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," and 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, LLC, 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.

Third Quarter Highlights:

• Third quarter 2009 net sales of $45.6 million

• Continued gains in year-over-year profitability as a result of the Company's profit improvement plan

• Third quarter operating income of $1.6 million and a significant reduction in the net loss reported in the quarter versus the third quarter of 2008

• Continuing positive cash flow from operations

• Strengthened balance sheet

• Viptronic campus sale closed with net proceeds of $2.3 million

• Debt paid down in the third quarter by $7.7 million and $41.9 million year-to-date

• Cash balance of $29.0 million

• Exchanged $41.7 million of debt for mandatorily redeemable preferred stock and warrants

• Launched myPANTONE™ software application for Apple's App Store selling over 25,000 copies in first 60 days and earning Editor's Choice Award

• MatchRite®iVue™ color matching system achieves pre-recession bookings at the Ace Hardware Fall Exhibition

Condition and Results of Operations - continued

RESULTS OF OPERATIONS

The following table summarizes the results of the Company's operations for the
three and nine month periods ended October 3, 2009 and September 27, 2008 (in
millions):



                                                         Three Months Ended                                     Nine Months Ended
                                            October 3, 2009           September 27, 2008           October 3, 2009           September 27, 2008
Net sales                                 $   45.6      100.0 %     $     61.3       100.0 %     $  141.6      100.0 %     $    200.7       100.0 %
Cost of sales:
Products sold                                 18.5       40.6             25.9        42.2           58.0       41.0             83.5        41.6
Inventory valuation adjustment                  -          -               3.9         6.4             -          -              11.6         5.8
Restructuring charges                          0.1        0.2               -           -             0.1        0.1              0.4         0.2

Gross profit                                  27.0       59.2             31.5        51.4           83.5       58.9            105.2        52.4

Operating expenses                            25.4       55.7             31.2        50.9           81.2       57.3            106.5        53.1

Operating income (loss)                        1.6        3.5              0.3         0.5            2.3        1.6             (1.3 )      (0.7 )

Interest expense                              (8.5 )    (18.6 )          (12.4 )     (20.2 )        (25.7 )    (18.1 )          (35.6 )     (17.7 )
Write-off of deferred financing costs         (2.3 )     (5.0 )             -           -            (2.3 )     (1.6 )             -           -
Other, net                                    (1.9 )     (4.2 )            0.9         1.4           (1.2 )     (0.9 )             -           -

Loss before taxes                            (11.1 )    (24.3 )          (11.2 )     (18.3 )        (26.9 )    (19.0 )          (36.9 )     (18.4 )

Income taxes                                  (2.1 )     (4.6 )            4.3         7.0           (1.6 )     (1.1 )           16.3         8.1


Net Loss                                  $   (9.0 )    (19.7 )%    $    (15.5 )     (25.3 )%    $  (25.3 )    (17.9 )%    $    (53.2 )     (26.5 )%

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 manufacturer 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 nine months ended October 3, 2009, the Color Measurement segment accounted for approximately $37.4 and $116.9 million in net sales versus $51.2 and $167.2 million for the comparable periods in the previous year. The Color Standards segment accounted for approximately $8.2 and $24.7 million in net sales for the three and nine months ended October 3, 2009, versus $10.1 and $33.5 million for the comparable periods in the previous year.

Condition and Results of Operations - continued

Net Sales

The following table denotes net sales by business unit for the three and nine months ended October 3, 2009 and September 27, 2008 (in millions):

Net Sales By Product Line



                                                      Three Months Ended                                    Nine Months Ended
                                         October 3, 2009          September 27, 2008          October 3, 2009          September 27, 2008
Imaging and Media                       $    16.8     36.8 %    $     25.9         42.3 %    $     54.4    38.4 %    $      86.1        42.9 %
Industrial                                   10.5     23.0            12.3         20.1            29.6    20.9             40.0        19.9
Retail                                        2.8      6.2             4.3          7.0            10.9     7.7             14.3         7.1
Color Support Services                        5.8     12.7             7.2         11.7            17.6    12.5             22.3        11.1
Other                                         1.5      3.3             1.5          2.4             4.4     3.1              4.5         2.2

Total Color Measurement                      37.4     82.0            51.2         83.5           116.9    82.6            167.2        83.3
Color Standards                               8.2     18.0            10.1         16.5            24.7    17.4             33.5        16.7

Total                                   $    45.6    100.0 %    $     61.3        100.0 %    $    141.6   100.0 %    $     200.7       100.0 %

Consolidated

Net sales for the third quarter of 2009 and year to date results were $45.6 and $141.6 million, a decrease of $15.7 and $59.1 million, or 25.6 and 29.4 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 nine month periods ended October 3, 2009 in all of the regions of the world where it conducts business. For the three months ended October 3, 2009, net sales in North America decreased $4.3 million, or 20.2 percent, compared with the third quarter of 2008, while net sales in Europe decreased $9.5 million, or 36.3 percent for the third quarter of 2009. Net sales in Asia Pacific decreased $1.6 million, or 13.0 percent compared with the third quarter of 2008. For the nine months ended October 3, 2009, net sales in North America decreased $15.5 million, or 21.9 percent, compared with the same period of 2008, while net sales in Europe decreased $34.4 million, or 39.2 percent for the nine months of 2009. Net sales in Asia Pacific decreased $8.6 million, or 22.4 percent compared with the first nine months of 2008. The Company experienced nominal net sales declines in Latin America compared to prior year 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 $0.4 million unfavorable effect on third quarter 2009 net sales, and a $4.9 million unfavorable effect on year to date net sales for the period ended October 3, 2009, as compared to similar periods in 2008.

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 October 3, 2009, the Imaging and Media product line recorded a decrease in net sales of $9.1 million, or 35.1 percent, compared with the third quarter of 2008. For the nine month period ended October 3, 2009, Imaging and Media net sales decreased $31.7 million, or 36.8 percent, compared with the similar period in 2008. 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 initially experienced in the third quarter of 2008. Leading the decline in the Imaging and Media product line was a year over year decline in European sales of 43.7 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 October 3, 2009 decreased by $1.8 million, or 14.6 percent compared to the same quarter in the prior year. Net sales for the nine months ended October 3, 2009 decreased by $10.4 million, or 26.0 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 35.6 percent.

The Retail product line 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 $1.5 million, or 34.9 percent, for the third quarter of 2009 compared with that of 2008. For the nine month period ended October 3, 2009, the Retail market recorded a decline in net sales of $3.4 million, or 23.8 percent, compared to the same period in the prior year. For the three and nine months ended October 3, 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 12.6 percent year over year our European sales have shown a much deeper decline of 62.4 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 group recorded a third quarter 2009 decrease in net sales of $1.4 million, or 19.4 percent, compared to the third quarter of the previous year. For the nine month period ended October 3, 2009, this market experienced a decline in net sales of $4.7 million, or 21.1 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 primarily serve 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 nine month periods ended October 3, 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 manufacturer 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 third quarter of 2009, the Color Standards segment recorded a net sales decrease of $1.9 million, or 18.8 percent, compared to the same quarter of 2008. For the nine month period ended October 3, 2009, the Color Standards segment recorded a decline in net sales of $8.8 million, or 26.3 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.

Condition and Results of Operations - continued

Cost of Sales and Gross Profit

Gross profit for the three month period ended October 3, 2009 was $27.0 million, or 59.2 percent of sales, compared with $31.5 million or 51.4 percent of sales, for the comparable period in 2008. For the nine month period ended October 3, 2009, gross profit was $83.5 million, or 58.9 percent of sales, compared with $105.2 million, or 52.4 percent of sales, for the same period in 2008. The three and nine month increase in margin of approximately 780 and 650 basis points, respectively, is partially a result of the January 2009 restructuring plan and the completion of the Pantone purchase accounting inventory adjustments in October 2008. Included in the three and nine month cost of sales for 2008 are $3.9 and $11.6 million, or 640 and 580 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                                    Nine Months Ended
                                               October 3, 2009          September 27, 2008           October 3, 2009          September 27, 2008
Selling and marketing                        $    11.9      26.1 %    $    15.5          25.3 %    $    38.6      27.3 %    $       50.5       25.2 %
Research, development and engineering              5.4      11.8            6.8          11.1           17.0      12.0              23.2       11.6
General and administrative                         7.3      16.0            9.0          14.7           21.6      15.2              27.2       13.5
Restructuring and other related charges            0.8       1.8           (0.1 )        (0.2 )          4.0       2.8               5.6        2.8

Total                                        $    25.4      55.7 %    $    31.2          50.9 %    $    81.2      57.3 %    $      106.5       53.1 %

For the three and nine month periods ended October 3, 2009, Selling and marketing expenses decreased by $3.6 and $11.9 million, or 23.2 and 23.6 percent, as compared with the same periods of 2008. Research, development and engineering expenses have declined by $1.4 and $6.2 million, or 20.6 and 26.7 percent, respectively, for the three and nine month periods of 2009 as compared with the same period in 2008. General and administrative expenses decreased by $1.7 and $5.6 million or 18.9 and 20.6 percent, for the three and nine month periods ended October 3, 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 uncertain economic conditions. For the third quarter of 2009, restructuring and other related charges increased by $0.9 million compared to the third quarter of 2008. Restructuring and other related charges decreased by $1.6 million, or 28.6 percent, for the nine months ended October 3, 2009, over the same period of 2008. This decrease was the result of the substantial completion of the Amazys restructuring plan and the April 2008 restructuring plan in 2008. In the first nine months of 2009, the Company expensed $0.5 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 nine months ended October 3, 2009, the Company has incurred $0.4 and $3.5 million in charges related to these restructuring efforts.

Operating Income (Loss)

Operating income (loss) for the Color Measurement segment was $0.3 and $(1.2) million for the three and nine month periods in 2009, as compared to $2.2 and $3.0 million for the same periods in 2008. The operating income (loss) for the Color Measurement segment was negatively impacted on a 2009 year to date basis as a result of the charges incurred in connection with the January 2009 restructuring plan. Operating income (loss) for the Color Standards segment was $1.3 and $3.5 million for the three and nine month periods in 2009, as compared to $(1.9) and $(4.3) million for the same periods in 2008. Operating income
(loss) for the Color Standards segment for the three and nine month periods of 2009, as compared with the comparable periods in 2008, have increased by $3.2 and $7.8 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.

Condition and Results of Operations - continued

Other Income (Expense)

Interest Expense

Interest expense was $8.5 and $25.7 million for the three and nine months ended October 3, 2009, which is a decrease of 31.5 percent and 27.8 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 the former Corporate headquarters in the first quarter of 2009, sale of its Italian manufacturing facility for $2.3 million, and excess cash from continuing operations throughout 2009. These decreases were partially offset by $0.8 million of preferred stock dividends and $0.6 million of amortization on the discount on mandatorily redeemable preferred stock, which were incurred in connection with the Exchange (see Note 7 for further discussion). 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. For further discussions see Note 7 regarding the Company's short and long-term indebtedness and Note 9 on the Company's derivative financial instruments.

Write-off of Deferred Financing Costs

During August 2009, the Company entered into the Exchange Agreement where $41.6 million of second lien facilities were canceled (see Note 7 for further discussion). As a result of the second lien cancellation, the Company wrote-off $2.3 million of previously existing deferred financing costs.

Other Income (Expense)

Other income (expense) consists of gains or losses from foreign exchange transactions and sales of assets. Other income (expense) totaled $(1.9) and $(1.2) million for the three and nine months ended October 3, 2009 and $0.9 million for the three months ended September 27, 2008.

Income Taxes

The Company's effective tax rate for the third quarter of 2009 was 19.2 percent compared to (38.4) percent for the third quarter of 2008. For the nine months ended October 3, 2009, the Company's effective tax rate was 6.2 percent compared to (44.1) percent for the same period in prior year. The 2009 income tax benefit primarily relates to foreign tax deductions related to intangible asset amortization charges that correspondingly reduce taxable foreign earnings. The 2008 income tax provision primarily relates to charges for additional reserves associated with tax contingencies, additional valuation allowances recorded against net deferred tax assets in the U.S. and the tax consequence associated with the liquidation of certain investments.

Net Loss

The Company recorded a net loss of $9.0 and $25.3 million, respectively, for the three and nine month periods ended October 3, 2009, compared to a net loss of $15.5 and $53.2 for comparable periods in 2008. On a per share basis, fully diluted loss per share was $(0.12) and $(0.33) for the three and nine month periods in 2009, compared to $(0.53) and $(1.83) 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.

Condition and Results of Operations - continued