Information included in this Quarterly Report on Form 10-Q contains certain forward-looking statements that involve potential risks and uncertainties. The Company's future results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed herein and those discussed in the Company's Annual Report on Form 10-K for the year ended March 31, 2009. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date thereof. Results for interim periods may not be indicative of annual results.

Critical Accounting Policies and Estimates

The preparation of condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We continually evaluate our estimates, including, but not limited to, those related to revenue recognition, bad debts, inventories and any related reserves, income taxes, fixed assets, goodwill and intangible assets. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the facts and circumstances. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies impact the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. Additionally, our senior management has reviewed the critical accounting policies and estimates with the Board of Directors' Audit and Finance Committee. For a more detailed discussion of the application of these and other accounting policies, refer to Note 2 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended March 31, 2009.

Revenue Recognition

The Company recognizes revenue on sales of products when the customer receives title to the goods, which is generally upon shipment or delivery depending on sales terms. Revenues are generally denominated in the currency of the country from which the product is shipped and are net of applicable returns and discounts.

Accounts Receivable

Our customers are primarily major consumer product and wine and spirits companies and container manufacturers. Accounts receivable consist of amounts due from customers in connection with our normal business activities and are carried at sales value less allowance for doubtful accounts. The allowance for doubtful accounts is established to reflect the expected losses of accounts receivable based on past collection history, age and specific individual risks identified. Losses may also depend to some degree on future economic conditions. Although these conditions are unknown to us and may result in additional credit losses, we do not anticipate significant adverse credit circumstances in fiscal 2010. If we are unable to collect all or part of the outstanding receivable balance, there could be a material impact on the Company's operating results and cash flows.

The accounts receivable balances in Australia and South Africa are subject to foreign exchange rate fluctuations which can cause the balance to change significantly with an offset to other comprehensive earnings.

Inventories

Inventories are valued at the lower of cost or market value and are maintained using the FIFO (first-in, first-out) or specific identification method. Excess and obsolete cost reductions are generally established based on inventory age.

Goodwill and Other Acquired Intangible Assets

We test goodwill and other intangible assets for impairment annually and/or whenever events or circumstances make it more likely than not that impairment may have occurred. The impairment test is completed based upon our assessment of the estimated fair value of goodwill and other intangible assets. The annual review for impairment of goodwill requires the use of estimates and assumptions which we believe are appropriate. Application of different estimates and assumptions could have a material impact on the consolidated statements of income.

Impairment of Long-Lived Assets

We review long-lived assets for impairment whenever events or changes in circumstances indicate that assets might be impaired and the related carrying amounts may not be recoverable. The determination of whether impairment has occurred involves various estimates and assumptions, including the determination of the undiscounted cash flows estimated to be generated by the assets involved in the review. The cash flow estimates are based upon our historical experience, adjusted to reflect estimated future market and operating conditions. Measurement of an impairment loss requires a determination of fair value. We base our estimates of fair values on quoted market prices when available, independent appraisals as appropriate and industry trends or other market knowledge. Changes in the market condition and/or losses of a production line could have a material impact on the consolidated statements of income.

Income Taxes

Income taxes are recorded based on the current year amounts payable or refundable, as well as the consequences of events that give rise to deferred tax assets and liabilities. Deferred tax assets and liabilities result from temporary differences between the tax basis and reported book basis of assets and liabilities and result in taxable or deductible amounts in future years. Our accounting for deferred taxes involves certain estimates and assumptions that we believe are appropriate. Future changes in regulatory tax laws and/or different positions held by taxing authorities may affect the amounts recorded for income taxes.

The benefits of tax positions are not recorded unless it is more likely than not the tax position would be sustained upon challenge by the appropriate tax authorities. Tax benefits that are more likely than not to be sustained are measured at the largest amount of benefit that is cumulatively greater than a 50% likelihood of being realized.

Executive Overview

We provide a complete line of innovative decorative label solutions and offer a wide variety of technical and graphic services to our customers based on their specific needs and requirements. Our customers include a wide range of consumer product companies and we supply labels for many of the world's best known brands and products, including laundry detergent, fabric care, food, beverages, and wine and spirits.

Our vision is to be a premier global resource of decorating solutions. We currently serve customers located throughout North, Central and South America, Australia, South Africa and New Zealand. We continue to monitor and analyze new trends in the packaging and consumer products industries to ensure that we are providing appropriate services and products to our customers. Certain factors that influence our business include consumer spending, new product introductions, new packaging technologies and demographics.

The label markets we serve continue to experience a competitive environment and price pressures. We continually search for ways to reduce our costs through improved production and labor efficiencies, reduced substrate waste, new substrate options and lower substrate pricing.

In addition, the current macroeconomic environment has added additional new challenges with the current high rate of unemployment and impact on reduced consumer spending. As a result, sales volumes and pricing is difficult to predict.

In January 2009, the Company announced plans to consolidate its heat transfer label (HTL) manufacturing business located in Framingham, Massachusetts into its other existing facilities. The transition began immediately with final plant closure occurring in the second quarter of fiscal 2010. In connection with the closure of the Framingham facility, the Company recorded a total charge of $2,553 during its fourth quarter period ending March 31, 2009, consisting of $1,407 in cash charges for employee severance and other termination benefits related to 62 associates and $1,146 in non-cash charges related to asset impairments. In the first half of fiscal 2010, the Company incurred employee retention charges of $274 (See Note 12).

On February 29, 2008, the Company acquired Collotype International Holdings Pty. Ltd. (Collotype) which is headquartered in Adelaide, South Australia. Collotype is the world's leading and highly awarded pressure sensitive wine and spirits label manufacturer and a growing provider of labels in the fast-moving consumer goods marketplace in Australia. Collotype has manufacturing operations in Australia, South Africa and the United States.

In October 2007, we announced the expansion of our manufacturing operations with the purchase of two new presses for a newly acquired manufacturing facility in Batavia, Ohio. Our Troy and Batavia, Ohio plants were consolidated into this new facility to both reduce costs and provide needed capacity for long term growth.

Prior to June 2007, we were organized into two segments within the packaging industry: Decorating Solutions and Packaging Services. The Decorating Solutions segment's primary operations involved the design and printing of labels, while the Packaging Services segment provided promotional packaging, assembling and fulfillment services. On July 2, 2007, we completed the sale of Quick Pak whose operating results were reported as the Packaging Services segment. Accordingly, the results of Quick Pak are now presented as discontinued operations for all periods in the consolidated financial statements and we no longer report any segment results as we now only have one business segment.

Results of Operations

Three Months Ended September 30, 2009 compared to the Three Months Ended
September 30, 2008:



                                                                     %
                                2009       2008     $ Change       Change
               Net Revenues   $ 71,963   $ 80,637   $  (8,674 )       (11 )%

Revenues for the three months ended September 30, 2009 as compared to the same period of the prior year decreased 11% primarily due to a 8% decline in sales volumes due to market share declines experienced by our customers' brands, a 2% unfavorable pricing impact due to reduced pricing schedules associated with the new contracts for our three largest customers and a 1% unfavorable foreign exchange impact due to a stronger Australian dollar in the prior year. Volume with our two largest customers remained below prior year and accounted for approximately three-fourths of the volume decline.

                                                                          %
                               2009          2008        $ Change       Change
             Gross Profit    $ 12,821      $ 14,687      $  (1,866 )       (13 )%
             % of Revenues         18 %          18 %

Gross profit decreased $1,866 or 13% compared to the prior year primarily due to the impact of lower sales volumes. Gross margins remained steady at 18% in the second quarter compared to the prior year quarter despite the decline in revenues and start-up inefficiencies related to moving our heat transfer business from Framingham to Scottsburg due to improved operating efficiencies at our Batavia facility and reductions in fixed costs.

                                                                          $           %
                                              2009         2008        Change       Change
Selling, General & Administrative Expenses   $ 6,697      $ 6,952      $  (255 )        (4 )%
% of Revenues                                      9 %          9 %

Selling, general and administrative (SG&A) expenses decreased $255 or 4% compared to the prior year due to reductions in headcount and incentive compensation, and other cost decreases partially offset by $126 in acquisition-related expenses. As a percent of revenues, SG&A expenses were steady at 9% compared to the prior year.

Interest Expense and Other (Income) Expense



                                                                   $           %
                                       2009         2008        Change       Change
        Interest Expense              $ 1,257      $ 1,855      $  (598 )       (32 )%
        Other (Income) Expense, net   $   (44 )    $  (293 )    $  (249 )       (85 )%

Interest expense decreased 32% to $1,257 compared to the same period of the prior year as a result of a reduction in bank debt of $23,609 due to debt repayments and lower interest rates. We had $92,354 of debt at September 30, 2009 compared to $115,963 of debt at September 30, 2008. Other (income) expense decreased by $249 from the prior year due to income in the prior year on a mark-to-market adjustment on a hedged payable to purchase a press that expired at the end of fiscal year 2009.

$ % 2009 2008 Change Change Income Tax Expense $ 1,479 $ 2,033 $ (554 ) (27 )%

Our effective tax rate decreased from 33% in 2008 to 30% in 2009 due to income in lower tax jurisdictions and the impact of the acquisition tax structure related to the Company's international operation that was finalized in the fourth quarter of fiscal 2009. Our expected tax rate for fiscal year 2010 is 30%.

$ % 2009 2008 Change Change Income (loss) from discontinued operations, net of tax $ - $ (27 ) $ 27 N/M

The sale of Quick Pak was completed on July 2, 2007 and therefore, there were no operations since the sale was completed. However, during the second quarter of 2008, the Company recorded additional state income tax expenses resulting from the sale of Quick Pak.

Six Months Ended September 30, 2009 compared to the Six Months Ended September 30, 2008:

$ % 2009 2008 Change Change Net Revenues $ 141,621 $ 160,087 $ (18,466 ) (12 )%

Revenues for the six months ended September 30, 2009 as compared to the same period of the prior year decreased 12% primarily due to an 8% decline in sales volumes due to reduced consumer spending resulting in market share declines experienced by our customers' brands, a 3% unfavorable foreign exchange impact due to a stronger Australian dollar in the prior year and a 1% unfavorable pricing impact. Volume with our two largest customers remained below prior year and accounted for approximately two-thirds of the volume decline.

                                                                          %
                               2009          2008        $ Change       Change
             Gross Profit    $ 25,776      $ 29,657      $  (3,881 )       (13 )%
             % of Revenues         18 %          19 %

Gross profit decreased $3,881 or 13% compared to the prior year primarily due to the impact of lower sales volumes. Gross margins declined slightly to 18% for the six months ended September 30, 2009 compared to the prior year due to the decline in sales volumes, pricing and start-up inefficiencies related to moving our heat transfer business from Framingham to Scottsburg partially offset by cost reduction actions and improved operating efficiencies at our Batavia facility.

                                                                                                  %
                                                    2009           2008         $ Change        Change
Selling, General & Administrative Expenses        $ 12,977       $ 15,405       $  (2,428 )        (16 )%
% of Revenues                                            9 %           10 %

Selling, general and administrative (SG&A) expenses decreased $2,428 or 16% compared to the prior year due to reductions in headcount and incentive compensation, and other cost decreases, partially offset by $274 in employee retention charges related to the Framingham plant closure and $126 in acquisition-related expenses. As a percent of revenues, SG&A expenses were reduced to 9% compared to 10% in the prior year.

Interest Expense and Other (Income) Expense



                                                                                %
                                      2009         2008        $ Change       Change
       Interest Expense              $ 2,486      $ 3,994      $  (1,508 )       (38 )%
       Other (Income) Expense, net   $  (180 )    $  (378 )    $    (198 )       (52 )%

Interest expense decreased 38% to $2,486 compared to the same period of the prior year as a result of a reduction in bank debt due to debt repayments and lower interest rates. Our average outstanding debt during the six months ended September 30, 2009 was $97,337 compared to $123,857 in the prior year. Other (income) expense decreased by $198 from the prior year due to income in the prior year on a mark-to-market adjustment on a hedged payable to purchase a press that expired at the end of fiscal year 2009.

$ % 2009 2008 Change Change Income Tax Expense $ 3,076 $ 3,659 $ (583 ) (16 )%

Our effective tax rate decreased from 34% in 2008 to 29% in 2009 due to income in lower tax jurisdictions and the impact of the acquisition tax structure related to the Company's international operation that was finalized in the fourth quarter of fiscal 2009. Our expected tax rate for fiscal year 2010 is 30%.

$ % 2009 2008 Change Change Income (loss) from discontinued operations, net of tax $ - $ (170 ) $ 170 N/M

The sale of Quick Pak was completed on July 2, 2007 and therefore, there were no operations since the sale was completed. However, during the first half of 2008, the Company recorded additional state income tax expenses resulting from the sale of Quick Pak.

Liquidity and Capital Resources

Through the six months ended September 30, 2009, net cash provided by operating activities was $15,817 as compared to $15,342 in the same period of the prior year. The increase in cash flow is primarily due to cash generated from earnings and lower tax and interest payments in the current quarter.

Through the six months ended September 30, 2009, net cash used in investing activities was $2,274 as compared to net cash used of $1,529 in the same period of the prior year. Capital expenditures in the six months ended September 30, 2009 were $3,189 and were partially offset by proceeds from the sale of plant and equipment of $738. Cash used in investing activities in the prior year included capital expenditures of $7,482 related primarily to the expansion of the Company's manufacturing operations partially offset by net proceeds from the sale of the existing Batavia building and other equipment of $1,675 and refunds of equipment deposits of $4,278.

Through the six months ended September 30, 2009, net cash used in financing activities was $13,503 as compared to $12,995 in the prior year. During the six months ended September 30, 2009, net debt payments were $12,266 compared to $13,317 in the prior year.

On February 29, 2008 and in connection with the Collotype acquisition, the Company executed a new five-year $200 million credit agreement with a consortium of bank lenders (Credit Facility). The new Credit Facility contains an election to increase the facility by up to an additional $50 million and the Company terminated its previous $50 million credit facility. At September 30, 2009, the aggregate principal amount of $185 million is available under the Credit Facility through: (i) a $110 million five-year revolving credit facility ("U.S. Revolving Credit Facility"); (ii) the Australian dollar equivalent of a $40 million five-year revolving credit facility ("Australian Sub-Facility"); and
(iii) a $35 million term loan facility ("Term Loan Facility"), which amortizes $10 million per year.

The Credit Facility may be used for working capital, capital expenditures and other corporate purposes. Loans under the U.S. Revolving Credit Facility and Term Loan Facility will bear interest at either: (i) the greater of (a) Bank of America's prime rate in effect from time to time; and (b) the federal funds rate in effect from time to time plus 0.5%; or (ii) the applicable London interbank offered rate plus the applicable margin for such loans which ranges from 0.75% to 2.00% based on the Company's leverage ratio at the time of the borrowing. Loans under the Australian Sub-Facility bear interest at the Bank Bill Swap Bid Rate (BBSY) plus the applicable margin for such loans, which ranges from 0.75% to 2.00% based on the Company's leverage ratio at the time of the borrowing.

Available borrowings under the Credit Facility at September 30, 2009 consisted of $62,000 under the U.S. Revolving Credit Facility and $30,448 under the Australian Sub-Facility. At September 30, 2009, the Company had one outstanding letter of credit totaling $200 for the purchase of equipment.

The Credit Facility contains customary representations and warranties as well as customary negative and affirmative covenants which requires the Company to maintain the following financial covenants: (i) a minimum consolidated net worth; (ii) a maximum consolidated leverage ratio of 3.25 to 1.00, stepping down to 3.00 to 1.00 at December 31, 2010 and for each fiscal quarter thereafter; and
(iii) a minimum consolidated interest charge coverage ratio of 3.50 to 1.00. The Credit Facility contains customary mandatory and optional prepayment provisions, customary events of default, and is secured by the capital stock of subsidiaries, intercompany debt and all of the Company's property and assets, except for real property.

We believe that we have both sufficient short and long term liquidity and financing. We had a working capital position of $15,208 and $13,531 at September 30, 2009 and March 31, 2009, respectively and were in compliance with our loan covenants and current in our principal and interest payments on all debt.

Contractual Obligations

The following table summarizes Multi-Color's contractual obligations as of September 30, 2009:

Aggregated Information about Contractual Obligations and Other Commitments for
Continuing Operations:



                                                                                                             More
                                                                                                            than 5
September 30, 2009                          Total      Year 1     Year 2     Year 3     Year 4    Year 5     years
Total debt                                $  92,354   $ 10,002   $ 10,000   $ 10,000   $ 62,352   $    -    $    -

Interest on total debt (1)                   11,725      3,971      3,583      3,017      1,154        -         -

Rent due under operating leases              24,164      3,954      3,790      3,407      3,278     3,250     6,485

Unconditional purchase obligations            1,421      1,267        154         -          -         -         -

Pension and post retirement obligations         729         13         24         36         60        49       547

Deferred compensation (2)                       742         -         435        237         -         -         70

Unrecognized tax benefits (3)                    -          -          -          -          -         -         -

Total Contractual Cash Obligations        $ 131,135   $ 19,207   $ 17,986   $ 16,697   $ 66,844   $ 3,299   $ 7,102

(1) Interest on floating rate debt was estimated using projected forward LIBOR and BBSY rates as of September 30, 2009.

(2) The more than 5 years column includes $70 of deferred compensation obligations for which the timing of such payments are not determinable.

(3) The table excludes $3,908 of liabilities related to unrecognized tax benefits as the timing and extent of such payments are not determinable.