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-K, 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," and 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 including those listed in Item 1A-Risk Factors. 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 or the Company). For purposes of this discussion, amounts from the accompanying Consolidated Financial Statements and related notes have been rounded to millions of dollars, except where separately disclosed, 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 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, distributors, and consumers 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 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.

Overview of 2008

• Fourth quarter and full year 2008 sales of $60.8 million and $261.5 million, respectively

• Initial shipments and positive customer feedback for two new next generation product lines-the MA 98 with xDNA and the iVue Paint Matching System

• A stronger balance sheet evidenced by $50.8 million in cash and a reduced debt balance of $270.9 million at year end. This primarily is due to the October 2008 Company recapitalization and monetization of the founders' life insurance policies

• Fourth quarter operating expenses totaled $28.6 million, excluding impairment charges and restructuring and other related charges. This represents a decrease of approximately $2.8 million compared to the third quarter of 2008

• The net loss for the year was $117.8 million, or a loss of $3.12 per share. Impairment, acquisition, and other related charges were key contributors to this reported net loss for the year

RESULTS OF OPERATIONS

The following table summarizes the results of the Company's operations for the 2008, 2007 and 2006 fiscal years and includes amounts expressed as a percentage of net sales (in millions):

                                               2008                      2007                     2006
Net Sales                               $  261.5      100.0 %     $ 248.7      100.0 %     $ 167.6      100.0 %
Cost of sales:
Products sold                              109.7       41.9          99.7       40.1          65.5       39.1
Inventory valuation adjustment              12.8        4.9           2.6        1.0           4.9        2.9
Restructuring and other related
charges                                      0.4        0.2           0.2        0.1           6.1        3.6

Gross profit                               138.6       53.0         146.2       58.8          91.1       54.4
Operating expenses                         135.4       51.8         129.6       52.1         116.8       69.7
Goodwill and indefinite-lived
intangibles impairment                      58.1       22.2            -          -             -          -

Operating income (loss)                    (54.9 )    (21.0 )        16.6        6.7         (25.7 )    (15.3 )
Interest expense                           (46.3 )    (17.7 )       (22.1 )     (8.8 )        (8.8 )     (5.3 )
Gain on derivative financial
instruments                                   -          -             -          -            2.1        1.3
Write-off of deferred financing
costs                                       (3.8 )     (1.5 )        (5.5 )     (2.2 )          -          -
Other income (expense)                      (1.1 )     (0.4 )        (0.2 )     (0.2 )         0.3        0.1

Loss before income taxes                  (106.1 )    (40.6 )       (11.2 )     (4.5 )       (32.1 )    (19.2 )
Income taxes (benefit)                      11.7        4.5           9.6        3.9          (5.0 )     (3.0 )

Loss from continuing operations           (117.8 )    (45.1 )       (20.8 )     (8.4 )       (27.1 )    (16.2 )
Discontinued operations:
Income from operations                        -          -             -          -            1.7        1.0
Net gain on sale                              -          -            8.2        3.3            -          -

Net loss                                $ (117.8 )    (45.1 )%    $ (12.6 )     (5.1 )%    $ (25.4 )    (15.2 )%

On October 24, 2007, the Company acquired Pantone, a worldwide market leader in color communication and specification standards in the creative design industries.

On July 5, 2006, the Company acquired Amazys Holding AG, a primary competitor in key markets.

As a result of executing comprehensive integration plans for the Amazys and Pantone acquisitions, various operations have been integrated into the operations of X-Rite as of January 3, 2009 and included in the sales attributable to X-Rite for the 2008 and 2007 periods presented. As Amazys' and Pantone's financial information is not included in the consolidated results prior to their respective dates of acquisition, comparability on a period to period basis is limited.

                                      2008                2007                2006
       (in millions)
       Net Sales
       Imaging and Media         $ 112.6    43.1 %   $ 124.2    50.0 %   $  78.9    47.1 %
       Industrial                   53.2    20.3        58.3    23.4        41.3    24.6
       Retail                       18.3     7.0        22.2     8.9        20.7    12.4
       Color Support Services       28.9    11.1        28.3    11.4        21.8    13.0
       Other                         6.4     2.4         6.7     2.7         4.9     2.9

       Total Color Measurement     219.4    83.9       239.7    96.4       167.6   100.0
       Color Standards              42.1    16.1         9.0     3.6          -       -

       Total Net Sales           $ 261.5   100.0 %   $ 248.7   100.0 %   $ 167.6   100.0 %

As a result of the Pantone acquisition, the Company has two reportable segments, Color Measurement and Color Standards. The Color Measurement segment is engaged in X-Rite's traditional hardware, software technology, and services business that offers a full range of color management solutions. The Company's solutions 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 for global customers in a variety of industries including imaging and media, textiles, plastics, and paint.

For 2008, net sales increased $12.8 million, or 5.1 percent, compared to 2007. The acquisition of Pantone during the last quarter of 2007 contributed $42.1 million in net sales to the Company's 2008 net sales. Net sales for 2007 increased $81.1 million, or 48.4 percent, over 2006. The Amazys acquisition and changes in product mix and selling price in the Color Measurement segment accounted for $72.1 million of the increase in 2007. The acquisition of Pantone, as of October 24, 2007, accounted for $9.0 million of the increase in 2007 net sales.

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. The impact of translating foreign denominated net sales to U.S. dollars improved net sales by $7.1, $6.7, and $0.8 million in 2008, 2007, and 2006, respectively. Both domestic and international revenue increased, with international revenue accounting for 67.2 percent of net sales in 2008 compared to 65.7 and 60.7 percent in 2007 and 2006, respectively.

Color Measurement Segment

The Imaging and Media product lines 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. The Imaging and Media market reported a decrease in revenue of $11.6 million, or 9.3 percent, as compared to 2007. The decline in the Imaging and Media market was sharply influenced by the economic slowdown and associated credit issues experienced throughout 2008 in North America. The largest impacts were seen in the pressroom and printing sub markets where demand from some strategic partners declined and aftermarket channel sales decreased compared to 2007 performance.

In 2007, the Imaging and Media market reported an increase in revenue of $45.3 million, or 57.4 percent, as compared to 2006. The increase in the Imaging and Media market was assisted by incremental European sales of $28.9 million, or 91.6 percent, compared to 2006. The growth in the Imaging and Media market was primarily through the acquisition of Amazys in mid 2006. As a result of the acquisition, the Company had year over year incremental sales to its largest customer of $17.1 million compared to 2006. In 2007, the company introduced several new products which contributed to increased sales and had full year sales for products that were launched in the second half of 2006.

The Industrial group 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 2008 net sales decreased by $5.1 million, or 8.7 percent compared to the prior year. The Industrial year over year decline was largely a slowdown in global supply chain projects between U.S. retailers or product companies and their suppliers in Asia. As the U.S. economy weakened in 2008 a number of these supply chain projects were delayed into 2009 or potentially 2010. In addition, the declining economy impacted a number of small to medium sized customers in the Americas and Asia by lowering their purchasing power. A reduction in export demand in China hindered our sales volume in the Asian Industrial market in 2008.

The Industrial market's net sales in 2007, increased by $17.0 million, or 41.2 percent compared to the prior year. European sales accounted for 43.0 percent, or $5.2 million, of the total sales increase for the industrial business unit. The year over year increase was primarily due to the Amazys acquisition and increased software sales in the industrial business unit.

The Retail market experienced a sales decrease of $3.9 million, or 17.6 percent, for 2008 compared with 2007. The Retail market suffered a significant reduction in European sales versus 2007 as we were unable to build upon the success of our Matchstick product line. While our customer relationships and the competitive landscape are favorable for X-Rite in this market, new solutions are the key for rebuilding this positive momentum. We also saw a 2008 sales slowdown in the Americas for behind the counter paint matching sales as the North American retail industry was negatively impacted by the 2008 economic conditions. The release of iVue® (a next generation retail paint matching system) late in 2008 was received well by many of our major retail accounts. Projects were deferred by management until 2009 or 2010 based on the capital limitations in the retail industry.

The Retail market experienced a sales increase of $1.5 million, or 7.2 percent, for 2007 compared with 2006. This increase in sales was a result of an increase in European sales of $2.1 million offset partially by decrease sales in North America of $0.8 million. The increase in European sales was a result of an expanded presence with key customers and the continued development of strong regional dealer partners. These factors, combined with a stronger resource commitment to the region, have enabled the growth.

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 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 an increase in sales of $0.6 million or 2.1 percent compared to 2007. The increase in Color Support Services sales was driven in large part by the increased focus on new service repair bundles, certifications, and training products targeted at either the installed base (for certifications) or new color section users (for easy to use training alternatives). X-Rite is using direct marketing and telesales techniques to reach out to our vast customer base to maximize the value of our solutions with those customers and to fuel growth in these uncertain economic times.

At the year of formation, the Color Support Services group recorded an increase in sales of $6.5 million or 29.8 percent compared to 2006. The increase in the Color Support Services market was primarily due to the Amazys acquisition. Increased sales of $5.9 million in Europe accounted for 91.0 percent of the Color Support Services increase from 2006.

The Company's product lines denoted as Other are primarily comprised of the Medical and Dental category. 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 matching technology to the cosmetic dental industry through X-Rite's ShadeVision and Shade-X systems. Other product sales represented $6.4, $6.7, and $4.9 million for the 2008, 2007, and 2006 years, respectively. Other product sales have ranged from 2.4 percent of sales to 2.9 percent of sales in the three years.

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 2008, the color standards segment recorded $42.1 million in net sales.

For 2007, the results presented in the color standards segment reflect the operations of Pantone since the October 24, 2007 acquisition date. For 2007, the color standards segment recorded $9.0 million in net sales.

Cost of Sales and Gross Profit

X-Rite's cost of sales consists primarily of materials, labor, and overhead associated with manufacturing its products. Manufacturing activities are primarily conducted at facilities in Michigan, New Jersey, and Switzerland, with smaller operations located in Italy and Germany. Software development is also conducted at these facilities, as well as at a facility in Massachusetts. The Company's gross profit historically has fluctuated within a narrow range. Principal drivers of gross profit include production volumes, product mix, labor, facilities and materials costs.

For the year ended January 3, 2009, gross profit was $138.6 million, or 53.0 percent of sales, compared with $146.2 million, or 58.8 percent of sales, for fiscal 2007. 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. This adjustment has been recognized in cost of sales ratably as the inventory is sold. For the year ended January 3, 2009 the Company recognized $12.8 million, or 4.9 percent of sales, 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 its reserves over excess and obsolete inventory as a result of restructuring efforts and decreased sales which further decreased the Company's gross profit during fiscal 2008.

For the year ended December 29, 2007, gross profit was $146.2 million, or 58.8 percent of sales, compared with $91.1 million, or 54.4 percent of sales, for fiscal 2006. As part of the $15.4 million fair value inventory adjustment relating to the Pantone acquisition, the Company recognized $2.6 million, or 1.0 percent of sales, in cost of sales during 2007. Additionally, cost of sales included $0.2 million in restructuring expenses representing charges for the write-down of inventory and capitalized software directly related to X-Rite product lines that were discontinued as a result of the Amazys acquisition. The remaining decrease in margin was primarily due to the full year of Amazys production, whose gross margins have historically run 4 to 8 percent lower than X-Rite's. Other factors contributing to the 2007 gross margin include manufacturing and material variances, and efficiencies generated from the movement of production from subsidiaries to the Michigan location.

Operating Expenses

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



                                                     2008               2007               2006
Selling and marketing                           $  64.9   24.8 %   $  60.6   24.4 %   $  43.4   25.9 %
Research, development and engineering              29.4   11.2        34.7   14.0        25.3   15.1
General and administrative                         35.2   13.5        28.2   11.3        23.7   14.1
Acquired in-process research and development         -      -           -      -         11.1    6.6
Restructuring and other related charges             5.9    2.3         6.1    2.4        13.3    8.0
Goodwill and indefinite-lived intangibles
impairment                                         58.1   22.2          -      -           -      -

Total                                           $ 193.5   74.0 %   $ 129.6   52.1 %   $ 116.8   69.7 %

The effect of foreign exchange rates increased operating expenses by $0.5 million in 2008, $3.8 million in 2007, and $0.2 million in 2006.

Selling and Marketing Expenses

Selling and marketing expenses consist primarily of wages, commissions, facility costs, travel, advertising, trade shows, media and product promotion costs. Selling and marketing expenses for 2008 were $64.9 million, an increase of $4.3 million, or 7.1 percent, compared with 2007. The increase was primarily a result of the full year of selling expenses related to the Pantone acquisition, offset by a decrease due to cost reductions and reduced variable compensation. As a percentage of sales, 2008 expenses were 24.8 percent compared to 24.4 and 25.9 percent for 2007 and 2006, respectively.

Selling and marketing expenses for 2007 were $60.6 million, an increase of $17.2 million, or 39.6 percent, compared with 2006. The increase was primarily a result of the full year selling expenses related to the Amazys acquisition. Included in the 2007 selling and marketing expenses are the costs associated with Pantone's selling and marketing group of $1.9 million since the acquisition date. In addition selling and marketing expenses also include $1.8 million of acquisition related amortization expenses.

Research, Development and Engineering Expenses

Research, development and engineering (RD&E) expenses include compensation, facility costs, consulting fees, and travel for the Company's engineering staff. These costs are incurred primarily in the United States and Switzerland for both new product development and the support and refinement of existing product lines. RD&E expenses in 2008 decreased $5.3 million, or 15.3 percent, compared to 2007. The decrease is primarily a result of cost reductions related to the April 2008 restructuring along with a reduction of variable compensation. RD&E expenses as a percentage of sales were 11.2, 14.0 and 15.1 percent for 2008, 2007 and 2006, respectively. The Company intends to make investments in RD&E in the range of 11 to 13 percent of net sales for the foreseeable future.

RD&E expenses in 2007 increased $9.4 million, or 37.2 percent, compared to 2006. Of this increase $3.5, million was attributable to acquisition related intangible amortization incurred in the July 2006 acquisition of Amazys and the October 2007 acquisition of Pantone. Also contributing to the increase over 2006 was the full year costs of the Amazys acquisition RD&E expenses.

In addition to the RD&E costs reported as operating expenses, certain costs to develop new software products were capitalized in each of the last three years. Software development costs capitalized totaled $4.0, $3.7, and $3.0 million in 2008, 2007, and 2006, respectively. The related amortization expense was included in cost of sales (see Note 1 to the Consolidated Financial Statements).

General and Administrative Expenses

General and administrative (G&A) expenses include compensation, facility costs, and travel for the Company's executive, finance, human resources and administrative functions, as well as legal and consulting costs. G&A expenses in 2008 increased $7.0 million, or 24.8 percent, over 2007. This increase is primarily attributable to a full year of expenses related to the Pantone G&A expenses. In addition, 2008 G&A expenses included a special property tax assessment and equity issuance costs partially offset by a reduction in variable compensation expense.

G&A expenses in 2007 increased $4.5 million, or 19.0 percent, over 2006. This increase is primarily attributable to a full year of expenses related to the Amazys G&A expenses. In addition, 2007 G&A expenses included $1.7 million of incremental expense related to amortization of intangible assets recorded as part of the Pantone and Amazys purchase price allocations. G&A expenses also included the results of Pantone of $0.9 million for the two months ended December 29, 2007.

Acquired In-Process Research and Development

In 2006, the Company allocated $11.1 million to acquired in-process research and development (IPR&D) as part of the intangibles valuation process in connection with the Amazys acquisition. This value was calculated utilizing the income approach by determining cash flow projections related to IPR&D projects at the date of the acquisition. The full value of the acquired IPR&D intangible assets was written off at the date of acquisition in accordance with U.S. Generally Accepted Accounting Principles as technological feasibility had not been established and no future alternative uses existed. See Note 3 to the Consolidated Financial Statements for further discussion of the Amazys acquisition.

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.

In 2008, the Company incurred $6.3 million in restructuring charges of which $5.9 million were recorded in operating expenses and $0.4 million were recorded in cost of goods sold. In 2007, the Company incurred $6.4 million in restructuring charges of which $6.1 million were recorded in operating expenses and $0.3 million were recorded in cost of goods sold. In 2006, the Company incurred $19.5 million in restructuring charges of which $13.3 million were recorded in operating expenses and $6.2 million were recorded in cost of goods sold.

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 years 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 . . .