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

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 %

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.

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.

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.

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.

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 . . .