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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number: 0-18805

(650) 357-3500

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

     Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ         No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes þ         No o

     The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the price at which the common equity was last sold on June 28, 2002.

Common Stock, $.01 par value: $625,969,929**

     The number of shares outstanding of each of the registrant’s classes of common stock as of February 28, 2003.

Common Stock , $.01 par value: 54,797,037

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on May 22, 2003 are incorporated by reference into Part III hereof.

**

Based upon the last trade price of the Common Stock reported on the Nasdaq National Market on June 28, 2002. Excludes approximately 14,870,354 shares of common stock held by Directors, Officers and holders of 5% or more of the Registrant’s outstanding Common Stock on December 31, 2002. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that such person is controlled by or under common control with the Registrant.

Table of Contents

PART I

      This Annual Report on Form 10-K includes certain registered trademarks and tradenames of Electronics for Imaging, Inc. (“EFI” or “the Company”) and others. EFI, the EFI logo, EFI Fiery, eBeam, Fiery, the Fiery logo, Fiery Driven, the Fiery Driven logo, Fiery Driven and Design, Fiery Spark, ColorWise, RIP-While-Print, EDOX, Mousitometer, PrintMe, Spot-On, Spot-On and Design, Check Mate, Freedom of Press, Go Wide, Splash, Velocity and Solitaire are registered trademarks of Electronics for Imaging, Inc. with the U.S. Patent and Trademark Office, and/or other foreign jurisdictions. Advanced Secure Print Module, Fiery Prints, Fiery ZX, Fiery LX, Fiery SI, Fiery XJ, Fiery XJe, Fiery XJ-W, BookletMaker, Fiery Downloader, Fiery Graphic Arts Package, Fiery Scan, Fiery Spooler, Fiery FreeForm, Fiery Link, Fiery Driver, PowerWise Architecture, RIPChips, Splash, WebTools, WebSpooler, WebInstaller, WebStatus, Command Workstation, Continuous Print, DocBuilder, EFICOLOR, EFICOLOR Works, EFI Color Profiler Kit, FreeForm, Memory Multiplier, NetWise, STARR Compression, EDOX Profile Manager, RIP Ahead, Instant Reprint, Document Recovery, Sapphire, Opal, PrintMe, PrintMe Networks, Harmony, eBeam and Unimobile are trademarks of Electronics for Imaging, Inc. All other terms and product names may be registered trademarks or trademarks of their respective owners, and are hereby acknowledged.

      Certain of the information contained in this Annual Report on Form 10-K, including without limitation, statements made under this Part I, Item 1 “Business” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” which are not historical facts, may include “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. When used herein, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will” and similar expressions as they relate to the Company or its management are intended to identify such statements as “forward-looking statements.” Such statements reflect the current views of the Company and its management with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company’s actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Important factors that could cause the Company’s actual results to differ materially from those included in the forward-looking statements made herein include, without limitation, those factors discussed in Item 1 “Business — Competition,” in Item 7 “Management’s Discussion and Results of Operations — Factors That Could Adversely Affect Performance” and elsewhere in this Annual Report on Form 10-K and in the Company’s other filings with the Securities and Exchange Commission, including the Company’s most recent Quarterly Report on Form 10-Q. The Company assumes no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.

Item 1:     Business

Filings

      The company files annual reports, quarterly reports, proxy statements, and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (Exchange Act). The public may read and copy any materials that the company files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including the company, that file electronically with the SEC. The public can obtain any documents that the company files with the SEC at http://www.sec.gov.

      The corporation also makes available free of charge through its Internet website (http://www.efi.com) the company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after the company electronically files such material with, or furnishes it to, the SEC.

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General

      EFI was founded in 1989 by Efraim Arazi. EFI is a global provider of printing and imaging solutions and services and is focused on making printing and imaging related technology easy to use. EFI’s main focus involves the design and marketing of products that support color and black-and-white printing on a variety of peripheral devices. Its products incorporate hardware and software technologies that transform digital copiers and printers from many leading printer and copier manufacturers into networked printing devices that can be shared across workgroups. The Company’s products include stand-alone servers, which are connected to digital copiers and other peripheral devices, and controllers, which are embedded in digital copiers and desktop color laser printers. The Company sells its products primarily to original equipment manufacturers (“OEM”) in North America, Europe and Japan.

      The Company was founded to develop innovative solutions to enable color desktop publishing. In pursuit of this goal, the Company first developed the Fiery line of color servers (“Fiery Color Servers”) to enable in-house, short-production run color printing, together with application and system software to facilitate color correction and device-independent color. Fiery Color Servers are sophisticated, stand-alone computers that enable digital copier machines to accept, process, and print digital images from personal computers and computer networks. Historically, the Company primarily focused its efforts on its stand-alone Fiery Color Servers that supported printing on digital color copiers. The Company has since expanded its focus to include embedded solutions that support printing on a broader range of devices, including digital black-and-white copiers and desktop color laser and inkjet printers (“Fiery Controllers” and, together with Fiery Color Servers, “Fiery Products”). The Company has also developed stand-alone Fiery Color Servers for wide-format color inkjet printers and expanded its line of digital color servers through its merger with Management Graphics, Inc. (“MGI”) and its EDOX line of digital color servers (“EDOX Color Servers”) in 1999 and its acquisition of Splash Technology Holdings, Inc. (“Splash”) and Splash’s line of digital color servers (“Splash Color Servers” and together with Fiery Color Servers and EDOX Color Servers, “EFI Color Servers”) in 2000. In January 2003, the Company acquired Best GmbH (“Best”), a global software company providing products for the print and publishing markets. Best complements the Company’s strengths in graphic arts and workflow software, adding a range of pre-print, pre-press and remote proofing solutions to the Company’s portfolio of products. The Company also continues to promote other product lines such as eBeam, its first Internet appliance product, PrintMe Networks, an Internet printing solution and Unimobile wireless messaging software which the Company acquired through its acquisition of Unimobile, Inc. (“Unimobile”) in May 2002.

The Electronics for Imaging Solution

      The Company’s EDOX, Fiery and Splash brands of print servers transform digital copiers and printers into networked printing devices. Once networked, EFI-powered printers and copiers can be shared across workgroups, departments, the enterprise and the Internet to quickly and economically produce high-quality color and black-and-white documents. The Company develops products with a wide range of price and performance levels. The Company believes that consumers generally prefer color as evidenced by the migration of photographs, motion pictures, television and newspapers from black-and-white to color. In the personal computer field, EFI believes this preference is shown by the migration of personal digital assistants (“PDAs”) to color and the almost exclusive use of color monitors with color-oriented graphical user interfaces, application software and Internet content. In each of these cases, once the enabling technology developed sufficiently, consumer adoption of color quickly followed. The Company believes that consumers prefer color in documents created through desktop publishing. Until recently, however, the technology was not available to do this in a high quality, quick and cost-effective manner due to the complexity of accurate color reproduction. EFI’s Color Servers permit users of digital color copiers to transmit and convert digital data from a computer to a color copier so that the color copier can print high-quality color documents easily, quickly and cost-effectively. As a result, EFI’s Color Servers transform digital color copiers into fast, high-quality, networked color printers. The black-and-white copier market is migrating toward the development and use of digital black-and-white copiers. Thus, in addition to EFI Color Servers for digital color copiers, the Company has leveraged its technology to develop and manufacture other products that support both color and black-and-white printing. These products include: (i) Fiery Servers for digital black-and-white copiers;

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Growth and Expansion Strategies

      The Company’s overall objective is to continue to introduce new generations of controller products, new software applications, and other new product lines related to printing and imaging. With respect to its current products, the Company’s primary goal is to provide a range of processing and printing solutions that address broad sections of the color printing market and to continue to leverage its technology to enable digital black-and-white printing on additional peripheral devices including digital black-and-white copiers and multi-function devices. The Company’s strategy to accomplish these goals consists of five key elements.

      The Company intends to continue to develop new products that are scalable and offer a broad range of features and performance when connected to, or integrated with, digital color and black-and-white copiers, as well as desktop color laser printers. Historically, the Company sold products that supported digital color copiers. In 1996 the Company expanded its line of color servers to drive a wide range of output devices including desktop color laser printers and wide-format color inkjet printers with poster-size output. In 1997, the Company further expanded the use of its technology, shipping its first products that supported black-and-white printing systems and copiers. The Company has continued to introduce new generations of its products including the Fiery ZX and Fiery X2 platforms in 1998, the Fiery Z4 and Fiery X4 platforms in 1999, the Fiery X3 and EDOX 2000 Document Server platforms in 2000 and the Fiery Z5 and Z18 platforms in 2001. In 2002, the Company introduced its next generation of products, including: the Fiery Q4000 platform, the Fiery X5 platform, the Splash G640 platform, and the EDOX 4 Document Server. By utilizing the advantages of these new platforms, the Company intends to continue to develop new products.

      The Company also intends to continue to develop new software applications that advance the performance and usability of its servers and embedded controllers. In 2000, the Company introduced the Velocity line of software designed to maximize workflow efficiencies. The Velocity line of products includes Velocity Balance, Velocity Build, Velocity Estimate and Velocity Scan, as well as the Harmony Software Developers Kit which enables users to develop custom applications that maximize the power, speed and throughput of copiers and printers powered by Fiery technology. In 2001, the Company developed and released additional software applications including, the Fiery Graphics Arts Package , the EFI Color Profiler Kit, variable data printing solutions, and the Advanced Secure Print Module. In 2002, the Company developed and released the Fiery System 5, the Data Center Package software, new prepress workflow technology, and enhancements to its Velocity workflow software, document security software and variable data printing software. See “Products and Technology — EFI Technology.” We expect to continue developing new software applications as well as acquiring new software applications through business combinations such as the Best acquisition in January 2003. The Company is seeking to develop, acquire or partner with other suppliers to provide a full digital workflow suite of products for the professional printing market.

      The Company plans to continue to expand its product line to include Internet appliance products. In November, 1999, the Company introduced eBeam. eBeam converts a conventional whiteboard into a digital workspace, allowing users to capture whiteboard meeting-notes and diagrams in real time on their personal computers. Words and images can be viewed, edited and shared across the world using a standard web browser. In 2001, the Company introduced its third generation of eBeam software and also introduced eBeam System 3^TM, believed to be the smallest digital whiteboard solution on the market and the eBeam ImagePort^TM accessory, a whiteboard system that allows data to be beamed to a Palm^TM handheld computer. In 2002, the Company increased the size of the whiteboard surface captured by the device and introduced a Mac OS X

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      In October, 2001, the Company announced PrintMe Networks, a complete Internet printing solution that enables remote printing without requiring print drivers, cables or complex setup. PrintMe Networks allows people to access and print their e-mail messages, Internet content and other documents at virtually any time, anywhere, from any device, to any printer connected to the Internet. In early 2002 the Company released PrintMe Networks. The Company has partnered with many industry leaders including, Adobe Systems Incorporated , Xerox, IBM, Canon, IKON, Minolta, Toshiba, Sharp, Palm, Sir Speedy, Office Max, STSN, Yahoo! and Mariott to help provide the technologies and channels necessary to make this new technology widely available. The Company believes that PrintMe Networks expands the scope and sophistication of its products and will help it gain access to new markets.

      Through the acquisition of Unimobile in 2002, the Company acquired Unimobile’s suite of enterprise solutions, including the Mobile Messaging Platform and the Unimobile Intelligent Network, which allow users to deliver data to virtually any mobile device. In late 2002, the Company announced Unimobile 5.0, its latest version of the Unimobile enterprise messaging solution. The Company believes its acquisition of Unimobile’s technology is a strategic fit with PrintMe Network.

      The Company has established relationships with leading printer and copier industry companies, including Canon, Danka Business Systems, Epson, Fuji-Xerox, Hewlett-Packard, Ikon Office Solutions, Konica, Minolta, Océ, Ricoh, Sharp, Toshiba, and Xerox (collectively, the “Strategic Partners” or “OEM partners”). EFI seeks to expand its relationships with its Strategic Partners and other partners in pursuit of the goal of offering Fiery, EDOX and Splash products as well as its new technology for additional digital color and black-and-white devices produced by its Strategic Partners and other partners. The Company also seeks to establish relationships with other digital copier and printer distribution companies for the marketing of Fiery, EDOX and Splash products with their copiers and printers as well as the Company’s workflow software suite of products.

      In its development of new products and platforms, EFI seeks to establish coherence across its entire product line by designing products that provide a consistent “look and feel” to the end-user. For example, EFI believes enterprise coherence can create higher productivity levels as a result of shortened learning curves. Additionally, EFI believes enterprise coherence leads to a lower total cost of ownership by providing one source for sales, support and training. The Company believes that its effort to achieve enterprise coherence engenders goodwill among its Strategic Partners and other partners and end-users of its products and assists in the development of new strategic relationships and markets for the Company. The Company also advocates open architecture utilizing industry-established standards to provide inter-operability across a range of digital printing devices, ultimately giving the user more choice in their selection of products.

      The Company has assembled an experienced team of technical personnel with backgrounds in color reproduction, digital pre-press, image processing, networking, and software and hardware engineering. By applying its expertise in these areas, the Company expects to continue to expand the scope and sophistication of its products and gain access to new markets.

Products and Technology

      The Company is a leader in enabling networked printing solutions. EFI’s technology allows copiers, printers and digital presses to be shared across work groups, the enterprise and the Internet. The Company develops products with a wide range of price and performance levels designed to make high-quality, short-run

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	•	desktop color laser printers,
	•	high-end desktop ink jet printers,
	•	wide-format printers,
	•	mid-range color copiers,
	•	mid-range digital black-and-white copiers,
	•	production color copiers and
	•	high-speed color and black-and-white digital presses.

      Given the breadth of our product offerings, we believe the Company’s products are attractive to a variety of end users including, multimedia authors, advertising agencies, print-for-pay businesses, graphic designers, pre-press providers and small to large businesses.

      The Company currently has three main product categories that support color and black-and-white printing: (i) stand-alone color servers which are connected to color digital copiers and other peripheral devices; (ii) embedded and chip-set color solutions which are used in digital color copiers and desktop laser printers; and (iii) digital black-and-white solutions, which include both stand-alone servers and embedded and chip-set solutions, for digital black-and-white copiers and laser printers. All of EFI’s products incorporate EFI’s proprietary software and hardware features. In addition, the Company is expanding its presence in software with the intent of offering a full suite of digital tools for the commercial print industry.

      From its inception, EFI has invested heavily in research and development. EFI has focused on developing technologies that can be implemented in a variety of products. Examples of such technologies include: (i) DocBuilder Pro^TM, which enables electronic collation, reverse order printing, job merging and editing, and Fiery WebTools which enables print job management from different computer platforms via a Java^TM-enabled Web Browser; (ii) RIP-While-Print which allows one page to be printed while subsequent pages are simultaneously processed; (iii) Continuous Print which allows processed pages to be stored in memory before printing, eliminating the need for the copier or printer to cycle down between unique pages; (iv) NetWise 3.0, EFI’s third generation networking architecture which provides enhanced programmability that helps users build customized printing solutions and provides extensive Internet-based functionality; (v) Colorwise 3.0, EFI’s third generation color management system which provides greater image quality and calibration (vi) workflow management architecture which allows for the management and manipulation of digital print jobs including, CommandWorkstation 4.0, Fiery WebTools, EFI SDK, Velocity Balance and Velocity OneFlow; (vi) Variable Data Printing solutions including, FreeForm and FreeForm 2, (vii) Fiery Driver, a unified printing interface that simplifies the printing process; (viii) Fiery Link, providing users with information on print job status and connected Fierys allowing users to monitor the status of any print job, its position in the queue, and general information on the Fiery and paper and toner levels from any workstation; and (ix) ECT compression, an improved and more advanced compression scheme than EFI’s previous STARR compression technologies, offering definite compression ratios and virtually lossless image quality. Compression software decreases the amount of memory necessary to store documents during processing and enables faster printing of documents. In addition to such software innovations, EFI custom designs its products to increase productivity. For example, EFI’s custom-designed RIPChips, application specific integrated circuit (“ASIC”) chips, decrease overall print times by off-loading data movement from the microprocessor. The Company expects to continue to refine these printing technologies and develop new printing technologies.

      In 2002, the Company continued its efforts to improve its products’ performance, features and ease of use. During 2002, the Company added new features to the following products: (i) Colorwise 3.0, (ii) Netwise

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     Stand-alone Color Servers

      EFI Color Servers permit users of digital color copiers to transmit and convert digital data from a computer to a color copier so that the color copier can print color documents easily, quickly and cost-effectively. As a result, EFI Color Servers transform digital color copiers into fast, high-quality networked color printers. In addition to EFI Color Servers for digital color copiers, the Company has leveraged its technology to develop and manufacture other products that support color printing. These products include Fiery Color Servers, EDOX Color Servers and Splash Color Servers for wide-format inkjet printers.

      Since the introduction of the first Fiery Color Server in 1991, the Company has expanded this product line. During 2002, the Company focused its development efforts on improvements to its products’ performance, features and ease of use and introduced the Fiery Q4000 server and the Splash G640 server. Each new platform features a major re-architecture — enabling improvements in printing speed — and is designed to run new EFI software featuring specialized tools for graphic arts professionals. The Fiery Q4000 server is capable of processing complex documents at twice the speed of other high-end printing systems with dual processors of at least 2.2 GHz speed. It also includes many of EFI’s most advanced software technologies including, the Fiery System 5 software, the Fiery Graphic Arts Package, variable data solutions, and the Data Center Package. The Splash G640 is a color server based on Macintosh operating systems. The Splash G640 is designed for the graphic arts market. In 2002, the Company shipped stand-alone EFI Color Servers for use with color copiers, color inkjet printers and wide-format color printers distributed by companies such as Canon, Epson, Fuji-Xerox, Minolta, Océ, Ricoh, Toshiba, Ikon Office Solutions, Sharp and Xerox. In 2002, the Company also shipped Fiery servers for use with digital black-and-white copiers distributed by Canon, Danka, Konica, Minolta, Océ and Sharp.

     Embedded and Chipset Color Solutions

      Unlike our Fiery, EDOX and Splash servers, which are sold as stand-alone products to be connected to copiers, controllers are embedded inside copiers and desktop printers manufactured by our OEM partners. Our OEM partners can design their own controller using our chipset solution, or purchase the controller from EFI. Controllers allow users to print documents directly from their computers to the digital color copier, desktop color laser printers, and color multi-function devices. Because the Company believes that the Fiery name and trademark, including the trademark “Fiery Driven,” are associated with substantial goodwill and recognition in the marketplace, the Company seeks to have the “Fiery Driven” logo placed on printing devices that include an embedded Fiery Controller or chipset solution. The Company has increased the use of the EFI technology by licensing the EFI color solutions to our OEM partners for their manufacture.

     Digital Black-and-White Solutions

      The Company has utilized its color technology to provide stand-alone servers, embedded controllers and chipset solutions for digital black-and-white copiers and laser printers. EFI Black-and-White Servers permit users of digital copiers to transmit and convert digital data from a computer to a black-and-white copier so that the copier can print documents easily, quickly and cost-effectively in professional environments. The Fiery X3e, an embedded controller, allows users to efficiently print large quantities of black-and-white documents in corporate environments.

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Significant Relationships

      The Company has established, and continues to try to build and expand relationships with its OEM partners and other leading copier and printer companies, in order to benefit from their respective products, distribution channels and marketing resources. These OEMs include domestic and international manufacturers, distributors and sellers of digital copiers (both color and black-and-white), wide-format printers and desktop color printers. The Company works closely with OEM partners with the aim of developing solutions that incorporate leading technology and that optimally work in conjunction with such companies’ products. OEMs that the Company sold products to in 2002 include, among others, Canon, Epson, Fuji-Xerox, Hewlett-Packard, Ikon Office Solutions, Konica, Minolta, Océ, Ricoh, Sharp, Toshiba and Xerox. Together, sales to Canon, Xerox, and Minolta accounted for approximately 67% of the Company’s 2002 revenue, with sales to each of these customers accounting for more than 10% of the Company’s revenue. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That Could Adversely Affect Performance — We rely on sales to a relatively small number of OEM partners, and the loss of any of these customers could substantially decrease our revenues.”

      The Company customarily enters into development and distribution agreements with its OEM partners. These agreements can be terminated under a range of circumstances, and often upon relatively short notice. The circumstances under which an agreement can be terminated vary from agreement to agreement and there can be no assurance that the Company’s OEM partners will continue to purchase products from the Company in the future, despite such agreements. The Company recognizes the importance of, and works hard to maintain, its relationships with its customers. However, the Company’s relationships with its customers are affected by a number of factors including, among others: competition from other suppliers, competition from internal development efforts by the customers themselves (including the OEMs), and changes in general economic, competitive or market conditions (such as changes in demand for the Company’s or the OEM’s products, or fluctuations in currency exchange rates). There can be no assurance that the Company will continue to maintain or build the relationships it has developed to date. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That Could Adversely Affect Performance — We face competition from other suppliers as well as our own OEM customers, and if we are not able to compete successfully then our business may be harmed.”

      In addition to its development and sales relationships with the OEM partners, in order to increase the distribution and presence of EFI Color Servers connected to both color and black-and-white copiers and wide-format printing devices, the Company has developed strategic relationships with well-known print-for-pay companies, including Kinko’s, AlphaGraphics, the CopyMax operations of office products superstore OfficeMax, the American Speedy group of franchised printing centers (including Allegra Print and Imaging, American Speedy, Speedy Printer, Zippy Print and Quik Print), MultiCopy, Inc. and the SAMPA Corporation, franchiser of Signal Graphics Printing Centers. Several of these print-for-pay companies, including, American Speedy, OfficeMax, MultiCopy, Inc. and SAMPA Corporation, have entered into worldwide strategic alliances with the Company whereby they have agreed to continue standardization efforts on EFI’s Fiery Color Servers with respect to their printing services.

      The Company also has a continuing relationship pursuant to a license agreement with Adobe and licenses PostScript® software from Adobe for use in many Fiery Products. This relationship is important because each Fiery Product requires page description language software such as that provided by Adobe in order to operate. Adobe’s PostScript® software is widely used to manage the geometry, shape and typography of hard copy documents and Adobe is a leader in providing page description software. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That Could Adversely Affect Performance — We license software used in most of our products from Adobe Systems Incorporated, and the loss of this license would prevent us from shipping these products.”

Distribution and Marketing

      The Company’s primary distribution method for its Fiery and Splash servers is to sell the Fiery and Splash servers to its OEMs. The Company’s OEMs in turn sell these products to distributors and end-users for

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      The Company promotes all of its products through public relations, direct mail, advertising, promotional material, trade shows and ongoing customer communication programs.

Research and Development

      Research and development costs for 2002, 2001 and 2000 were $90.0 million, $98.1 million and $94.1 million, respectively. As of December 31, 2002, 502 of the Company’s 927 full-time employees were involved in research and development. The Company believes that development of new products and enhancement of existing products are essential to its continued success, and management intends to continue to devote substantial resources to research and new product development. The Company expects to make significant expenditures to support its research and development programs for the foreseeable future.

      The Company is developing products to support additional color and black-and-white printing devices including desktop printers, high-end color copiers, digital black-and-white copiers and multi-function devices. This ongoing development work includes a multiprocessor architecture for high-end systems and lower-cost designs for desktop color laser printers. The Company is also developing Internet printing solutions, new software applications designed to maximize workflow efficiencies and to meet the needs of the graphics arts and commercial print professional.

      The Company also expects to continue to enhance functionality of its other product lines, including eBeam, PrintMe and Unimobile. See “— Growth and Expansion Strategies — Proliferate and Expand Product Lines.” Substantial additional work and expense will be required to complete and bring to market each of the products currently being developed by the Company See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That Could Adversely Affect Performance — If we are unable to develop new products, or execute product introductions on a timely basis, our future revenue may be harmed.”

Manufacturing

      The Company utilizes subcontractors to manufacture its products. These subcontractors work closely with the Company to ensure low costs and high quality in the manufacture of the Company’s products. Subcontractors purchase components needed for the Company’s products from third parties. The Company is totally reliant on the ability of its subcontractors to produce products sold by the Company, and although the Company supervises its subcontractors, there can be no assurance that such subcontractors will continue to perform for the Company as well as they have in the past. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That Could Adversely Affect Performance — We are dependent on subcontractors to manufacture and deliver products to our customers.”

      Certain components necessary for the manufacture of the Company’s products, including ASICs and certain other semiconductor components, are obtained from a sole supplier or a limited group of suppliers. The purchase of certain of these key components may involve significant lead times. Accordingly, in the event of interruptions in the supply of these key components or unanticipated increases in demand for the Company’s products, the Company could be unable to manufacture certain of its products in a quantity sufficient to meet customer demand. There can be no assurance that such supply or manufacturing problems would not adversely affect the Company’s results of operations or financial condition. In an attempt to mitigate these supply issues, the Company purchases certain components for later resale to the Company’s subcontractors

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Human Resources

      As of December 31, 2002, the Company employed 927 full-time individuals. Of the 927 total employees, approximately 232 were in sales and marketing, 124 were in management and administration, 69 were in manufacturing, and 502 were in research and development. Of the total number of employees, the Company had approximately 784 employees located in U.S. and Canadian offices, and 143 employees located in international offices including employees based in The United Kingdom, The Netherlands, Germany, Japan, France, Italy, Finland, Spain, Australia, Singapore, Brazil, Mexico, Sweden, India and Hong Kong. The Company’s employees are not represented by any collective bargaining organization and the Company has never experienced a work stoppage. However, there can be no assurance that collective bargaining, work stoppage or other employment related issues will not arise.

Competition

      Competition in the Company’s markets is intense and involves rapidly changing technologies and frequent new product introductions. To maintain and improve its competitive position, the Company must continue to develop and introduce, on a timely and cost-effective basis, new products and features that keep pace with the evolving needs of its customers. The principal competitive factors affecting the markets for the Company’s Fiery, EDOX and Splash products include, among others, customer service and support, product reputation, quality, performance, price and product features such as functionality, scalability, ability to interface with OEM products and ease of use. The Company believes it has generally competed effectively in the past against product offerings of its competitors on the basis of such factors. However, there can be no assurance that the Company will continue to be able to compete effectively in the future based on these or any other competitive factors.

      The Company also faces competition from its OEM partners and other copier and printer manufacturers that offer internally developed server products or that incorporate internally developed embedded solutions or server features into their copiers and printers, thereby eliminating the need for the Company’s products and limiting future opportunities for the Company. In addition, the Company competes directly with other independent manufacturers of color servers, independent manufacturers of embedded solutions, copier manufacturers, printer manufacturers and others. The Company also faces competition from wide-format printer manufacturers that develop their own controllers and other companies that develop controllers for wide-format printers and manufacturers of desktop color laser printers which do not utilize a controller (relying instead on host based processing of data) and which offer increasing speed and color capability. The Company believes that it competes effectively due to, among other things, its efforts to continually advance its technology, name recognition, end-user loyalty, sizable installed base, number of products supported and price. The Company expects that competition in its markets will increase due to, among other factors, market demand for higher performance products at lower prices, rapidly changing technology and product offerings from competitors and customers. There can be no assurance that the Company will be able to continue to advance its technology and products or to compete effectively against other companies’ product offerings, and any failure to do so could have a material adverse effect upon the Company’s business, operating results and financial condition.

Intellectual Property Rights

      The Company relies on a combination of patent, copyright, trademark and trade secret laws, non-disclosure agreements and other contractual provisions to establish, maintain and protect its intellectual property rights, all of which afford only limited protection. As of December 31, 2002, the Company had 92 issued U.S. patents, 62 pending U.S. patent applications and various foreign counterpart patents and applications. There can be no assurance that patents will issue from these pending applications or from any

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      The Company has registered certain trademarks, which include, among others, its EFI, Fiery, Fiery and Design, Fiery Driven, Fiery Driven and Design, ColorWise, EDOX, Splash and RIP-While-Print trademarks, and has applied for registration of certain additional trademarks. The Company will continue to evaluate the registration of additional trademarks as appropriate. Any failure by the Company to properly register or maintain its trademarks or to otherwise take all necessary steps to protect its trademarks may diminish the value associated with the Company’s trademarks. The Company’s products include software sold pursuant to “shrink wrap” licenses that are not signed by the end user and, therefore, may be unenforceable under the laws of certain jurisdictions. In addition, the laws of some foreign countries, including several in which the Company operates or sells its products, do not protect intellectual property and proprietary rights to as great an extent as do the laws of the United States.

      From time to time, litigation may be necessary to defend and enforce the Company’s proprietary rights. Such litigation, whether or not concluded successfully for the Company, could involve significant expense and the diversion of management’s attention and other Company resources. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That Could Adversely Affect Performance — We may be unable to adequately protect our proprietary information and may incur expenses to defend our proprietary information.”

Risk Factors

      In addition to the above information, a discussion of factors that may adversely affect the Company’s future performance and financial results can be found in this Report under the heading “Factors That Could Adversely Affect Performance” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

Financial Information About Foreign and Domestic Operations and Export Sales

      See Note 9 of the Company’s Notes to Consolidated Financial Statements. See also Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That Could Adversely Affect Performance — We face risks from our international operations and from currency fluctuations.”

Item 2:     Properties

      The Company’s principal offices are located at 303 Velocity Way, Foster City, California on approximately 35 acres of land which the Company owns. The corporate headquarters facility, which is leased by the Company, includes approximately 295,000 square feet completed in July, 1999 and 163,000 square feet of additional facilities completed in December 2001. In addition to the Foster City offices, the Company has leased facilities in Parsippany, New Jersey; Vancouver, Washington and Amsterdam, The Netherlands. The Company also leases a number of domestic and international sales offices. In January 2001 the Company purchased facilities with approximately 44,000 square feet in Minneapolis, Minnesota. For additional information on the Company’s lease obligations see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

      The Company believes that its facilities, in general, are adequate for its present and currently foreseeable future needs.

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Item 3:     Legal Proceedings

      In December 1997, class action complaints were filed naming the Company and certain principal officers and directors as defendants in both the California Superior Court of the County of San Mateo, and the United States District Court for the Northern District of California on behalf of purchasers of the common stock of the Company during the class period from April 10, 1997, through December 11, 1997. On August 30, 2001, the Federal Court dismissed the complaint filed in the United States District Court for the Northern District of California, leaving only the California Superior Court case on which the plaintiffs could proceed. From the beginning, the Company viewed these lawsuits as having absolutely no merit. However, EFI determined that a proposed settlement of the suit was in the best interests of the Company and its shareholders and on September 4, 2002 the Company announced its decision to settle all pending claims in this action. The Company incurred a one-time charge to after-tax net income in the third quarter of 2002 of $3.1 million or $0.06 per share, including legal fees and costs related to the settlement. On December 20, 2002, the court issued its final approval of the settlement.

      In January 1999, two class action complaints were filed naming Splash Technology Holdings, Inc. and certain of its officers (“Splash), in the United States District Court for the Northern District of California, on behalf of purchasers of the common stock of Splash during the class period from January 7, 1997 through October 13, 1998 (EFI acquired Splash in October 2000). The complaints alleged violations of securities laws during the class period. The two cases were subsequently consolidated into one case. On August 28, 2001, the Court dismissed the complaint with prejudice; however, the plaintiffs appealed that ruling. On December 4, 2002, after oral argument on the appeal, the plaintiffs dismissed their appeal, resulting in the final dismissal of the action against Splash. Throughout the litigation, the Company maintained its belief that these lawsuits were without merit.

      Over the past five years, Mr. Jan R. Coyle, an individual living in Nevada, has repeatedly demanded that the Company buy technology allegedly invented by his company, Kolbet Labs. In December 2001, Coyle threatened to sue the Company and its customers for allegedly infringing his soon to issue patent and for misappropriating his alleged trade secrets. The Company believes Coyle’s claims are completely without merit and on December 11, 2001, the Company filed a declaratory relief action in the United States District Court for the Northern District of California, asking the Court to declare that the Company and its customers have not breached any nondisclosure agreement with Coyle or Kolbet Labs, nor has it infringed any alleged patent claims or misappropriated any alleged trade secrets belonging to Coyle or Kolbet Labs through its sale of Fiery, Splash or EDOX print controllers. The Company also sought an injunction enjoining both Coyle and Kolbet Labs from bringing or threatening to bring a lawsuit against the Company, its suppliers, vendors, customers and users of its products for breach of contract and misappropriation of trade secrets. On March 26, 2002, the Northern District of California court dismissed the Company’s complaint for lack of jurisdiction over Coyle. The Company has appealed the Court’s dismissal to the Federal Circuit Court of Appeals in Washington, D.C. That motion is pending. However, due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the litigation. Any unfavorable outcome of the litigation could have an adverse impact on the Company’s financial condition and results of operations.

      On February 26, 2002, J & L Electronics, another company owned by Coyle, filed a complaint against the Company in the United States District Court for the District of Nevada alleging patent infringement, breach of non-disclosure agreements, misappropriation of trade secrets, violations of federal antitrust law, and related causes of action and is seeking damages, costs and an injunction. On April 22, 2002, the Company filed a motion to dismiss the Nevada complaint. That motion is pending. The Company denies all of these allegations and believes this lawsuit is without merit and intends to defend the actions vigorously. However, due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the litigation. Any unfavorable outcome of the litigation could have an adverse impact on the Company’s financial condition and results of operations.

      On September 16, 2002, ArrivalStar, Inc., a privately held Delaware corporation, (“ArrivalStar”) filed a complaint in the U.S. District Court for the Northern District of Georgia against fourteen defendants, including EFI, alleging that each of the defendants infringed one or more claims of six identified patents

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      On February 13, 2003, Printcafe Software, Inc. (“Printcafe”) entered into the following three agreements with the Company; a standby credit facility in the amount of $11 million plus a working capital facility which will provide up to an additional $3 million under certain circumstances; a stock option agreement granting the Company an option to purchase up to 2,126,574 shares of Common Stock at a purchase price equal to $2.60 per share; and a letter agreement that places certain restrictions on Printcafe’s ability to take actions in order to facilitate a business combination with a party other than the Company subject to customary “fiduciary out” provisions (collectively, the “Agreements”). The Agreements were entered into in connection with EFI’s proposal to acquire all of the outstanding shares of common stock of Printcafe at a purchase price equal to $2.60 per share, payable in cash or EFI stock. On February 19, 2003, Creo Inc. commenced litigation in the Delaware Court of Chancery against the Company, Printcafe and certain of Printcafe’s principal officers and directors, challenging and seeking to temporarily restrain the use of a newly adopted stockholder rights plan by Printcafe, the Agreements and seeking to restrain the Company and Printcafe from proceeding to enter into any further agreements with respect to a business combination. On February 21, 2003, the Delaware Court of Chancery denied the temporary restraining order sought by Creo. The underlying litigation is still pending and management of the Company intends vigorously to defend such action. However, due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the litigation. Any unfavorable outcome of the litigation could have an adverse impact on the Company’s financial condition and results of operations.

      In addition, the Company is involved from time to time in litigation relating to claims arising in the normal course of its business. The Company believes that the ultimate resolution of such claims will not materially affect the Company’s business or financial condition. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That Could Adversely Affect Performance — We face risks from third party claims of infringement and potential litigation.”

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

      None.

PART II

Item 5:     Market for Registrant’s Common Equity and Related Stockholder Matters

      The Company’s common stock was first traded on the Nasdaq National Market under the symbol EFII on October 2, 1992. The table below lists the high and low closing sales price during each quarter the stock was traded in 2002 and 2001.

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      As of February 28, 2003, there were approximately 270 stockholders of record. The Company has never paid cash dividends on its capital stock. The Company currently anticipates that it will retain all available funds for its business, and does not anticipate paying any cash dividends in the foreseeable future.

Item 6:     Selected Financial Data

      The following table summarizes selected consolidated financial data as of, and for the five years ended December 31, 2002. This information should be read in conjunction with the audited consolidated financial statements and related notes thereto.

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(1)	See Note 2 of Notes to Consolidated Financial Statements.
(2)	Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets. SFAS 142 requires among other things, the discontinuance of goodwill amortization and provisions for the reclassification of certain existing recognized intangibles to goodwill. Upon the adoption of SFAS 142, the Company ceased amortizing goodwill and reclassified net intangibles and deferred tax liabilities relating to acquired workforce totaling $0.9 million in goodwill.
(3)	The Company incurred approximately $1.4 million of non-recurring expenses related to the merger with Management Graphics, Inc. in 1999.
(4)	See Note 1 of Notes to Consolidated Financial Statements.

      The following discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes thereto included in this Annual Report on Form 10-K.

      All assumptions, anticipations, expectations and forecasts contained herein are forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those discussed here. For a discussion of the factors that could impact the Company’s results, readers are referred to the section below entitled “Factors that Could Adversely Affect Performance. “

      The preparation of the consolidated financial statements which are the basis of the following discussion and analysis requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company evaluates its estimates, including those related to bad debts, inventories, intangible assets, income taxes, warranty obligations, purchase commitments and contingencies. The estimates are based upon historical experience and on various other assumptions that are believed to be reasonable under the circumstances at the time of the estimate, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

      The following are believed to be the critical accounting policies of the Company:

	•	revenue recognition;
	•	estimating allowance for doubtful accounts, inventory reserves and other allowances;
	•	accounting for income taxes;
	•	valuation of long-lived and intangible assets and goodwill; and
	•	determining functional currencies for the purposes of consolidating our international operations.

      Revenue recognition. We derive our revenue from primarily two sources: (i) product revenue, which primarily includes servers, controllers, chipsets and royalties, and (ii) services and support revenue which includes consulting and development fees. As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences could result in the amount and timing of our revenue for any period if our management made different judgments or utilized different estimates.

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      We recognize revenue from the sale of servers, controllers and chipsets when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable and collection of the resulting receivable is reasonably assured. Delivery generally occurs when product is delivered to the customer’s common carrier.

      At the time of the transaction, we assess whether the fee associated with our revenue transactions is fixed or determinable and whether or not collection is reasonably assured. We assess whether the fee is fixed or determinable based on the terms of the contract.

      We assess collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. We do not request collateral from our customers. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash.

      For all sales, we use either a binding purchase order or signed contract as evidence of an arrangement. Sales through some of our OEMs are evidenced by a master agreement governing the relationship together with binding purchase orders on a transaction by transaction basis. Our arrangements do not generally include acceptance clauses.

      We license software in multiple element arrangements in which a customer purchases a combination of software, post-contract customer support (“PCS”), and/or professional services. PCS, or maintenance, includes rights to upgrades, when and if available, telephone support, updates, and enhancements. Professional services relate to consulting services and training. When vendor specific objective evidence (“VSOE”) of fair value exists for all elements in a multiple element arrangement, revenue is allocated to each element based on the relative fair value of each of the elements. VSOE of fair value is established by the price charged when the same element is sold separately. The VSOE of fair value of PCS is based on renewal rates for the same term PCS. Revenue allocated to PCS is recognized ratably over the contractual term (typically one to two years). At December 31, 2002, revenue from software sales represented less than 2% of total revenue.

      We recognize revenue for consulting and development services ratably over the contract term. Our consulting and development fees are based on time and materials, and we recognize revenue as these services are performed. If these services are related to product development, we recognize the entire fee using the percentage of completion method. We estimate the percentage of completion based on our estimate of the total costs estimated to complete the project as a percentage of the costs incurred to date and the estimated costs to complete.

      Allowance for doubtful accounts, inventory reserves and other allowances. The preparation of financial statements requires our management to make estimates and assumptions that affect the reported amount of assets and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Specifically, management must make estimates of the collectibility of our accounts receivables. Management specifically analyzes accounts receivable and analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Our accounts receivable balance was $42.3 million, net of allowance for doubtful accounts and sales returns of $1.2 million as of December 31, 2002.

      Similarly, management must make estimates of potential future inventory obsolescence and purchase commitments. Management analyzes current economic trends, changes in customer demand and acceptance of our products when evaluating the adequacy of such allowances. Significant management judgments and estimates must be made and used in connection with establishing the allowances in any accounting period. Material differences may result in the amount and timing of our income for any period if management made different judgments or utilized different estimates.

      Accounting for income taxes. In preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. We estimate our actual current tax exposure and the temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and book accounting purposes. These differences result in deferred tax assets and liabilities, which are

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      Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have not recorded a valuation allowance as of December 31, 2002. If actual results differ from these estimates or we adjust these estimates in future periods we may need to establish a valuation allowance that could materially impact our financial position and results of operations.

      Net deferred tax assets as of December 31, 2002 were $19.5 million.

      We provide US taxes on earnings of our non-US subsidiaries, to the extent such earnings are not permanently reinvested. Significant management judgement is needed in estimating the extent to which earnings are considered permanently reinvested. As of December 31, 2002, the non-US earnings considered permanently reinvested were not material.

      Valuation of long-lived and intangible assets and goodwill. In 2002 we adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” In lieu of amortization, we are required to perform an initial impairment review of our goodwill and an annual impairment review of goodwill thereafter. We completed our initial review in June 2002 with no impairment of goodwill indicated as a result of the review. We assess the impairment of identifiable intangibles and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable or that the life of the asset may need to be revised. Factors we consider important which could trigger an impairment review include the following:

	•	significant underperformance relative to expected historical or projected future operating results;
	•	significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
	•	significant negative industry or economic trends;
	•	significant decline in our stock price for a sustained period; and
	•	our market capitalization relative to net book value.

      When we determine that the carrying value of intangibles or long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Net intangible assets and long-lived assets amounted to $114.1 million as of December 31, 2002. We ceased to amortize approximately $43.6 million of goodwill, and reclassified approximately $0.9 million of other net intangible assets and related deferred taxes to goodwill upon adoption of SFAS No. 142. No adjustments to the lives of the other intangible assets were made during 2002.

      Determining functional currencies for the purpose of consolidating our international operations. We have several foreign subsidiaries which together account for approximately 41% of our net revenues, 11% of our assets and 14% of our total liabilities as of December 31, 2002.

      In preparing our consolidated financial statements, we are required to translate the financial statements of the foreign subsidiaries from the currency in which they keep their accounting records, generally the local currency, into United States dollars. This process results in exchange gains and losses which, under the relevant accounting guidance are either included within the statement of income or as a separate component of stockholders’ equity under the caption “Accumulated other comprehensive income.”

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      Under the relevant accounting guidance the treatment of these translation gains or losses is dependent upon our management’s determination of the functional currency of each subsidiary. The functional currency is determined based on management judgment and involves consideration of all relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billings, financing, payroll and other expenditures would be considered the functional currency but any dependency upon the parent company and the nature of the subsidiary’s operations must also be considered. If any subsidiary’s functional currency is deemed to be the local currency, then any gain or loss associated with the translation of that subsidiary’s financial statements is included in stockholders’ equity. However, if the functional currency is deemed to be the United States dollar then any gain or loss associated with the translation of the subsidiary’s financial statements would be included within our consolidated statement of income. If we dispose of any of our subsidiaries, any cumulative translation gains or losses would be realized in our consolidated statement of income. If we determine that there has been a change in the functional currency of a subsidiary to the United States dollar, any translation gains or losses arising after the date of change would be included within our consolidated statement of income.

      Based on our assessment of the factors discussed above, we consider the United States to be the functional currency for each of our international subsidiaries except for our Japanese subsidiary, where we consider the Japanese yen to be the subsidiary’s functional currency. In January 2003 we acquired Best Gmbh, a German software company. The functional currency for Best has been determined to be the Euro.

Results of Operations

      The following tables set forth items in the Company’s consolidated statements of income as a percentage of total revenue for 2002, 2001 and 2000, and the year-to-year percentage change from 2002 over 2001 and from 2001 over 2000, respectively. These operating results are not necessarily indicative of results for any future period.

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     Revenue

      The Company’s revenue in 2002 was principally derived from three major categories. The first category was made up of stand-alone servers which connect digital color copiers with computer networks. This category includes the Fiery X, Z and Q series, the Splash G series, and Edox products and accounted for a majority of the Company’s revenue prior to 1999. The second category consisted of embedded desktop controllers, bundled color solutions, chipset solutions and software RIPs primarily for the office market. The third category consists of controllers for digital black and white products. Other revenue consisted of spares, licensing of certain products, eBeam, software solutions and Unimobile, which individually are an insignificant part of the total 2002 revenue.

      The following is a break-down of revenue in dollars and volumes as a percentage of total units shipped by category.

      Revenue was $350.2 million in 2002, compared to $517.6 million in 2001 and $588.4 million in 2000, which resulted in a 32% decrease in 2002 versus 2001 and a decrease of 12% in 2001 compared to 2000. The corresponding unit volume decreased by 40% in 2002 over 2001 and decreased by 12% in 2001 over 2000. The decrease in revenue in 2002 from 2001 was primarily from a decrease in the volume of product shipped, a reflection of the continued decline in general economic conditions. The decrease in revenue in 2001 from 2000 was primarily from a decline in average selling prices due to changes in product mix, as businesses looked to contain costs in a weakened economy.

      Throughout all categories, the number of units shipped declined in 2002 as compared to 2001. In the embedded and design-licensed color solution category there was a change in the product mix toward the higher-end products evidenced by a higher average selling price. In all of the other categories, the product mix resulted in a lower average selling price, which combined with lower shipping volumes, accounted for the decrease in revenue.

      During 2001, a shift in the revenue mix away from the higher-priced stand-alone color servers to the embedded and design-licensed color solution category led to the decline in revenues in the stand-alone category and the increase in the embedded category from 2000. The move reflected the poor economic climate of 2001, as companies strove to maximize their results and minimize capital expenditures.

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      The embedded category includes embedded boards, chipsets and design-licensed color solution products. Embedded boards are generally characterized by higher unit volumes but lower unit prices and associated margins than the Company has experienced in its more traditional stand-alone server line of products. The chipset and design-licensed solutions can be characterized by lower unit prices but significantly higher per unit margins compared to the traditional stand-alone server line of products. The black and white product category can be characterized by much higher unit volumes and lower unit prices and associated margins than the Company has experienced in its more traditional stand-alone server line of products. To the extent these categories do not grow over time in absolute terms, or if the Company is not able to meet demand for higher unit volumes, it could have a material adverse effect on the Company’s operating results. There can be no assurance that the new products for 2003 will be qualified by all the OEMs, or that they will successfully compete, or be accepted by the market, or otherwise be able to effectively replace the volume of revenue and/ or income from the older products.

      The Company also believes that in addition to the factors described above, price reductions for all of its products may affect revenues in the future. The Company has made and may in the future make price reductions for its products in order to drive demand and remain competitive. Depending upon the price-elasticity of demand for the Company’s products, the pricing and quality of competitive products, and other economic and competitive conditions, such price reductions may have an adverse impact on the Company’s revenues and profits. If the Company is not able to compensate for lower gross margins that may result from price reductions with an increased volume of sales, its results of operations could be adversely affected. In addition, if the Company’s revenue in the future depends more upon sales of products with relatively lower gross margins than the Company obtained in 2002 (such as embedded controllers for printers, embedded controllers for color and black-and-white copiers, and stand-alone controllers for black-and-white copiers), results of operations may be adversely affected.

      Shipments by geographic area for the years ended December 31, 2002, 2001 and 2000 were as follows:

      The decrease in revenue between 2002 and 2001 stems from decreased sales of all products in all regions except the Rest of World. The Rest of World region includes the Asia Pacific market, where penetration of new markets has kept revenues at the same level during 2002 and 2001. The decline in revenues during 2001 from 2000 was a reflection of the difficult economic times across all regions. Deteriorating worldwide economic conditions may continue to have an adverse impact on the Company’s results of operations in the future.

      As shipments to some of the Company’s OEM partners are made to centralized purchasing and manufacturing locations which in turn sell through to other locations, the Company believes that non-U.S. sales of its products into each region may differ from what is reported, though accurate data is difficult to obtain. The Company expects that non-U.S. sales will continue to represent a significant portion of its total revenue.

      Substantially all of the revenue for the last three years was attributable to sales of products through the Company’s OEM channels with such partners as Canon, Epson, Fuji-Xerox, IBM, Hewlett-Packard, Kodak/ Danka Business Systems, Konica, Minolta, Océ, Ricoh, Sharp, Toshiba, Xerox and others. During 2002, the Company continued to work on both increasing the number of OEM partners, and expanding the size of

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      The Company continues to work on the development of products utilizing the Fiery, Splash and EDOX architecture and other products and intends to continue to introduce new generations of server and controller products and other new product lines with current and new OEM’s in 2003 and beyond. No assurance can be given that the introduction or market acceptance of new, current or future products will be successful.

     Gross Margins

      The Company’s gross margin was 52%, 45% and 47% for 2002, 2001 and 2000 respectively. The increase in gross margin from 45% to 52% from 2001 to 2002 resulted principally from the migration to a design-license model on certain of our products, enhancements of our software suite, the utilization of fewer contract manufacturers for cost savings and favorable component pricing. The decrease in gross margin from 47% to 45% from 2000 to 2001 was primarily due to a higher mix of low-end products with relatively lower margins and the volatile components market.

      The Company’s color servers as well as embedded desktop controllers and digital black and white products are manufactured by third-party manufacturers who purchase most of the necessary components. The Company does purchase certain parts directly, including processors, memory, certain ASICs, and software licensed from various sources, including PostScript interpreter software, which the Company licenses from Adobe Systems, Inc.

      In general, the Company believes that gross margins will continue to be impacted by a variety of factors. These factors include the market prices that can be achieved on the Company’s current and future products, the availability and pricing of key components (including DRAM, Processors and Postscript interpreter software), third party manufacturing costs, product, channel and geographic mix, the success of the Company’s product transitions and new products, competition, and general economic conditions in the United States and abroad. Consequently, the Company anticipates gross margins will fluctuate from period to period.

      In addition to the factors affecting revenue described above, the Company expects to be subject to pressures to reduce prices, and as a result, gross margins for all of its products may be lower and therefore the Company’s current gross margins may not be maintained.

     Operating Expenses

      Operating expenses decreased by 13% in 2002 over 2001 and decreased by 7% in 2001 over 2000. Operating expenses as a percentage of revenue amounted to 47%, 37%, and 35% for 2002, 2001 and 2000, respectively. Operating expenses in absolute dollars decreased $18.0 million before the amortization of goodwill and other acquisition-related charges in 2002 compared to 2001. There was a decrease of $3.1 million before the amortization of goodwill and other acquisition-related charges in 2001 compared to 2000. Beginning in 2001 and continuing through 2002 management has focused on reducing expenses during a difficult business climate. Careful management of discretionary expenditures and selective workforce reductions were used to achieve the reduced expenditures.

      Operating expenses for 2002 included approximately $4.4 million for the amortization of goodwill and other intangibles. In 2001 the amortization of goodwill and other intangibles was $12.3 million. In 2000 the Company included in operating expenses $23.6 million of acquisition related costs and the amortization of goodwill and other intangibles from the acquisition of Splash.

      The Company anticipates that operating expenses may increase both in absolute dollars and as a percentage of revenue as investments are made in new business areas and acquired companies are integrated.

      The components of operating expenses are detailed below.

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     Research and Development

      Expenses for research and development consist primarily of personnel-related and facility expenses and, to a lesser extent, consulting, depreciation and costs of prototype materials. Research and development expenses were $90.0 million or 26% of revenue in 2002 compared to $98.1 million or 19% of revenue in 2001 and $94.1 million or 16% of revenue in 2000. The $8.1 million or 8% decrease in absolute dollars from 2001 to 2002 stems from the company-wide effort to control spending, including payroll-related costs. The increase in 2001 from 2000 in research and development expenses was mainly due to an increase in research and development projects. The Company believes that the development of new products and the enhancement of existing products are essential to its continued success, and intends to continue to devote substantial resources to research and product development efforts. The Company expects that its research and development expenses may increase in absolute dollars and also as a percentage of revenue. As part of its cost containment practices, the Company now reviews all projects on a periodic basis for estimated return on investment. Those projects that do not meet certain criteria are halted.

     Sales and Marketing

      Sales and marketing expenses include personnel expenses, costs for trade shows, marketing programs and promotional materials, sales commissions, travel and entertainment expenses, depreciation, and costs associated with sales offices in the United States, Europe, Japan and other locations around the world. Sales and marketing expenses for 2002 were $50.6 million or 14% of revenue compared to $56.8 million or 11% of revenue in 2001 and $64.5 million or 11% of revenue in 2000. The $6.2 million decrease in absolute dollars in 2002 from 2001 was primarily attributable to the company-wide effort to control spending by fewer trade show participations, reduced personnel-related and facility expenses and overall cost containment.

      The Company expects that its sales and marketing expenses may increase in absolute dollars and possibly also as a percentage of revenue as it continues to actively promote its products, and launch new products. This expected increase might not proportionally increase with increases in volume if the Company’s sales continue to gravitate toward products such as software and design-licensed solutions which require less marketing support from the Company.

     General and Administrative

      General and administrative expenses consist primarily of personnel-related expenses and, to a lesser extent, depreciation and facility costs, professional fees and other costs associated with public companies. General and administrative expenses were $21.8 million or 6% of revenue in 2002, compared to $25.5 million or 5% of revenue in 2001 and $24.8 million or 4% of revenue in 2000. While general and administrative expenses have increased as a percentage of total revenue in 2002 over 2001 and 2000, in absolute dollars the expenses decreased by $3.7 million during 2002. The decrease in 2002 was primarily a result of the company-wide effort to control spending through decreased consulting costs, reduced facility expenses and reduced personnel-related expense. The increase in 2001 over 2000 was primarily due to the increase in headcount to support the needs of the growing Company’s operations, including a business development department and a ERP implementation team. The Company expects that its general and administrative expenses could increase in absolute dollars and possibly also as a percentage of revenue in order to support the Company’s efforts to grow its business in future periods.

     Amortization of Goodwill and Other Identifiable Intangibles

      Amortization of purchased intangibles, excluding goodwill was $4.4 million or 1% of revenue in 2002. Amortization of goodwill and other identifiable intangibles was $12.3 million or 2% of revenue in 2001 and $3.3 million or 1% in 2000, while acquisition-related charges in 2000 were $20.3 million, or 3% of revenue. SFAS No. 142, issued in July, 2001, requires, among other things, the discontinuance of goodwill amortization for fiscal years beginning after March 15, 2001. Upon adoption of the standard in January 2002, we ceased amortizing goodwill and began periodic testing of goodwill for impairment. Net unamortized goodwill at December 31, 2002 was $43.6 million, including net intangible assets and deferred tax liabilities relating to

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     Other Income, net

      Net other income relates mainly to interest income and expense. Net interest income of $11.7 million in 2002 decreased by 28% from $16.3 million in 2001. Net interest income of $16.3 million in 2001 decreased by 21% from $20.4 million in 2000. The decrease in 2002 from 2001 and in 2001 from 2000 is due mainly to a lower return on investments as a result of market interest rates that have fallen in the last two years. Litigation settlement expenses in other income consist of the settlement of the 1997 securities class action lawsuit for $4.4 million, including legal fees and other related costs. While there has been no change in the Company’s view that the lawsuit had no merit, it determined that settlement of the lawsuit was in the best interest of the Company and its shareholders.

     Income Taxes

      The Company’s effective tax rate was 30% in 2002, 35.5% in 2001, and 40.8% in 2000. In each of these years, the Company benefited from tax-exempt interest income and the utilization of the research and development credits. The Company also benefited from a foreign sales corporation in 2001 and 2000. The Company’s effective tax rate was adversely impacted both by taxes provided on non-US earnings in 2002 and 2001 and by charges associated with the acquisition of Splash in 2001 and 2000. Excluding the impact of the Splash acquisition-related charges, the Company’s effective tax rate for 2001 and 2000 was 33%. The rate decreased in 2002 as a result of the elimination of non-deductible goodwill amortization due to the implementation of SFAS No. 142 and increased benefits related to the generation of tax-exempt interest income due to lower pre-tax income. The Company currently estimates that its effective tax rate for 2003 will be approximately 27% due to increased benefits from foreign sales.

Stock Option Exchange

      During the fourth quarter of 2001, the Company authorized the implementation of an option exchange program pursuant to which our current employees had the opportunity to exchange their outstanding options to purchase shares of our common stock for new stock option grants to be made to them at least 6 months and 1 day in the future. The strike price for the new stock option grants was subject to market risk, in that the price could have been higher than the strike price of the options tendered. Outstanding stock options granted between December 1, 1999 and May 31, 2000 under our 1990 Plan or our 1999 Plan were exchanged for new replacement options granted under our 1999 Plan during the second quarter of 2002. The number of shares of common stock subject to each new option were equal to two-thirds of the number of shares of common stock subject to the tendered option. Options for approximately 2,590,825 shares of common stock were eligible for participation in the option exchange program. At the conclusion of the option exchange program on October 12, 2001, the Company accepted for exchange and cancelled options with exercise prices ranging from $28.9529 to $59.8125 to purchase an aggregate of 2,500,143 shares of our common stock. We issued new replacement options to purchase 1,607,114 shares of common stock at an exercise price of $17.15 in exchange for those cancelled options. No compensation cost was recorded in conjunction with the stock option exchange.

Subsequent Events

      In January 2003 the Company acquired Best GmbH, a German-based software company providing market-leading proofing products for the print and publishing markets worldwide for approximately $9 million in cash. The purchase price will be allocated to tangible and identifiable intangible assets acquired based on their estimated fair values at the date of acquisition. Total costs in excess of tangible and identifiable intangible assets will be recorded as goodwill. Goodwill is estimated at $4.8 million, with other identifiable intangibles estimated at $4.9 million and in-process research and development, which will be expensed, estimated at $1.2 million.

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      On February 13, 2003, Printcafe Software, Inc. (“Printcafe”) entered into the following three agreements with the Company; a standby credit facility in the amount of $11 million plus a working capital facility which will provide up to an additional $3 million under certain circumstances; a stock option agreement granting the Company an option to purchase up to 2,126,574 shares of Common Stock at a purchase price equal to $2.60 per share; and a letter agreement that places certain restrictions on Printcafe’s ability to take actions in order to facilitate a business combination with a party other than the Company subject to customary “fiduciary out” provisions (collectively, the “Agreements”). The Agreements were entered into in connection with EFI’s proposal to acquire all of the outstanding shares of common stock of Printcafe at a purchase price equal to $2.60 per share, payable in cash or EFI stock. On February 19, 2003, Creo Inc. commenced litigation in the Delaware Court of Chancery against the Company, Printcafe and certain of Printcafe’s principal officers and directors, challenging and seeking to temporarily restrain the use of a newly adopted stockholder rights plan by Printcafe, the Agreements and seeking to restrain the Company and Printcafe from proceeding to enter into any further agreements with respect to a business combination. On February 21, 2003, the Delaware Court of Chancery denied the temporary restraining order sought by Creo. On February 26, 2003, the Company announced that it signed a merger agreement providing for the acquisition of PrintCafe for $2.60 per share, or approximately $27.6 million, in cash or Company stock, for each outstanding PrintCafe share. The underlying litigation filed by Creo is still pending and management of the Company intends vigorously to defend such action. However, due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the litigation. Any unfavorable outcome of the litigation could have an adverse impact on the Company’s financial condition and results of operations.

Recent Accounting Pronouncements

      In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, Accounting for Asset Retirement Obligation. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. The company does not expect that the adoption of SFAS No. 143, which is effective for financial statements issued for fiscal years beginning after June 15, 2002, will have a material effect on our consolidated financial statements.

     SFAS 145

      In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The Company does not expect the adoption of SFAS No. 145, the provisions of which are effective for financial years beginning after May 15, 2002, will have a material effect on our consolidated financial statements.

     SFAS 146

      In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which is effective for exit or disposal activities that are initiated after December 31, 2002. This Statement applies to costs associated with an exit activity, including restructuring, that does not involve an entity newly acquired in a business combination, or with the disposal of long-lived assets. The Company does not expect that the adoption of SFAS 146 will have a material effect upon our consolidated financial statements.

     SFAS 148

      In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial

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     FASB Interpretation No. 45

      In December 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantors, Including Direct Guarantees of Indebtedness of Others (“FIN 45”), which will significantly change current practice in the accounting for, and disclosure of, guarantees. Most guarantees are to be recognized and initially measured at fair value, which is a change from current practice. In addition, guarantors will be required to make significant new disclosures, even when the likelihood of the guarantor making payments under the guarantee is remote. In general, the Interpretation applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability, or an equity security of the guaranteed party. The Interpretation’s disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002 and have been incorporated into these financial statements and accompanying footnotes, while the initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.

     FASB Interpretation No. 46

      In January 2003, the FASB issued Interpretation No. 46 Consolidation of Variable Interest Entities (“FIN 46”). The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprise should consolidate the VIE (the “primary beneficiary”). This new model for consolidation applies to an entity in which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is sufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures regarding the nature, purpose, size and activities of the VIE and the enterprise’s maximum exposure to loss as a result of its involvement with the VIE. The Company is required to adopt this interpretation no later than July 1, 2003 for any VIEs in which it holds a variable interest that it acquired before February 1, 2003. The interpretation is effective immediately for any VIEs created after January 31, 2003 and for VIEs in which an enterprise obtains an interest after that date. The Company continues to evaluate the impact of this Interpretation on its financial condition and results of operations. Based upon its initial analysis, it is possible that the Company may consolidate one or both of the synthetic lease arrangements, as it may be considered the primary beneficiary of the variable interest entity, when the consolidation requirements become effective for our third quarter ending September 30, 2003.

Liquidity and Capital Resources

      Cash, cash equivalents and short-term investments increased by $47.2 million to $498.4 million as of December 31, 2002, from $451.2 million as of December 31, 2001. Working capital increased by $32.1 million to $470.1 million as of December 31, 2002, up from $438.0 million as of December 31, 2001.

      Net cash provided by operating activities was $49.9 million, $126.6 million and $76.5 million in 2002, 2001 and 2000, respectively. Cash provided by operating activities decreased in 2002 compared to 2001 principally as a result of a decrease in net income and depreciation expense and decreases in the cash generated by the change in inventories, accounts receivable from customers and subcontract manufacturers, income taxes payable, and accounts payable. Cash provided by operating activities increased in 2001 over 2000 as a result of a decrease in inventories and accounts receivable from customers and subcontract manufacturers and an increase in income taxes payable, offset with a decrease in accounts payable and accrued liabilities.

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      The Company has continued to invest cash in short-term investments, mainly municipal securities. Net purchases of short-term investments were $83.3 million in 2002 and $8.3 million in 2001, while net sales were $57.5 million in 2000. The Company’s capital expenditures generally consist of investments in computers and related peripheral equipment and office furniture for use in the Company’s operations. The Company purchased approximately $8.2 million, $19.3 million and $15.5 million of such equipment and furniture during 2002, 2001 and 2000, respectively. During 2002 the Company invested $1.7 million in the acquisition of Unimobile. The Company purchased land and facilities in Minnesota for approximately $4.8 million and incurred $7.1 million in land improvements at its Foster City campus during 2001. During 2000 the Company invested $83.8 million, net of cash received, in the acquisition of Splash.

      Net cash provided by financing activities of $9.2 million in 2002 were primarily the result of exercises of common stock options and distribution of common stock pursuant to the employee stock purchase plan. Net cash provided by financing activities of $13.9 million in 2001 was primarily the result of exercises of common stock options. Net cash used in financing activities of $82.5 million in 2000 was primarily the difference between the $100.0 million used to repurchase common stock and the cash received from exercises of common stock options. Net cash provided by financing activities in 2001 and 2000 includes approximately $3.1 million and $0.8 million, respectively, of cash used to repay long-term obligations.

      We do not have significant long-term debt outstanding. Future payments due under lease obligations as of December 31, 2002 (in thousands):

     Off-Balance Sheet Financing — Synthetic Lease Arrangements

      In 1997 the Company entered into an agreement (“1997 Lease”) to lease a ten-story 295,000 square foot building on land owned by the Company in Foster City, California. The lessor funded the approximately $56.8 million construction cost of the building which was completed in July 1999. In conjunction with the 1997 Lease, the Company entered into a separate ground lease with the lessor of the building at a nominal rate and for a term of approximately 35 years. If the Company does not renew the 1997 Lease, the ground lease converts to a market rate.

      In December 1999 the Company entered into a second agreement (“1999 Lease” and together with the 1997 Lease, the “Leases”) to lease additional facilities, to be constructed adjacent to the first building discussed above. A 165,000 square foot building was completed in December 2001 at a cost to the lessor of approximately $43.1 million. Rent obligations for the additional facilities, which began in January 2002, bear a direct relationship to the funded amount, as described below. In connection with the 1999 Lease, the Company entered into a separate ground lease of the related parcels of land in Foster City with the lessor of the buildings at a nominal rate and for a term of 30 years. If the Company does not renew the 1999 Lease, the ground lease converts to a market rate.

      Both Leases have an initial term of seven years, with options to renew subject to certain conditions. The Company may, at its option, purchase the facilities during or at the end of the term of the Leases for the amount expended by the respective lessor to construct the facilities (approximately $56.8 million for the 1997 Lease and approximately $43.1 million for the 1999 Lease). The Company has guaranteed to the lessors a residual value associated with the buildings equal to approximately 82% of the their funding. The Company may be liable to the lessor for the amount of the residual guarantee if it either fails to renew the lease or does

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      The Company is treated as the owner of these facilities for income tax purposes.

      In January 2003 the FASB issued FIN 46. As noted under Recent Accounting Pronouncements, the primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities”) and how to determine when and which business enterprise should consolidate the variable interest entity (“primary beneficiary”). We continue to evaluate the impact of this Interpretation on our financial condition and results of operations. Based upon our initial analysis, it is possible that we may consolidate one or both of the synthetic lease arrangements, as we may be considered the primary beneficiary of the variable interest entity, when the consolidation requirements become effective for our third quarter ending September 30, 2003.

      Under both leases the Company has first loss guarantees to the lessors, which make the Company liable for declines in the value of these buildings up to approximately 82% of the cost of the construction of the buildings. The first loss guarantee requires payment upon the end of the lease. The Company had a valuation of the building related to the 1997 Lease performed in December 2002 to determine if the Company had exposure related to the residual value guarantee, which would require the payment of the first loss guarantee at the end of the 1997 Lease in July 2004. A valuation of $60.0 million was indicated by the analysis, so the Company has not recorded a reserve for potential impairment. The Company will continue to assess the real estate market conditions to evaluate whether it needs to record any reserves under its first loss guarantee obligations.

     Derivatives

      We conduct our operations globally, however, our transactions are primarily conducted using the United States dollar. We enter into a limited number of forward foreign exchange contracts in order to hedge the currency fluctuations between the Company and its Japanese subsidiary. No forward foreign exchange contracts were outstanding at December 31, 2002. We do not use any derivatives for trading or speculative purposes.

     Financial Risk Management

      The following discussion about our risk management activities includes “forward-looking statements” that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements.

      As a global concern, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results. Our primary exposures are related to non U.S. dollar-denominated sales in Japan and operating expenses in Japan and the Netherlands. Our exposure to movements in foreign currency exchange rates will increase in 2003 after our acquisition of Best Gmbh, which has sales and expenses in the Euro. At the present time, we do not hedge against these currency exposures, but as these exposures grow we may consider hedging against currency movements.

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      We maintain investment portfolio holdings of various issuers, types and maturities, typically U.S. Treasury securities and municipal bonds. These securities are classified as available-for-sale, and consequently are recorded on the balance sheet at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income (loss). These securities are not leveraged and are held for purposes other than trading.

      The Company’s inventory consists primarily of memory subsystems, processors and ASICs, which are sold to third-party contract manufacturers responsible for manufacturing the Company’s products. Should the Company decide to purchase components and do its own manufacturing, or should it become necessary for the Company to purchase and sell components other than the processors, ASICs or memory subsystems for its contract manufacturers, inventory balances and potentially fixed assets would increase significantly, thereby reducing the Company’s available cash resources. Further, the inventory the Company carries could become obsolete, thereby negatively impacting the Company’s consolidated financial position and results of operations. The Company is also reliant on several sole-source suppliers for certain key components and could experience a further significant negative impact on its financial condition and results of operations if such supply were reduced or not available.

      The Company may be required to compensate its sub-contract manufacturers for components purchased for orders subsequently cancelled by the Company. The Company periodically reviews the potential liability and the adequacy of the related reserve. The Company’s financial condition and results of operations could be negatively impacted if the Company were required to compensate the sub-contract manufacturers in amounts in excess of the accrued liability.

      In December 2001, Mr. Jan R. Coyle threatened to sue the Company and its customers for infringing a purported soon to be issued patent and for misappropriating trade secrets. The Company believes that Mr. Coyle’s threats are completely without merit. The Company has sought declaratory relief as well as an injunction against Mr. Coyle. See Item 3 “Legal Proceedings.”

      In February 2002, J & L Electronics, another company owned by Mr. Coyle, filed a complaint against the Company in the United States District Court for the District of Nevada alleging patent infringement, breach of non-disclosure agreements, misappropriation of trade secrets, violations of federal antitrust law, and related causes of action. The Company has denied all of these allegations and management believes this lawsuit is without merit and intends to defend the actions vigorously. See Item 3 “Legal Proceedings.”

      On September 16, 2002, ArrivalStar, Inc., a privately held Delaware corporation, (“ArrivalStar”) filed a complaint in the U.S. District Court for the Northern District of Georgia against fourteen defendants, including EFI, alleging that each of the defendants infringed one or more claims of six identified patents owned by the ArrivalStar. EFI believes that the plaintiff’s claims against it are without merit and intends to vigorously defend itself in this litigation. See Item 3 “Legal Proceedings.”

      In February 2003, Printcafe Software, Inc. (“Printcafe”) entered into three agreements with the Company; a standby credit facility in the amount of $11 million plus a working capital facility which will provide up to an additional $3 million under certain circumstances; a stock option agreement granting the Company an option to purchase up to 2,126,574 shares of Common Stock at a purchase price equal to $2.60 per share; and a letter agreement that places certain restrictions on Printcafe’s ability to take actions in order to facilitate a business combination with a party other than the Company subject to customary “fiduciary out” provisions (collectively, the “Agreements”). In February 2003, Creo Inc. commenced litigation in the Delaware Court of Chancery against the Company, Printcafe and certain of Printcafe’s principal officers and directors, challenging and seeking to temporarily restrain the use of a newly adopted stockholder rights plan by Printcafe, the transactions contemplated by the Agreements and seeking to restrain the Company and Printcafe from proceeding to enter into any further agreements with respect to a business combination. See Item 3 “Legal Proceedings.”

      The Company believes that its existing capital resources, together with cash generated from continuing operations will be sufficient to fund its operations and meet capital requirements through at least 2003.

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Disclosures on Stock Option Programs

     Option Program Description

      Our stock option program is a broad-based, long-term retention program that is intended to attract and retain talented employees and align stockholder and employee interests. We consider our option program critical to our operation and productivity; essentially all of our employees participate. Of the options we granted last year, 90% went to employees other than the top 3 officers. The program consists of a broad-based plan under which options may be granted to all employees, directors and consultants. Option vesting periods range from 2 – 4 years, with an average vesting period of 3.5 years.

     Distribution and Dilutive Effect of Options

*	See Executive Officers for listed officers; these are defined by the SEC for the proxy as the CEO and each of the four other most highly compensated executive officers. The Company has only three executive officers.

      During 2000, 3 company-wide grants were made. However, the listed officers did not receive options under the third grant until 2001. This has created the variance in the 2001 percentage of grants to officers compared to total options granted as compared to 2000 and 2002. The third grant to employees in 2000 was in lieu of the annual company-wide grant during 2001. The lack of a company-wide grant during 2001 has resulted in the decrease in grants as a percentage of outstanding shares in 2001 as compared to 2000 and 2002.

      The officers are restricted by company policy as to the dates when they can exercise their options. The inability to exercise when other employees can trade has resulted in the increase in the cumulative options held by officers as a percentage of the total options outstanding.

     General Option Information

     Summary of Option Activity

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As of December 31, 2002

(1)	Out-of-the-money options are those options with an exercise price equal to or above the closing price of $16.44 at the end of the year.

     Executive Options

Option Grants in Year Ended December 31, 2002