Net cash provided by (used for) financing activities		(35,824	)		9,235
EFFECT OF EXCHANGE RATE CHANGES ON CASH		(340	)		1,052
NET INCREASE (DECREASE) IN CASH		(16,996	)		8,043
CASH AT BEGINNING OF YEAR		50,835			20,300
CASH AT END OF PERIOD	$	33,839		$	28,343

The accompanying notes are an integral part of these statements.

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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”), 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 2008 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 July 4, 2009 and the results of its operations and its cash flows for the three and six month periods ended July 4, 2009 and June 28, 2008, respectively. All such adjustments were of a normal and recurring nature. The balance sheet at January 3, 2009 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. Certain prior year information has been reclassified to conform with current year presentation.

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through August 13, 2009, the date the financial statements were issued.

NOTE 2—NEW ACCOUNTING STANDARDS

On December 30, 2008, the FASB issued FSP SFAS No. 132(R)-1,Employer’s Disclosures about Postretirement Benefit Plan Assets (FSP SFAS No. 132(R)-1). This FSP amends SFAS No. 132 (Revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The disclosures about plan assets required by FSP SFAS No. 132(R)-1 shall be provided for fiscal years ending after December 15, 2009 (fiscal 2009 for the Company). Upon initial application, the provisions of FSP SFAS No. 132(R)-1 are not required for earlier periods that are presented for comparative purposes. Earlier application of the provisions of FSP SFAS No. 132(R)-1 is permitted. Since FSP SFAS No. 132(R)-1 requires only additional disclosures concerning plan assets, adoption of FSP SFAS No. 132(R)-1 will not affect the Company’s financial condition, results of operations, or cash flows.

The Company adopted Staff Position (FSP) Emerging Issue Task Force (EITF) Issue No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1), on January 4, 2009. FSP EITF 03-6-1 provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The adoption of FSP EITF 03-6-1 did not have any impact on the Company’s reported basic and diluted net loss per share amounts.

In April 2009, the FASB issued FSP SFAS No. 107-1 and Accounting Principles Bulletin (APB) No. 28-1,Interim Disclosures about Fair Value of Financial Instruments (FSP SFAS No. 107-1 and APB No. 28-1), to require, on an interim basis, disclosures about the fair value of financial instruments for public entities. FSP No. 107-1 and APB No. 28-1 is expected to improve the transparency and quality of information provided to financial statement users by increasing the frequency of disclosures about fair value for interim periods as well as annual periods. FSP No. 107-1 and APB No. 28-1 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company has disclosed the required information in Note 8 to the condensed consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS 157-4,Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are Not Orderly, and FSP No. FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments. These FSP’s provide additional application guidance and enhance disclosures about fair value measurements and impairments of securities. FSP No. FAS 157-4 clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured. FSP No. FAS 115-2 and FSP No. FAS 124-2 established a new model for measuring other-than-temporary impairments for debt securities, including establishing criteria for when to recognize a write-down through earnings. There was no impact to the Company’s consolidated financial statements as a result of the adoption of these three Staff Positions.

6

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 2—NEW ACCOUNTING STANDARDS – continued

In May 2009, the FASB issued SFAS No. 165,Subsequent Events(SFAS No. 165). The objective of this statement is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165, among other things, sets forth the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures an entity should make about events or transactions that occurred after the balance sheet date. In accordance with this statement, an entity should apply the requirements to interim or annual financial periods ending after June 15, 2009. The Company adopted SFAS No. 165 in the second quarter of 2009 and the adoption did not affect the Company’s consolidated financial condition, results of operations, or cash flows.

In June 2009, the FASB issued SFAS No. 168,The “FASB Accounting Standards Codification^TM” and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162(SFAS No. 168). SFAS No. 168 establishes theFASB Accounting Standards CodificationTM (Codification) as the source of authoritative U.S. generally accepted accounting principles (U.S. GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. SFAS No. 168 and the Codification are effective for financial statements issued for interim and annual periods ending after September 15, 2009 (third quarter ended October 3, 2009 for the Company).

NOTE 3—BUSINESS SEGMENTS

The Company is comprised of two primary reportable 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 measures, communicates, and simulates color. These products are used in several industries but in all cases their core application is the measurement of color. Company management views its products, technology, and key strategic decisions in terms of the global color measurement market and not the specific components of the markets it serves.

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

7

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 3—BUSINESS SEGMENTS– continued

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

	Three Months Ended					Six Months Ended
	July 4, 2009		June 28, 2008			July 4, 2009			June 28, 2008
Net Sales:
Color Measurement	$	41,217	$	61,855		$	79,450		$	115,934
Color Standards		8,145		11,606			16,530			23,446
Total	$	49,362	$	73,461		$	95,980		$	139,380
Depreciation and Amortization:
Color Measurement	$	5,056	$	5,426		$	10,215		$	10,870
Color Standards		1,911		821			3,823			3,286
Total	$	6,967	$	6,247		$	14,038		$	14,156
Operating Income (Loss):
Color Measurement	$	1,454	$	682		$	(1,458	)	$	905
Color Standards		1,007		(227	)		2,132			(2,428	)
Total	$	2,461	$	455		$	674		$	(1,523	)
Capital Expenditures:
Color Measurement	$	1,318	$	868		$	2,209		$	1,938
Color Standards		10		176			154			192
Total	$	1,328	$	1,044		$	2,363		$	2,130
	July 4, 2009		January 3, 2009
Total Assets:
Color Measurement	$	382,853	$	411,035
Color Standards		111,662		133,419
Total	$	494,515	$	544,454

NOTE 4—INVENTORIES

Inventories consisted of the following (in thousands):

	July 4, 2009		January 3, 2009
Raw materials	$	11,912	$	12,685
Work in process		15,469		15,071
Finished goods		7,777		12,180
Total	$	35,158	$	39,936

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 was recognized in cost of sales ratably as the inventory was sold within a year of the acquisition date. The write-up was fully recognized by the end of fiscal 2008. For the six months ended June 28, 2008, the Company expensed $7.7 million related to the fair value valuation of Pantone’s inventory.

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X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 5—RESTRUCTURING AND OTHER RELATED CHARGES

Restructuring and other related charges include the costs the Company incurred to execute various corporate restructuring activities. These charges include cash costs, accrued liabilities, asset write-offs, and employee severance pay due to layoffs. Restructurings may occur as a result of corporate acquisitions or a major reconfiguration of business operations.

For the three and six months ended July 4, 2009, the Company incurred $1.4 and $3.2 million, respectively, in restructuring charges which were recorded in operating expenses. For the three and six months ended June 28, 2008, the Company incurred $4.7 and $6.1 million in restructuring charges of which $4.6 and $5.8 million were recorded in operating expenses and $0.1 and $0.3 million, respectively, were recorded in cost of sales.

The Company has engaged in the following corporate restructurings:

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 included inventory, tooling, capitalized software, and other intangible asset write-downs directly related to discontinued product lines.

The Company has fully executed its restructuring plan related to Amazys. The only future charges that the Company anticipates incurring for this restructuring are related to true-up of the former CEO’s severance estimate, the value of which is variable based on future results and stock price performance of the Company. Cumulative charges incurred to date related to the Amazys restructuring plan are $20.2 million. The following table summarizes the remaining severance accrual balances and utilization for these restructuring actions (in thousands):

	Severance			Other			Total
Balance at January 3, 2009	$	1,360		$	—		$	1,360
Amounts paid or utilized		(317	)		—			(317	)
Balance at April 4, 2009		1,043			—			1,043
Adjustments		(213	)		4			(209	)
Amounts paid or utilized		(110	)		(4	)		(114	)
Balance at July 4, 2009	$	720		$	—		$	720

April 2008 Restructuring Plan

In the first quarter of 2009, the Company completed the restructuring actions initiated in prior periods related to the April 2008 restructuring plan. The April 2008 restructuring plan was initiated in response to weaker than expected economic conditions and market softness that adversely affected net sales. The plan consisted of a revised cost savings and an operational plan which included 100 headcount reductions at various locations worldwide as well as additional cost of sales and operating cost reductions. To date, the Company has incurred $3.9 million in charges in connection with the April 2008 restructuring plan. The following table summarizes the remaining severance accrual balances related to these restructuring actions (in thousands):

	Severance
Balance at January 3, 2009	$	18
Charges incurred		7
Amounts paid or utilized		(13	)
Balance at April 4, 2009		12
Amounts paid or utilized		(2	)
Balance at July 4, 2009	$	10

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X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 5—RESTRUCTURING AND OTHER RELATED CHARGES – continued

October 2008 Restructuring Plan

On October 30, 2008, the Company announced that it would 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. The Company has incurred $1.2 million in charges, to date, for this restructuring plan. The following table summarizes the severance and other accrual balances related to these restructuring actions (in thousands):

	Severance			Other			Total
Balance at January 3, 2009	$	650		$	36		$	686
Charges incurred		—			124			124
Amounts paid or utilized		(46	)		(124	)		(170	)
Balance at April 4, 2009		604			36			640
Charges incurred		303			—			303
Amounts paid or utilized		(531	)		(26	)		(557	)
Balance at July 4, 2009	$	376		$	10		$	386

January 2009 Restructuring Plan

On January 8, 2009, the Company announced a profit improvement plan to address the current economic conditions (January 2009 restructuring plan). The January 2009 plan includes narrowing the Company’s business focus and closing certain facilities, aggressively pursuing manufacturing efficiencies, implementing a reduction in headcount of up to 120 jobs, executing reduced work schedules and furloughs for selected employee groups, reducing executive compensation and suspending selected employee benefit programs. The Company has incurred $2.8 million in charges, to date, for this restructuring plan. The following table summarizes the severance, lease, and other accrual balances related to these restructuring actions (in thousands):

	Severance			Lease Termination Costs			Other			Total
Balance at January 3, 2009	$	—		$	—		$	—		$	—
Charges incurred		1,172			410			84			1,666
Amounts paid or utilized		(293	)		(410	)		(84	)		(787	)
Balance at April 4, 2009		879			—			—			879
Charges incurred		1,119			5			55			1,179
Amounts paid or utilized		(1,231	)		(5	)		(55	)		(1,291	)
Balance at July 4, 2009	$	767		$	—		$	—		$	767

Other Related Charges

Other related charges are comprised of costs associated with the Company’s efforts to create a more efficient global tax structure, reduce the amount of legal entities and reorganize the global treasury and cash management footprint. These efforts and related costs are related to the Company’s past acquisitions and do not include normal recurring operating costs. For the three and six months ended July 4, 2009, the Company had incurred and accrued $0.2 million of other related charges.

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X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 6—GOODWILL, INDEFINITE-LIVED INTANGIBLES, AND OTHER AMORTIZABLE INTANGIBLE ASSETS

A summary of changes in goodwill and indefinite-lived intangibles for the six months ended July 4, 2009, consisted of the following (in thousands):

	Color Measurement		Color Standards		Total
January 3, 2009	$	195,148	$	52,555	$	247,703
Foreign currency adjustments		123		—		123
July 4, 2009	$	195,271	$	52,555	$	247,826

The following is a summary of changes in amortizable intangible assets for the six months ended July 4, 2009 (in thousands):

	January 3, 2009		Amortization			July 4, 2009
Technology and patents	$	35,234	$	(3,934	)	$	31,300
Customer relationships		37,835		(1,868	)		35,967
Trademarks and trade names		6,412		(549	)		5,863
Covenants not to compete		3,829		(2,191	)		1,638
Total	$	83,310	$	(8,542	)	$	74,768

Estimated future amortization expense for intangible assets as of July 4, 2009, for each of the succeeding years is as follows (in thousands):

Remaining 2009	$	7,370
2010		11,959
2011		11,793
2012		11,793
2013		4,954
Thereafter		26,899

NOTE 7—SHORT-TERM BORROWINGS AND LONG-TERM DEBT

First and Second Lien Term Loans

In connection with the Pantone acquisition in October 2007, the Company entered into secured senior credit facilities which initially provided for aggregate principal borrowings of up to $415 million and replaced the Company’s previous credit facilities. These credit facilities initially consisted of a $310 million first lien loan, which included 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 may select. The unused portion of the revolving credit facility is subject to a fee of 0.5 percent per annum.

The credit facilities contain operational and financial covenants regarding the Company’s ability to create liens, incur indebtedness, make investments or acquisitions, enter into certain transactions with affiliates, incur capital expenditures beyond prescribed limits, and require delivery of certain reports and information, and compliance with 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 loan. 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 (Corporate Recapitalization Plan) 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 Corporate Recapitalization Plan. As of July 4, 2009, the Company was in compliance with the financial covenants contained in its first and second lien credit agreements, as amended.

11

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 7—SHORT-TERM BORROWINGS AND LONG-TERM DEBT – continued

On October 28, 2008, the Company’s shareholders approved the Corporate Recapitalization Plan to raise $155 million in capital through issuance of common stock. Under the terms of the Corporate Recapitalization Plan, the Company issued a total of 46.9 million shares of common stock to three parties involved. Proceeds from the capital raise were used to pay related transaction fees and expenses, settle the $12.5 million liability from terminated interest rate swap agreements, repay $3.5 million of the mortgage on the Company’s former headquarters facility, and repay $82.0 million of the first lien term loan and $37.2 million of the second lien term loan. The first and second lien credit agreement amendments became effective upon this recapitalization.

During the second quarter of 2009, the Company selected the three month LIBOR plus 5.0 percent and 11.38 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. Interest payments on loans linked to the Prime Rate are required to be paid on a scheduled quarterly basis. Under the terms of the amended credit agreements, the margin above LIBOR for first lien loans is subject to adjustment based on the Company’s leverage ratio and the margin above LIBOR for second lien loans is 11.38 percent per annum. Both the first and the second lien agreements stipulate a LIBOR floor of 3 percent per annum. The margin above Prime for the first lien loans is 4 percent per annum and the margin above Prime for the second lien loans is 10.38 percent per annum. The second lien agreement stipulates a Prime rate floor of 4 percent per annum. The Company has entered into an interest rate cap to limit a substantial portion of its LIBOR exposure (see Note 8 for further discussion).

Mortgage Loan

As of the end of 2008, the Company had a mortgage loan of $5.2 million related to its former headquarters. In November 2008 the Company had reduced the mortgage by $3.5 million with proceeds from the equity capital raised on October 28, 2008. On January 29, 2009, the Company completed the sale of its former headquarters for $7.2 million, proceeds from which were used to pay transaction closing costs and the balance of the mortgage, with the remainder used to repay a portion of the Company’s first lien term loan.

NOTE 8—FINANCIAL INSTRUMENTS

The Company adopted the provisions of SFAS No. 157,Fair Value Measurements(SFAS No. 157), for financial assets and liabilities, and non financial assets and liabilities, measured at fair value on a recurring basis, effective December 30, 2007. This Statement requires fair value measurements be classified and disclosed in one of the following three categories:

Level 1:	Financial instruments with unadjusted, quoted prices listed on active market exchanges.
Level 2:	Financial instruments lacking unadjusted, quoted prices from active market exchanges, including over-the- counter traded financial instruments. The prices for the financial instruments are determined using prices for recently traded financial instruments with similar underlying terms as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3:	Financial instruments that are not actively traded on a market exchange. This category includes situations where there is little, if any, market activity for the financial instrument. The prices are determined using significant unobservable inputs or valuation techniques.

In accordance with SFAS No. 157, the Company has classified certain marketable securities held in a trust for a former employee within the Level 1 category of the fair value hierarchy. As of July 4, 2009 and January 3, 2009, the Company recognized an asset of $0.9 and $0.8 million related to the marketable securities, respectively. In accordance with SFAS No. 157, the Company has classified its interest rate caps within the Level 2 category of the fair value hierarchy. As of July 4, 2009 and January 3, 2009, the Company recognized $1.5 and $1.6 million related to this asset, respectively. The Company did not have any additional assets or liabilities that were measured at fair value on a recurring basis.

12

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 8—FINANCIAL INSTRUMENTS – continued

Accounting for Derivative Financial Instruments

The Company accounts for derivative financial instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities(SFAS No. 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 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

In prior years, 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 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 received net interest settlements related to these interest rate swaps of $0.2 million. Portions of these 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, and totaled $2.0 million. No cash settlements were made during the remainder 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 swap liability accrued interest until closing of the Corporate Recapitalization Plan. The Company paid the outstanding balance on the swap liability, including the related accrued interest, upon closing of the Corporate Recapitalization Plan in October 2008 (see Note 7 for further information).

Due to termination of the swap contracts in April 2008, related accumulated other comprehensive loss 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 six months ended July 4, 2009 totaled $3.1 million. The remaining balance in accumulated other comprehensive income related to these terminated swaps was $3.4 million as of July 4, 2009, $2.2 million of which is expected to be reclassified to earnings during the next twelve months.

Interest Rate Cap

On December 30, 2008, the Company purchased an interest rate cap to limit its exposure to increases in the 3 month LIBOR rate above 3 percent per annum. The cost of the interest rate cap was $1.6 million, payment for which was made in January 2009. The cap became effective January 6, 2009, at a notional amount of $256.0 million. The notional amount amortizes by $1.0 million every six months through January 6, 2012. Effective April 6, 2009, the Company reduced the notional amount of the cap by $25 million. The Company received $0.1 million in proceeds related to the sale of this portion of the cap and reclassified $0.1 million from accumulated other comprehensive income as a decrease to interest expense related to this reduction.

At inception this cap was designated as a cash flow hedge under SFAS 133. The Company assesses hedge effectiveness based on the total changes in cash flows on its interest rate caps as described by the Derivative Implementation Group (DIG) Issue G20 “Cash Flow Hedges: Assessing and Measuring the Effectiveness of a Purchased Option Used in a Cash Flow Hedge” and records subsequent changes in fair value in other comprehensive income, including the changes in the option’s time value. Gains or losses on interest rate caps used to hedge interest rate risk on variable-rate debt are reclassified out of accumulated other comprehensive income into earnings (as interest expense) when the forecasted transaction occurs. The current market value of the interest rate cap is reported on the Consolidated Balance Sheets in other current and long-term assets or other current and long-term liabilities.

13

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 8—FINANCIAL INSTRUMENTS – continued

The interest rate cap was marked to current market value as of July 4, 2009 resulting in an increase in value of $0.6 million for the three months ended July 4, 2009. This adjustment was recorded through other comprehensive income. As LIBOR was not above the capped rate, no cash was received from the existing cap agreements during the second quarter of 2009 and no amounts were reclassified from other accumulated other comprehensive income to interest expense. The amount of accumulated other comprehensive income related to this cap and expected to be reclassified to interest expense over the next twelve months is not material.

The counterparty to the Company’s interest rate cap is a major financial institution with which the Company also has other financial relationships. The counterparty exposes the Company to credit loss in the event of non-performance. If the counterparty fails to meet the term of the agreement, the Company’s exposure is limited to the cost of a replacement agreement. The Company does not anticipate non-performance by the counterparty, and no material loss would be expected from non-performance by the counterparty.

NOTE 9—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 and units are valued at closing market price on the date of the grant. Compensation expense for shares issued under the Employee Stock Purchase Plan is recognized for 15 percent of the market value of shares purchased, using the purchase date closing market price. This expense is recognized in the quarter to which the purchases relate.

The Company used the following assumptions in valuing employee options granted during the three and six months ended July 4, 2009 and June 28, 2008:

	Three Months Ended				Six Months Ended
	July 4, 2009		June 28, 2008		July 4, 2009		June 28, 2008
Dividend yield	0	%	0	%	0	%	0	%
Volatility	57 – 58	%	48 – 55	%	57 – 58	%	48 – 55	%
Risk-free interest rates	2.3 – 3.2	%	3.2 – 3.6	%	2.3 – 3.2	%	2.7 – 3.6	%
Expected term of options	7 years		7 years		7 years		7 years

Share-Based Compensation Expense

Total share-based compensation expense recognized in the Condensed Consolidated Statements of Operations for the three and six months ended July 4, 2009 and June 28, 2008 was as follows (in thousands):

	Three Months Ended					Six Months Ended
	July 4, 2009		June 28, 2008			July 4, 2009		June 28, 2008
Stock options	$	766	$	485		$	1,064	$	937
Restricted stock awards		367		516			716		1,172
Restricted stock units		88		—			176		—
Employee stock purchase plan		3		7			8		16
		1,224		1,008			1,964		2,125
Vesting related to restructuring activities		—		(35	)		—		(50	)
Total share-based compensation expense	$	1,224	$	972		$	1,964	$	2,075

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 July 4, 2009, there was unrecognized compensation cost for non-vested share-based compensation of $4.5 million related to options, $2.5 million related to restricted share awards, and $1.1 million related to restricted share units. These costs are expected to be recognized over remaining weighted average periods of 2.0, 2.3, and 3.5 years, respectively.

14

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 10—EMPLOYEE BENFIT PLANS

401(k) Retirement Savings Plan

The Company maintains a 401(k) retirement savings plan for the benefit of substantially all full time U.S. employees. Investment decisions are made by individual employees. Investment in Company stock is not allowed under the plan. The matching contributions of the Company are discretionary and, in conjunction with its restructuring efforts, the Company has temporarily suspended the match through the end of 2009.

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 31, 2008. Net projected periodic pension cost of the plan includes the following components:

	Three Months Ended						Six Months Ended
	July 4, 2009			June 28, 2008			July 4, 2009			June 28, 2008
Service cost	$	730		$	793		$	1,321		$	1,571
Interest		184			207			365			410
Expected return on plan assets		(228	)		(277	)		(452	)		(548	)
Less contributions paid by employees		(188	)		(277	)		(373	)		(510	)
Net periodic pension cost	$	498		$	446		$	861		$	923

The Company is currently evaluating what additional contributions, if any will be made to the pension plan during the remainder of 2009. Actual contributions will be dependent upon investment returns, changes in pension obligations, and other economic and regulatory factors.

NOTE 11—EARNINGS PER SHARE

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

	Three Months Ended						Six Months Ended
	July 4, 2009			June 28, 2008			July 4, 2009			June 28, 2008
Numerators:
Net loss for both basic and diluted EPS	$	(7,604	)	$	(20,909	)	$	(16,335	)	$	(37,706	)
Denominators:
Denominators for basis EPS: weighted-average common shares outstanding		76,519			29,108			76,493			29,074
Dilutive potential shares		—			—			—			—
Denominators for diluted EPS		76,519			29,108			76,493			29,074

Dilutive potential shares are comprised of employee stock options, restricted common stock awards, and restricted share units. 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 5,764,000 and 4,904,000, respectively, for the three and six month periods ended July 4, 2009 and 3,012,000 and 2,763,000, respectively, for the three and six month periods ended June 28, 2008.

15

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 12—INCOME TAXES

For the three and six month periods ended July 4, 2009, the Company recorded a tax provision of $0.4 and $0.5 million, respectively, against pre-tax losses of $7.3 and $15.9 million, respectively, resulting in an effective income tax rate of (5.2) and (2.9) percent. For the three and six month periods ended June 28, 2008, the Company recorded a tax provision of $10.3 and $12.0 million against pre-tax losses of $10.6 and $25.7 million, respectively, an effective rate of approximately (98.0) and (46.8) percent, respectively. For the three and six months ended July 4, 2009 the income tax provision primarily relates to income earned outside the United States. For the three and six month periods ended June 28, 2008 the income tax provision primarily related to adjustments for the potential tax exposures associated with final valuation calculations pertaining to the Amazys acquisition and related facility shutdown and liquidation.

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

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

The Company’s policy is to accrue unrecognized tax benefits as a FIN 48 liability, accrue the related interest and penalties as a tax liability, and record the offsetting expenses as income tax. For the three and six month periods ended July 4, 2009, the Company recorded tax expense of $0.2 and $0.3 million, respectively, related accrued interest, and penalties. For the three and six month periods ended June 28, 2008, the Company accrued interest and penalties of $0.6 and $0.7 million respectively, net of associated tax benefits. At January 3, 2009, the Company had accrued $2.1 million for payment of interest and penalties.

The Company is subject to periodic audits by domestic and foreign tax authorities. The Company reported a net operating loss on its 2007 Federal Income Tax return and during 2008 it filed a loss carry back claim with the Internal Revenue Service (IRS) related to this loss. By statute, the IRS is required to submit tax refund claims in excess of $2 million to the Congressional Joint Committee on Taxation for review. Consequently, the IRS is currently in the process of examining the Company’s tax returns for the years 2005 and 2007. One foreign tax jurisdiction is currently conducting a periodic audit of the 2005 and 2004 tax returns. While it is possible that the audits could result in an additional tax assessment, the amount of any payment is not anticipated to be material. 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 2003.

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

NOTE 13—COMPREHENSIVE INCOME

Comprehensive loss was $(2.1) and $(14.2) million, respectively, for the three and six month periods ended July 4, 2009. Comprehensive loss was $(18.2) and $(40.7) million, respectively, for the three and six month periods ended June 28, 2008. The components of ending accumulated other comprehensive income (loss) are as follows (in thousands):

	Foreign currency translation adjustments			Net unrealized gain (loss) on derivative financial instruments (net of tax effects)			Pension adjustments (net of tax effects)			Other			Total Accumulated Other Comprehensive Income
Balance on January 3, 2009	$	9,156		$	(6,449	)	$	(700	)	$	(46	)	$	1,961
Other comprehensive income (loss) for the six months ended July 4, 2009		(995	)		3,085			—			46			2,136
Balance on July 4, 2009	$	8,161		$	(3,364	)	$	(700	)	$	—		$	4,097

16

X-RITE, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued

(Unaudited)

NOTE 14—FOUNDERS’ STOCK REDEMPTION AGREEMENTS AND RELATED LIFE INSURANCE POLICIES

In 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 their 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. At the beginning of 2008, the Company’s remaining life insurance portfolio consisted of eleven policies with a face value of $130.0 million and cash surrender value of $21.2 million. Throughout 2008 the Company surrendered or sold all eleven life insurance policies generating $21.0 million in proceeds. As part of the sale of the life insurance policies, the Company recognized a gain of $1.3 million during the fourth quarter of 2008. For policies that were surrendered the Company received the cash surrender value of the policy on the day of notification. The proceeds were used to fund the equity issuance costs and debt amendment fees incurred in connection with the October 28, 2008 Corporate Recapitalization Plan.

NOTE 15—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, Pantone. The term of the letter of credit is through December 31, 2009, with an automatic renewal provision for one year at the grantor’s discretion. The face amount of the agreement is $0.4 million at July 4, 2009.

The Company’s product warranty reserves were not significant.

NOTE 16—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 (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. In August 2008, the Company amended the Plan to render it inapplicable to the transactions contemplated by the Corporate Recapitalization Plan.

17

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. Forward-looking statements include, but are not limited to statements concerning liquidity, capital resources needs, tax rates, dividends and potential new markets. Words such as “anticipates,” “believes,” “estimates,” “expects,” “likely,” “plans,” “projects,” “should,” variations of such words and similar expressions are intended to identify 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.

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

Second Quarter Highlights:

• Second quarter 2009 net sales of $49.4 million

• Improved profitability as a result of the Company’s profit improvement plan

^¡ Second quarter operating income of $2.5 million and a significant reduction in the net loss in the second quarter versus prior year

^¡ Healthy cash flow from operations

• Strengthened balance sheet

^¡ Debt paid down in the second quarter by $13.4 million and $34.2 million year-to-date

^¡ Second quarter ending cash balance of $33.8 million

• New MatchRite^® iVue^TM color matching system announced as next generation solution for Benjamin Moore stores in North America

• Increased adoption of ColorMunki^TM Design by major industry partners and customer as key workflow tool in creative phase of product realization process

18

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

RESULTS OF OPERATIONS

The following table summarizes the results of the Company’s operations for the three and six month periods ended July 4, 2009 and June 28, 2008 (in millions):

	Three Months Ended										Six Months Ended
	July 4, 2009					June 28, 2008					July 4, 2009					June 28, 2008
Net sales	$	49.4		100.0	%	$	73.5		100.0	%	$	96.0		100.0	%	$	139.4		100.0	%
Cost of sales:
Products sold		19.7		39.9			31.1		42.3			39.5		41.2			57.6		41.3
Inventory valuation adjustment		—		—			3.9		5.3			—		—			7.7		5.5
Restructuring charges		—		—			0.1		0.1			—		—			0.3		0.3
Gross profit		29.7		60.1			38.4		52.3			56.5		58.8			73.8		52.9
Operating expenses		27.2		55.1			38.0		51.7			55.8		58.1			75.3		54.0
Operating income (loss)		2.5		5.0			0.4		0.6			0.7		0.7			(1.5	)	(1.1	)
Interest expense		(8.7	)	(17.6	)		(11.2	)	(15.3	)		(17.2	)	(17.9	)		(23.2	)	(16.7	)
Other, net		(1.0	)	(2.0	)		0.2		0.3			0.7		0.7			(1.0	)	(0.7	)
Loss before taxes		(7.2	)	(14.6	)		(10.6	)	(14.4	)		(15.8	)	(16.5	)		(25.7	)	(18.5	)
Income taxes		0.4		0.8			10.3		14.0			0.5		0.5			12.0		8.6
Net Loss	$	(7.6	)	(15.4	)%	$	(20.9	)	(28.4	)%	$	(16.3	)	(17.0	)%	$	(37.7	)	(27.1	)%

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.

For the three and six months ended July 4, 2009, the Color Measurement segment accounted for approximately $41.3 and $79.5 million in net sales versus $61.9 and $115.9 million for the comparable periods in the previous year. The Color Standards segment accounted for approximately $8.1 and $16.5 million in net sales for the three and six months ended July 4, 2009, versus $11.6 and $23.5 million for the comparable periods in the previous year.

19

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

Net Sales

The following table denotes net sales by business unit for the three and six months ended July 4, 2009 and June 28, 2008 (in millions):

Net Sales By Product Line

	Three Months Ended								Six Months Ended
	July 4, 2009				June 28, 2008				July 4, 2009				June 28, 2008
Imaging and Media	$	19.0	38.5	%	$	32.2	43.8	%	$	37.6	39.1	%	$	60.2	43.2	%
Industrial		10.9	22.1			14.5	19.7			19.1	19.9			27.7	19.9
Retail		4.2	8.5			5.9	8.0			8.1	8.4			10.0	7.2
Color Support Services		5.7	11.5			7.7	10.5			11.8	12.3			15.0	10.8
Other		1.5	3.0			1.6	2.2			2.9	3.1			3.0	2.1
Total Color Measurement		41.3	83.6			61.9	84.2			79.5	82.8			115.9	83.2
Color Standards		8.1	16.4			11.6	15.8			16.5	17.2			23.5	16.8
Total	$	49.4	100.0	%	$	73.5	100.0	%	$	96.0	100.0	%	$	139.4	100.0	%

Consolidated

Net sales for the second quarter of 2009 and year to date results were $49.4 and $96.0 million, a decrease of $24.1 and $43.4 million, or 32.8 and 31.1 percent, over the comparable periods in 2008. The most significant declines occurred within the Imaging and Media and the Industrial business units. These declines were a result of the continued global economic recession and its related effect on the Company.

The Company experienced net sales declines in the three and six month periods ended July 4, 2009 in all of the regions of the world where it conducts business. For the three months ended July 4, 2009, net sales in North America decreased $7.0 million, or 26.6 percent, compared with the second quarter of 2008, while net sales in Europe decreased $12.9 million, or 41.2 percent for the second quarter of 2009. Net sales in Asia Pacific decreased $3.8 million, or 26.2 percent compared with the second quarter of 2008. For the six months ended July 4, 2009, net sales in North America decreased $11.2 million, or 22.7 percent, compared with the same period of 2008, while net sales in Europe decreased $24.9 million, or 40.4 percent for the six months of 2009. Net sales in Asia Pacific decreased $7.0 million, or 26.8 percent compared with the first six months of 2008. The Company experienced nominal net sales declines in Latin America compared to prior year sales for both periods presented.

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 $2.2 million unfavorable effect on second quarter 2009 net sales, and a $4.5 million unfavorable effect on year to date net sales for the period ended July 4, 2009 as compared to similar periods in 2008.

20

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

Color Measurement Segment

The Imaging and Media product line provide solutions for commercial and package printing applications, digital printing and photo processing, photographic, graphic design and pre-press service bureaus in the imaging industries. For the three months ended July 4, 2009, the Imaging and Media product line recorded a decrease in net sales of $13.2 million, or 41.0 percent, compared with the second quarter of 2008. For the six month period ended July 4, 2009, Imaging and Media net sales decreased $22.6 million, or 37.5 percent, compared with the similar period in 2008. During the second quarter of 2009 the Company clarified the terms of certain customer agreements, which resulted in the recognition of $1.2 million of previously deferred revenue. The decline in the Imaging and Media product line continued from previous periods and has been driven by the pressroom and printing markets where demand from end user consumers has not recovered from economic recession conditions experienced in the second half of 2008. Leading the decline in the Imaging and Media product line was a year over year decline in European sales of 43.2 percent.

The Industrial group product line 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. The Industrial market’s net sales for the three months ended July 4, 2009 decreased by $3.6 million, or 24.8 percent compared to the same quarter in the prior year. Net sales for the six months ended July 4, 2009 decreased by $8.6 million, or 31.0 percent, compared to the same period a year ago. The Industrial market’s decline has been the result of the economic declines in the global automotive channel and related supply chain. As the U.S. economy weakened in 2008 and continued into 2009 a number of these supply chain projects were delayed into late 2009 or potentially 2010. The largest area of decline for the Industrial product line was experienced in North America where year over year sales were down 37.7 percent.

The Retail business markets its paint matching products under the Match-Rite name to home improvement centers, mass merchants, paint retailers and paint manufacturers. The Retail product line experienced a net sales decrease of $1.7 million, or 28.8 percent, for second quarter of 2009 compared with that of 2008. For the six month period ended July 4, 2009, the Retail market recorded a decline in net sales of $1.9 million, or 19.0 percent, compared to the same period in the prior year. For the three and six months ended July 4, 2009 the Retail product line has been negatively impacted by the challenging economic environment of the European retail markets. While sales in North America are down 1.8 percent year over year our European sales have shown a much deeper decline of 71.4 percent for the same period. The declining European sales in 2009 are directly related to the economic recession in Europe.

The Color Support Services product line 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 global service repair departments. The products repaired by the service department include the Company’s products currently covered by our warranty program as well as those products which have expired warranties. The Color Support Services market was formed in 2007 as a result of the Amazys acquisition. The Color Support Services group recorded a second quarter 2009 decrease in net sales of $2.0 million, or 26.0 percent, compared to the second quarter of the previous year. For the six month period ended July 4, 2009, this market experienced a decline in net sales of $3.2 million, or 21.3 percent, over the comparable period last year. The decrease in Color Support Services net sales was driven in large part by the continued global economic recession.

The Company’s products denoted as Other are primarily comprised of the Medical and Dental markets. The Medical product line provides instrumentation designed for use in controlling variables in the processing of x-ray film and other applications. The Dental product line provides shade matching technology to the cosmetic dental industry through X-Rite’s ShadeVision and Shade-X systems. Other product net sales for the three and six month periods ended July 4, 2009 decreased by a nominal amount compared to the same periods of 2008.

Color Standards Segment

The Color Standards segment includes the operations of the Pantone business unit. Pantone is a leading developer and marketer of products for the accurate communication and reproduction of color, servicing worldwide customers in a variety of industries including imaging and media, textiles, digital technology, plastics and paint. For 2008, the results presented in the Color Standards segment reflect the first full year of Pantone operations since the acquisition. For the second quarter of 2009, the Color Standards segment recorded a net sales decrease of $3.5 million, or 30.2 percent, compared to the same quarter of 2008. For the six month period ended July 4, 2009, the Color Standards segment recorded a decline in net sales of $7.0 million, or 29.8 percent, over the comparable period of the prior year. Decreases in the Color Standards segment were driven by declining sales in the graphics and textile markets.

21

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

Cost of Sales and Gross Profit

Gross profit for the three month period ended July 4, 2009 was $29.7 million, or 60.1 percent of sales, compared with $38.4, million or 52.3 percent of sales, for the comparable period in 2008. For the six month period ended July 4, 2009, gross profit was $56.5 million, or 58.8 percent of sales, compared with $73.8 million, or 52.9 percent of sales, for the same period in 2008. The three and six month increase in margin of approximately 780 and 590 basis points, respectively, is a result of the January 2009 restructuring plan and completion of the Pantone purchase accounting inventory adjustments in October 2008. Included in the three and six month cost of sales for 2008 are $3.9 and $7.7 million, or 530 and 550 basis points, of purchase accounting inventory adjustments as a result of the Pantone acquisition purchase price allocation. As part of the Pantone purchase price allocation, an adjustment of $15.4 million was recorded to increase inventory to its fair value at the date of acquisition. The remaining improvements in gross margin were a result of the January 2009 restructuring plan in which the Company aggressively pursued manufacturing efficiencies; implemented a reduction in headcount, reduced work schedules and initiated furloughs for selected employee groups while suspending selected employee benefit programs.

Operating Expenses

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

	Three Months Ended								Six Months Ended
	July 4, 2009				June 28, 2008				July 4, 2009				June 28, 2008
Selling and marketing	$	13.1	26.5	%	$	17.4	23.6	%	$	26.7	27.8	%	$	35.0	25.1	%
Research, development and engineering		5.7	11.6			7.7	10.5			11.6	12.1			16.4	11.8
General and administrative		7.0	14.2			8.3	11.3			14.3	14.9			18.1	13.0
Restructuring and other related charges		1.4	2.8			4.6	6.3			3.2	3.3			5.8	4.1
Total	$	27.2	55.1	%	$	38.0	51.7	%	$	55.8	58.1	%	$	75.3	54.0	%

For the three and six month periods ended July 4, 2009, Selling and marketing expenses decreased by $4.3 and $8.3 million, or 24.7 and 23.7 percent, as compared with the same periods of 2008. Research, development and engineering expenses have declined by $2.0 and $4.8 million or 26.0 and 29.3 percent, respectively, for the three and six month periods of 2009 as compared with the same period in 2008. General and Administrative expenses decreased by $1.3 and $3.8 million, or 15.7 and 21.0 percent, for the three and six month periods ended July 4, 2009, over the comparable periods of 2008. The decreases in all classifications of operating expenses are primarily driven by lower compensation levels due to lower employment levels, strong initiatives to reduce travel and entertainment expenses, and efforts to minimize consulting fees. These declines are a result of the cost reduction initiatives in response to the uncertain economic conditions. Restructuring and other related charges for the three and six month periods of 2009 decreased by $3.2 and $2.6 million, or 69.6 and 44.8 percent, compared with the same periods of 2008. These decreases were the result of the substantial completion of the Amazys restructuring plan and the April 2008 restructuring plan in 2008. In the first six months of 2009 the Company expensed $0.1 million related to the 2006 and 2008 restructuring plans. In the first and second quarters of 2009 the Company initiated the January 2009 restructuring plan and a global tax restructuring plan, respectively. For the three and six months ended July 4, 2009, the Company has incurred $1.4 and $3.1 million in charges related to these restructuring efforts.

Operating Income (Loss)

Operating income (loss) for the Color Measurement segment was $1.5 and $(1.4) million for the three and six month periods in 2009, as compared to $0.7 and $0.9 million for the same periods in 2008. The operating income (loss) for the Color Measurement segment was negatively impacted in the first quarter of 2009 as a result of the charges incurred in connection with the January 2009 restructuring plan. Operating income (loss) for the Color Standards segment was $1.0 and $2.1 million for the three and six month periods in 2009, as compared to $(0.3) and $(2.4) million for the same periods in 2008. Operating income (loss) for the Color Standards segment for the three and six month periods of 2009, as compared with the comparable periods in 2008, have increased by $1.3 and $4.5 million, respectively. Consolidated operating income for 2009 has increased year over year as a result of the Company’s restructuring efforts to counteract the decline in sales.

22

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

Other Income (Expense)

Interest Expense

Interest expense was $8.7 and $17.2 million for the three and six months ended July 4, 2009, which is a decrease of 22.3 percent and 25.9 percent over comparable periods in 2008. The year over year decreases are largely attributable to the significant pay downs of debt that occurred as a result of the Corporate Recapitalization Plan in the fourth quarter of 2008, sale of former Corporate headquarters in the first quarter of 2009, and excess cash from continuing operations throughout 2009. Interest expense was $11.2 and $23.2 million for the three and six months ended June 28, 2008, which was primarily related to the borrowings and amortization of associated financing costs incurred to finance the acquisitions of Amazys and Pantone that occurred during July 2006 and October 2007, respectively. For further discussions see Note 7 regarding the Company’s short and long-term indebtedness and Note 8 on the Company’s derivative financial instruments.

Other Income (Expense)

Other income (expense) consists of gains or losses from foreign exchange transactions and sale of assets. Other income (expense) totaled $(1.0) and $0.7 million for the three and six months ended July 4, 2009 and $0.2 and $(1.0) million for the three and six months ended in June 28, 2008.

Income Taxes

The Company’s effective tax rate for the second quarter of 2009 was (5.2) percent compared to (98.0) percent for the second quarter of 2008. For the six months ended July 4, 2009, the Company’s effective tax rate was (2.9) percent compared to (46.8) percent for the same period in prior year. The significant change in the effective tax rate is primarily due to a second quarter 2008 adjustment for the potential tax exposures associated with final valuation calculations pertaining to the Amazys acquisition and related facility shutdown and liquidation.

Net Loss

The Company recorded a net loss of $7.6 and $16.3 million, respectively, for the three and six month periods ended July 4, 2009, compared to a net loss of $20.9 and $37.7 for comparable periods in 2008. On a per share basis, fully diluted loss per share was $(0.10) and $(0.21) for the three and six month periods in 2009, compared to $(0.72) and $(1.30) per share for the comparable periods in 2008.

The average number of common shares outstanding for purposes of calculating basic shares outstanding was higher in 2009 due to shares being issued in connection with the recapitalization in 2008 and the Company’s employee stock programs.

23

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):

	Six Months Ended
	July 4, 2009			June 28, 2008			Increase (Decrease)
Net cash flow provided by (used for):
Operating activities	$	16.5		$	0.7		$	15.8
Investing activities		2.6			(2.9	)		5.5
Financing activities		(35.8	)		9.2			(45.0	)
Effect of exchange rate changes on cash		(0.3	)		1.0			(1.3	)
Net increase (decrease) in cash		(17.0	)		8.0			(25.0	)
Cash, beginning of period		50.8			20.3			30.5
Cash, end of period	$	33.8		$	28.3		$	5.5

Cash

At July 4, 2009, the Company had cash of $33.8 million, compared with $50.8 million at January 3, 2009, a decrease of $17.0 million. At July 4, 2009, approximately $16.4 million in cash was held by subsidiaries outside of the United States.

Operating Activities

Net cash provided by operating activities was $16.5 and $0.7 million for the first six months of 2009 and 2008, respectively.

In 2009, cash provided by operating activities consisted of a net loss of $16.3 million offset by net cash provided by operating assets and liabilities of $9.2 million and non-cash items of $23.6 million. Significant sources of cash in 2009 provided by operating activities included the collection of accounts receivable and decreased global inventory balances of $9.2 million and $3.6 million, respectively. The sources of cash were partially offset by a reduction in accounts payable of $4.8 million. Significant non-cash transactions for the quarter-ended July 4, 2009 included; $10.8 million of add-backs for amortization, depreciation of $3.3 million, derivative fair value adjustments and charges of $3.1 million, share-based compensation expense of $2.0 million, and amortization of deferred financing costs of $1.5 million.

In 2008, cash provided by operating activities consisted of a net loss of $37.7 million offset by net cash provided by operating assets and liabilities of $10.3 million and non-cash items of $28.1 million. Significant sources of cash in 2008 included decreases in global inventory and collection of accounts receivable of $11.3 million and $4.4 million, partially offset by decreases in accounts payable and other current and non-current liabilities of $7.0 million and $2.0 million, respectively. Significant adjustments for non-cash items include add-backs for amortization of $10.6 million, depreciation of $3.6 million, derivative fair value adjustments and charges of $3.1 million, share-based compensation expense of $2.1 million, and amortization of deferred financing costs of $1.5 million.

Investing Activities

The most significant components of the Company’s investment activities are (i) proceeds from sales of assets, and (ii) capital expenditures. Net cash provided by (used for) investing activities during the six months ended July 4, 2009 and June 28, 2008 was $2.6 and $(2.9) million, respectively. During 2009, proceeds from sales of assets were $7.3 million, which primarily resulted from the sale of the Company’s former headquarters for $7.2 million partially offset by capital expenditures of $2.4 million. Capital expenditures are primarily related to the acquisition of machinery, equipment and tooling for the Company’s manufacturing facilities in the United States and Switzerland. During 2008, cash used for investing activities was comprised of capital expenditures of $2.1 million.

24

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

Financing Activities

The primary components of the Company’s financing activities are (i) proceeds from issuance and payment of debt and (ii) purchase of interest rate cap. Net cash provided by (used in) financing activities during 2009 and 2008 was $(35.8) and $9.2 million, respectively.

During 2009, the Company paid down $34.3 million of its debt. In the first quarter of 2009, the Company completed the sale of its former headquarters for $7.2 million. Proceeds from the sale were used to pay transaction closing costs, pay off the remaining balance on the mortgage, and then used to repay a portion of the Company’s first lien term loan. In the second quarter of 2009, the Company used $13.0 million in cash from foreign operations to pay down the Company’s revolving line of credit. The remaining payments were generated from cash provided by the Company’s operating activities.

Another significant component of financing activities for 2009 was the purchase of an interest rate cap. On December 30, 2008, the Company purchased an interest rate cap to limit its exposure to increases in the 3 month LIBOR rate above 3 percent per annum. The cost of the interest rate cap was $1.6 million, payment for which was made in January 2009. The cap became effective January 6, 2009 at a notional amount of $256.0 million. The notional amount amortizes by $1.0 million every six months through January 6, 2012. Effective April 6, 2009, the Company reduced the notional of the cap by $25 million. The company received $0.1 million in proceeds related to the sale of this portion of the cap and reclassified $0.1 million from accumulated other comprehensive income as a decrease to interest expense related to this reduction.

During 2008, the Company’s principal financing activities related to the management of short and long term indebtedness incurred in connection with the acquisitions of Amazys and Pantone. For the six months ended June 28, 2008, the Company had drawn $10.5 million against the revolving line of credit offset partially by payments on debt of $1.4 million.

As of July 4, 2009, the Company was in compliance with the financial covenants contained in its first and second lien credit agreements, as amended. As a result of the completion of the Corporate Recapitalization Plan, the Company believes its current liquidity and cash position, future cash flows, and availability under its current credit facility should provide the necessary financial resources to meet its expected operating requirements for the foreseeable future. While the Company does not anticipate the need for additional financing, we continue to monitor the financial markets, and are uncertain how the recent downturn in the credit market would affect our ability to obtain additional financing if needed.

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 January 3, 2009.

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.

25

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations - continued

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.

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 past acquisitions. These agreements were terminated by the Company on April 21, 2008. On December 30, 2008, the Company replaced these swap agreements with an interest rate cap. The interest rate cap limits the Company’s exposure to an increase in the 3 month LIBOR rate above 3 percent per annum.

A hypothetical 25 basis point increase in interest rates during the quarter ended July 4, 2009 would have increased the interest expense reported in the Consolidated Financial Statements by $0.3 million.

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 $0.6 million for the six months ended July 4, 2009.

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 July 4, 2009 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

26

PART II OTHER INFORMATION

Items 1. Legal Proceedings

None

Item 1A. Risk Factors

None

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

None

Item 3. Defaults Upon Senior Securities

None

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

On May 20, 2009, the Company held its annual meeting of shareholders at the offices of McDermott Will & Emery LLP, 227 West Monroe Street, Chicago, IL 60606. The shareholders voted on a proposal to elect directors for the terms specified below.

The results of the voting are shown below:

	Total Affirmative Votes	Authority to Vote Withheld
David A. Eckert for a term expiring in 2010	71,991,900	733,250
Colin M. Farmer for a term expiring in 2011	71,415,956	1,309,194
Thomas J. Vacchiano, Jr. for a term expiring in 2011	70,866,392	1,858,758
David M. Cohen for a term expiring in 2012	70,978,128	1,747,022
Daniel M. Friedberg for a term expiring in 2012	71,238,474	1,486,676
Mark D. Weishaar for a term expiring in 2012	71,058,559	1,666,591

Company directors Gideon Argov and L. Peter Frieder (whose terms expire in 2010) and John E. Utley (whose term expires in 2011) continued as directors of the Company following the annual meeting.

Item 5. Other Information

None

27

PART II OTHER INFORMATION

Item 6 Exhibits

(a) Exhibit Index

31.1	Certification of the Chief Executive Officer and President of X-Rite, Incorporated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
31.2	Certification of the Chief Financial Officer of X-Rite, Incorporated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	X-RITE, INCORPORATED
August 13, 2009	/s/ Thomas J. Vacchiano Jr.
	Thomas J. Vacchiano Jr.
	Chief Executive Officer (principal executive officer)
August 13, 2009	/s/ Bradley J. Freiburger
	Bradley J. Freiburger, Interim Chief Financial Officer (principal financial and accounting officer)

28