UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2004

OR

Commission File Number: 000-18805

ELECTRONICS FOR IMAGING, INC.

303 Velocity Way, Foster City, CA 94404
(Address of principal executive offices, including zip code)

(650) 357 - 3500
(Registrant’s telephone number, including area code)

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 [X] No [ ]

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

The number of shares of Common Stock outstanding as of April 30, 2004 was 53,583,665.

ELECTRONICS FOR IMAGING, INC.

INDEX

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PART I            FINANCIAL INFORMATION

     ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Electronics for Imaging, Inc.

See accompanying notes to condensed consolidated financial statements.

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Electronics for Imaging, Inc.

     See accompanying notes to condensed consolidated financial statements.

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Electronics for Imaging, Inc.

See accompanying notes to condensed consolidated financial statements.

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Electronics for Imaging, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

1. Basis of Presentation

The unaudited interim condensed consolidated financial statements of Electronics for Imaging, Inc., a Delaware corporation (the “Company”), as of and for the interim period ended March 31, 2004, have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended December 31, 2003, contained in the Company’s Annual Report to Stockholders on Form 10-K. In the opinion of management, the unaudited interim condensed consolidated financial statements of the Company include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of the Company and the results of its operations and cash flows, in accordance with accounting principles generally accepted in the United States of America. The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements referred to above and the notes thereto. Certain prior year balances have been reclassified to conform with the current year presentation.

The preparation of the interim condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the interim condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

The interim results of the Company are subject to fluctuation. As a result, the Company believes the results of operations for the interim period ended March 31, 2004 are not necessarily indicative of the results to be expected for any other interim period or the full year.

2. Accounting for Derivative Instruments and Hedging

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of SFAS No. 133 requires companies to reflect the fair value of all derivative instruments, including those

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embedded in other contracts, as assets or liabilities in an entity’s balance sheet. The Company had one embedded derivative related to the 1.50% Senior Convertible Debentures as of March 31, 2004, the fair value of which was insignificant.

3. Stock-based Employee Compensation

As permitted under Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), the Company has elected to use the intrinsic value method as set forth in Accounting Principles Board Opinion No. 25. Accounting for Stock Issued to Employees. Accordingly, no stock based compensation costs related to stock options has been recorded in the income statement. The Company has determined pro forma net earnings and net earnings per share information as if the fair value method described in SFAS 123 had been applied to its employee stock-based compensation had been recognized as compensation expense.

4. Comprehensive Income

The Company’s comprehensive income, which encompasses net income, market valuation adjustments and currency translation adjustments, is as follows:

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5. Earnings Per Share

The following table represents unaudited disclosures of basic and diluted earnings per share for the periods presented below:

		Anti-dilutive weighted average shares of common stock of 2,460,711 and 7,266,524 as of March 31, 2004 and 2003, respectively, have been excluded from the effect of dilutive securities because the options’ exercise prices were greater than the average market price of the common stock for the periods then ended. The convertible debentures issued June 4, 2003 are considered contingently convertible securities and were excluded from the earnings per share calculations for all periods presented. The debentures represent 9,084,192 potential shares of common stock issuable upon conversion.

6. Acquisitions and Divestitures

2003 Acquisitions

In January 2003 the Company acquired Best GmbH, a German-based software company that provides proofing products for worldwide print and publishing markets for approximately $9.6 million in cash. The acquisition was accounted for as a purchase business combination and accordingly, the purchase price has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values on the date of acquisition. The following table summarizes the allocation of the purchase price to assets acquired and liabilities assumed:

The amounts allocated to intangible assets are being amortized using the straight-line method over their respective estimated useful lives with developed technology having a five-year life and all other acquired intangibles having a ten-year life.

Printcafe Software, Inc.

In October 2003, the Company acquired Printcafe Software, Inc. (“Printcafe”) for total consideration of approximately $33.4 million, paid in cash and common stock of the Company. Approximately 12.8 million shares of Printcafe common stock were issued and outstanding on that date, of which approximately 8.8 million shares of Printcafe common stock were redeemed for $22.9 million and approximately 1.9 million shares were exchanged for approximately 0.2 million shares of the Company common stock, valued at $5.0 million. The remaining 2.1 million shares of stock were acquired by the Company for $5.5 million earlier in 2003. The Company recorded a charge of $1.6 million after adopting the equity method of accounting for its investment in Printcafe, based upon its share of Printcafe’s losses for the pre-acquisition period. The Company incurred $1.0 million of capitalized transaction-related costs including legal fees, accounting fees and other consulting fees and assumed stock options with a fair value of $0.6 million. The Company assumed liabilities in excess of assets on the date of acquisition of $14.9 million. The

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acquisition was accounted for as a purchase business combination and accordingly, the purchase price has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the date of acquisition as follows:

The amounts allocated to intangible assets are being amortized using the straight-line method over their respective estimated useful lives with developed technology having a four-year life and all other acquired intangibles having a five-year life.

T/R Systems, Inc.

In November 2003 the Company acquired T/R Systems, Inc., for approximately $20.0 million in cash. The acquisition was accounted for as a purchase business combination and accordingly, the purchase price has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the date of acquisition. The following table summarizes the allocation of the purchase price to assets acquired and liabilities assumed:

The amounts allocated to intangible assets are being amortized using the straight-line method over their respective estimated useful lives with developed technology having a three-year life, customer relationships having a four-year life and the remaining acquired intangibles having a five- to seven-year life.

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2004 Acquisitions

Automated Dispatch Systems Inc.

In February 2004 the Company acquired Automated Dispatch Systems, Inc. (“ADS”), for approximately $11.8 million in cash. The acquisition was accounted for as a purchase business combination and accordingly, the purchase price has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the date of acquisition. The following table summarizes the allocation of the purchase price to assets acquired and liabilities assumed:

The amounts allocated to intangible assets are being amortized using the straight-line method over their respective estimated useful lives with developed technology having a three-year life, customer relationships having a four-year life and the remaining acquired intangibles having a five-year life.

Valuation Methodology

Intangible assets acquired consist of developed technology, patents, trademarks and trade names and customer relationships. The amount allocated to the purchased in-process research and development (“IPR&D”) was determined using established valuation techniques and was expensed upon acquisition because technological feasibility had not been established and no future alternative uses existed. The value of this IPR&D was determined by estimating the costs to develop the purchased IPR&D into a commercially viable product, estimating the resulting net cash flows from the sale of the products resulting from the completion of the IPR&D and discounting the net cash flows back to their present value at rates ranging from 25% to 30%. The percentage of completion for in-process projects acquired ranged from 10% to 90%. Schedules were based on management’s estimate of tasks completed and the tasks to be completed to bring the project to technical and commercial feasibility. IPR&D was included in operating expenses as part of other acquisition related charges.

Pro forma Information

The unaudited pro forma information set forth below represents the revenues, net income and earnings per share of the Company and its 2003 and 2004 acquisitions as if the acquisitions were effective as of the beginning of the periods presented and includes certain pro forma adjustments, including the adjustment of amortization expense to reflect purchase price allocations, interest income to reflect net cash used for the purchase and the related income tax effects of these adjustments.

The unaudited pro forma information is not intended to represent or be indicative of the consolidated results of operations of EFI that would have been reported had the acquisitions been completed as of the beginning of the periods presented and should not be taken as representative of the future consolidated results of operations or financial condition of EFI.

2004 Divestiture

In February 2004 the Company sold its investment in the Unimobile business for cash of $5.3 million, including $1.1 million of cash held in escrow for up to eighteen months after the sale. The Company recognized a gain on sale of $3.0 million after accounting for the intangible and tangible assets of $1.8 million and related liabilities of $0.5 million.

7. Balance Sheet Components

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8. Goodwill and Other Identified Intangible Assets

In connection with the adoption of Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets,” (SFAS 142), as of January 1, 2002, goodwill is no longer amortized but reviewed annually during the second fiscal quarter for impairment. The Company conducted goodwill impairment tests in fiscal 2003, and the results of these tests indicated that its goodwill was not impaired. Goodwill was increased by $9.5 million during the first quarter of 2004 related to the acquisition of ADS and additional costs associated with the 2003 acquisitions.

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     Aggregate amortization expense was $3.5 million for the three months ended March 31, 2004 and $1.3 million for the three months ended March 31, 2003. As of March 31, 2004 future estimated amortization expense related to intangible assets is estimated to be:

9. Long-term Debt

On June 4, 2003 the Company sold $240.0 million of its 1.50% convertible senior debentures due in 2023 (the “Debentures”) in a private placement. The Debentures have been registered with the Securities and Exchange Commission under the Securities Act of 1933 pursuant to a registration statement declared effective in January 2004. The Debentures are unsecured senior obligations of the Company, paying interest semi-annually in arrears at an annual rate of 1.50%. Additional interest at a rate of 0.35% per annum will be paid if the average market price of the debentures for the five trading days ending on the third trading day immediately preceding the first day of the relevant six-month period equals 120% or more of the principal amount of the debentures, beginning in the sixth year after issuance. The Debentures are convertible before maturity into shares of EFI common stock at a conversion price of approximately $26.42 per share of common stock but only upon the stock trading at or above $31.70 per share for 20 consecutive trading days during the last 30 consecutive trading days of the preceding fiscal quarter, or upon the occurrence of certain other specified events. The Company may redeem the Debentures at its option, on or after June 1, 2008 at a redemption price equal to par plus accrued interest, if any. In addition, holders of the Debentures may require the Company to repurchase all or some of the Debentures on June 1, 2008, 2013 and 2018 at a price equal to 100% of the principal amount plus accrued interest, including contingent interest, if any. The Company will pay the repurchase price for any debentures repurchased on June 1, 2008 in cash, but may choose to pay the repurchase price in cash, common stock of the Company, or any combination thereof in 2013 and 2018. Additionally, a holder may require the Company to repurchase all or a portion of that holder’s debentures if a fundamental change, as defined in the indenture, occurs prior to June 1, 2008 at 100% of their principal amount, plus any accrued and unpaid interest, including contingent interest, if any. The Company may choose to pay the repurchase price in cash, common stock of the Company, or any combination thereof. Maturities of long-term debt are approximately $58 thousand per year for the next five years.

10. Commitments and Contingencies

Off-Balance Sheet Financing — Synthetic Lease Arrangement

In July 1999 the Company completed construction on company-owned land of a ten-story, 295,000 square foot building funded under a lease agreement entered into in 1997 (“1997 Lease”). In December 1999 the Company entered into a second agreement (“1999 Lease” and together with the 1997 Lease, the “Leases”) to lease a 165,000 square foot building adjacent to the first building additional facilities. In conjunction with the Leases, the Company has entered into separate ground leases with the lessors of the buildings for approximately 35 years. If the Company does not renew the building leases, the ground leases convert to a market rate.

Both Leases have initial terms 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 ($56.8 million for the 1997 Lease and $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 their funding. The Company may be liable to the lessor for the amount of the residual guarantee if it either fails

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to renew the lease or does not purchase or locate a purchaser for the leased building at the end of the lease term. The Company must meet certain financial covenant requirements related to cash to debt, fixed charge coverage ratio, leverage ratio and consolidated tangible net worth as defined in the lease agreements. If the Company maintains pledged collateral, then a limited subset of these covenants must be met. The tangible net worth financial covenant requires us to maintain a minimum tangible net worth as of the end of each quarter. There are other covenants regarding mergers, liens and judgments and lines of business. The Company is in compliance with all of the covenants, either directly, or through the existence of the pledged collateral. The pledged collateral under the 1997 Lease (approximately $69.9 million at March 31, 2004) has been classified as restricted on the balance sheet. The Company is liable to the lessor for the full purchase amount of the buildings if it defaults on its covenants. The Company could be required to purchase the building covered by the 1997 Lease if the Company were to default on any indebtedness in excess of $10.0 million, to not appeal a judgment in excess of $10.0 million, or where a creditor has commenced enforcement proceedings on an order for payment of money in excess of $10.0 million. In addition, the Company has pledged certain marketable securities, which are in proportion to the amount drawn under each lease. The funds pledged under the 1999 Lease (approximately $43.1 million at March 31, 2004) are in a LIBOR-based interest bearing account and are restricted as to withdrawal at all times. With regards to the 1999 Lease the Company is considered a Tranche A lender of $35.3 million of the $43.1 million, while the lessor is considered a Tranche B lender for the remaining $7.8 million.

The 1997 lease expires in July 2004. The Company is currently negotiating a new lease, which may not contain the same terms as the current lease. Under each Lease, the Company has first loss guarantees to the lessors, which require the Company to reimburse the lessor at the end of the lease for declines in the value of the buildings up to approximately 82% of the cost of the construction of the buildings. The Company has assessed its exposure in relation to the first loss guarantees for both of the buildings under the Leases and believes there is no deficiency to the guaranteed value at March 31, 2004. 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.

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

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. In December 2003, the FASB completed deliberations of proposed modifications to FIN 46 (“revised interpretations”) resulting in multiple effective dates based upon the nature as well as the creation date of the VIE. VIEs created after January 31, 2003 but prior to January 1, 2004 may be accounted for on the basis of the original interpretation’s provisions. Non-special purpose entities created prior to February 1, 2003 should be accounted for under the revised interpretations provisions no later than December 31, 2003.

Effective July 1, 2003, the Company has applied the accounting and disclosure rules set forth in FIN 46 for VIEs acquired before January 31, 2003. We have evaluated the synthetic lease agreements to determine if the arrangements qualify as variable interest entities under FIN 46. The Company determined that the synthetic lease agreements do qualify as VIEs; however, as it is not the primary beneficiary under FIN 46 it is not required to consolidate the VIEs in the financial statements. The Company has not entered into any arrangement with VIEs created after January 31, 2003.

Purchase Commitments

The Company sub-contracts with other companies to manufacture its products. During the normal course of business the sub-contractors procure components based upon orders placed by the Company. If the Company cancels all or part of the order, it may still be liable to the sub-contractors for the cost of the components purchased by the sub-contractors for placement in its products. The Company periodically reviews the potential liability and the adequacy of the related reserve. The Company’s consolidated financial position and results of operations could be negatively impacted if the Company were required to compensate the sub-contract manufacturers for amounts in excess of the related reserve.

Product Warranties

Financial Accounting Standards Board Interpretation No 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”) requires that upon issuance of a guarantee, the guarantor must disclose and recognize a liability for the fair value of the obligation it assumes under that guarantee. The Company’s products are generally accompanied by a 12-month warranty, which covers both parts and labor. The Company accrues for warranty costs as part of its cost of sales based on associated material product costs and technical support labor costs. The warranty provision is based upon historical experience, by product, configuration and geographic region.

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Changes in the warranty reserves for the three months ended March 31, 2004 and 2003 were as follows:

Legal Proceedings

Over the past several 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, Mr. Coyle threatened to sue the Company and its customers for allegedly infringing his soon to be issued patent and for allegedly misappropriating his alleged trade secrets. The Company believes Mr. Coyle’s claims are baseless and completely without merit. 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 Mr. Coyle or Kolbet Labs, nor has it infringed any alleged patent claims or misappropriated any alleged trade secrets belonging to Mr. Coyle or Kolbet Labs through its sale of Fiery, Splash or EDOX print controllers. The Company also sought an injunction enjoining both Mr. 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 citing the Court’s lack of jurisdiction over Mr. Coyle. The Company appealed the Court’s dismissal to the Court of Appeals for the Federal Circuit, who reversed the dismissal of our case and remanded it to the Northern District of California Court. Mr. Coyle and Kolbet Labs subsequently moved to dismiss our complaint under the Declaratory Judgment Act. The Court entered an order granting that dismissal on February 17, 2004. The Company has filed a notice of appeal for that decision. On February 17, 2004 the Company filed another declaratory relief action in the Northern District of California against Mr. Coyle and Kolbet Labs. The Company is pursuing its case against Mr. Coyle and Kolbet Labs.

On February 26, 2002, Mr. Coyle’s company, J & L Electronics, 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 denied all of the allegations and management believed this lawsuit to be without merit. On March 28, 2003, the Federal District Judge dismissed the complaint for lack of jurisdiction over us. J & L Electronics appealed the dismissal to the Court of Appeals for the Federal Circuit. On February 9, 2004, the Court of Appeals for the Federal Circuit affirmed the dismissal of J & L Electronics’ complaint. On May 3, 2004, Mr. Coyle’s company, J&L Electronics, Inc., filed a complaint against the Company in the United States District Court for the District Court of Arizona, again alleging patent infringement, breach of non-disclosure agreements, misappropriation of trade secrets, violations of federal antitrust law and related causes of action. The Company continues to believe that these allegations are baseless and completely without merit, and intends to oppose these claims vigorously.

On February 13, 2003, the Company entered into agreements with Printcafe to facilitate a merger between the two companies. On February 19, 2003, Creo Inc. (a Printcafe shareholder) commenced litigation in the Delaware Court of Chancery against the Company, Printcafe and certain of Printcafe’s principal officers and directors, challenging those agreements and seeking to restrain the Company and Printcafe from proceeding to enter into any further agreements with respect to a business merger. On February 21, 2003, the Delaware Court of Chancery denied the temporary restraining order sought by Creo. On February 26, 2003, the Company and Printcafe entered into a merger agreement providing for the Company’s acquisition of Printcafe. Such acquisition was completed on October 21, 2003. In February 2004, Creo agreed to dismiss all claims against all parties with prejudice without any payment by any of the parties. The Court granted an order for dismissal with prejudice on February 19, 2004.

On June 25, 2003, a securities class action complaint was filed against Printcafe Software, Inc., now a wholly-owned subsidiary of the Company and certain of Printcafe’s officers in the United States District Court for the Western District of Pennsylvania. The complaint alleges that the defendants violated Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 due to allegedly false and misleading statements in connection with Printcafe’s initial public offering and subsequent press releases. The Company acquired Printcafe in October 2003 and believes that the lawsuit is without merit and intends to defend itself accordingly.

In addition, the Company is involved from time to time in litigation relating to claims arising in the normal course of its business.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our financial statements and the related notes thereto contained elsewhere in this Quarterly Report on Form 10-Q. Except for the historical information contained herein, the discussion in this Quarterly Report on Form 10-Q contains certain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, beliefs, expectations, forecasts and intentions. The cautionary statements made in this document should be read as applicable to all related forward-looking statements wherever they appear in this document. Our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include those discussed below in “Factors that Could Adversely Affect Performance,” as well as those discussed elsewhere herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update any forward- looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported. Please see the discussion of critical accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2003.

Results of Operations

The following tables set forth items in our condensed consolidated statements of income as a percentage of total revenue for the three -month periods ended March 31, 2004 and 2003 and the percentage change from 2004 over 2003. These operating results are not necessarily indicative of results for any future period.

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Revenue

We classify our revenue into three major categories. The first category, “Servers”, is made up of stand-alone servers which connect digital copiers with computer networks. This category includes the Fiery, Splash,Edox, and MicroPress color and black and white server products. The second category, “Embedded Products”, consists of embedded desktop controllers, bundled solutions, design-licensed solutions and software RIPs (Raster Image Processor) primarily for the office market. The third category, “Professional Printing Applications”, consists of software technology centered around printing workflow, print management information systems, proofing and web submission and job tracking tools. Miscellaneous revenue consists of spares, engineering services and the enterprise solutions suite of products consisting of scanning solutions, field dispatching solutions and mobile printing solutions.

Our revenues increased 24% to $106.7 million in the first quarter of 2004, compared to $85.7 million in the first quarter of 2003, with a 4% decrease in unit volume between the two periods. Sales of our stand-alone servers and professional printing applications accounted for a significant portion of the increase in revenue for the three month period in addition to the revenue generated by the acquisition of Printcafe, T/R Systems and ADS.

The following is a break-down of categories of revenue, both in terms of absolute dollars and as a percentage (%) of total revenue. Also shown is volume as a percentage (%) of total units shipped by product category.

The category of servers made up 48% of total revenue and 28% of total unit volume for the three-month period ended March 31, 2004. For the same period a year ago, it made up 49% of total revenue and approximately 19% of total unit volume. The increase in revenue and increase in unit volume in this category is due in part to the launch of a new series of Fiery servers in the fourth quarter of 2004 and to sales of the our Micropress server product, which we acquired through our purchase of T/R Systems in November 2003.

The category of embedded products made up 29% of total revenue and 71% of total unit volume in the first quarter of 2004. It made up approximately 34% of total revenue and 75% of total unit volume in the first quarter of 2003. The increase in revenue is attributable to the acceptance by our OEM customers from our design-licensed solutions, which have a lower average selling price but higher gross margin than our embedded products.

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For the three months ended March 31, 2004 and 2003, the professional printing applications category made up 14% and 3% of total revenue, respectively. The majority of the $12.6 million increase in this category came from the print management information system products acquired through the Printcafe transaction in October 2003.

The miscellaneous category has decreased from 14% of total revenue in the three-month period ended March 31, 2003 to 9% of total revenue in the three month period ended March 31, 2004 while volumes in this category decreased from 6% of total volume to 1% of total volume for the same period comparison. The decrease in revenue is primarily due to the spin-off of the eBeam product line during the third quarter of 2003. For the three months ended March 31, 2003 eBeam sales accounted for less than 10% of the revenue in this product category, and less than 1% of total revenues. The decrease in volume is due to the spin off of the eBeam product line. The revenue from ADS, acquired in February 2004, is reported in this category. Future quarters will reflect 3 months of revenue for ADS and should therefore increase the total revenue in this category in future quarters.

To the extent our major product categories do not grow over time in absolute terms, or if we are not able to meet demand for higher unit volumes, it could have a material adverse effect on our operating results. There can be no assurance that any new controller products that we introduce in the future will be qualified by all or any of our OEM customers, or that such products will successfully compete, be accepted by the market, or otherwise effectively replace the volume of revenue and/or income from our older products. Market acceptance of our software products, products acquired through acquistions and other products, such as PrintMe and DocSend, cannot be assured.

We also believe that in addition to the factors described above, price reductions for all of our products will affect revenues in the future. We have previously and will likely in the future reduce prices for our products. Depending upon the price-elasticity of demand for our products, the pricing and quality of competitive products, and other economic and competitive conditions, such price reductions may have an adverse impact on our revenues and profits. While we have managed to improve gross margins in the past through the utilization of fewer contract manufacturers, obtaining favorable component pricing from our suppliers and through an increase in higher gross margin software sales and design license sales, this trend may not continue. If we are not able to compensate for lower gross margins that result from price reductions with an increased volume of sales, our results of operations could be adversely affected. In addition, our revenue in the future may depend more upon sales of products with relatively lower gross margins such as embedded controllers for printers, and color and black-and-white copiers, and stand-alone controllers for black-and-white copiers or sales of our design-licensed solutions, which have lower per unit sales prices, but higher gross margins. If we are not able to compensate for such lower gross margins, or lower per unit revenues with an increased volume of sales of such products, our results of operations may be adversely affected.

Revenue and volume by geographic area for the three -month periods ended March 31, 2004 and March 31, 2003 were as follows:

The Americas region increased by 38% to $59 million in sales during the first three months of 2004 from $42.8 million in the first three months of 2003, largely attributable to sales of the newly acquired products from Printcafe, as well as increases in the server category. Revenues in the Japan region increased by 39% to $13.5 million during the first three months of 2004 from $9.7 million in the first three months of 2003. A significant portion of this increase can be attributed to greater demand for design-licensed color solutions, which are sold to OEM customers in Japan, for

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incorporation into their products which are then shipped from Japan to other countries. Europe also showed a moderate increase in revenue, due in part to increased sales of Best products, while the Rest-of-World region, which includes the Asia Pacific but excludes Japan, showed a slight decline for the three months ended March 31, 2004.

Shipments to some of our OEM customers are made to centralized purchasing and manufacturing locations which in turn sell through to other locations, making it difficult to obtain accurate geographical shipment data. Accordingly, we believe that export sales of our products into each region may differ from what is reported. We expect that export sales will continue to represent a significant portion of our total revenue.

Substantially all of our revenue for the last three years was attributable to sales of products through our OEM customers and independent distributor channels. During 2004, we have continued to work on both increasing the number of OEM customers and expanding the size of existing relationships with OEM customers. For the quarters ended March 31, 2004 and 2003, three customers - Canon, Konica Minolta, and Xerox - provided more than 10% of our revenue individually and approximately 66% and 65% of our revenue in aggregate, respectively. No assurance can be given that our relationships with these and other significant OEM customers will continue or that we will be successful in increasing the number of our OEM customers or the size of our existing OEM relationships. Several of our OEM customers have reduced or discontinued their purchases from us at various times in the past and any customer could do so in the future. Such reductions or discontinuations have in the past and could in the future have a significant negative impact on our consolidated financial position and results of operations.

We continue to develop new products and technologies for each of our product lines and intend to continue to introduce new generations of server and controller products and other new product lines with current and new OEM customers, distribution partners, and end-user in 2004 and beyond. No assurance can be given that the introduction or market acceptance of current or future products will be successful.

Gross Margins

For the quarter ended March 31, 2004 our gross margin was 64% compared to approximately 58% for the same period a year ago. The improvement came from increased sales of design-licensed solutions and an increase in software sales both of which traditionally have higher gross margins than our other products. We believe that gross margin will continue to be impacted by a variety of factors. These factors include the market prices that can be achieved on our 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 our product transitions and new products, the pace of migration to a design-licensed business model for embedded products, competition with third parties and our OEM customers, and general economic conditions in the United States and abroad. Consequently, we anticipate gross margins will fluctuate from period to period.

We anticipate that operating expenses may increase in future periods both in absolute dollars and as a percentage of revenue as investments are made in new business areas and acquired companies are integrated.

Operating Expenses

Operating expenses increased by 27% in the three-month period ended March 31, 2004 compared to the three-month period ended March 31, 2003. Operating expenses as a percentage of revenue amounted to approximately 54% for the three-month period ended March 31, 2004 and 53% for the three-month period ended 2003. The addition of Printcafe and T/R Systems in late 2003 and ADS in mid-February 2004 contributed the majority of the expense increases. We have recently experienced increased expenses from the translation of costs incurred in currencies such as the euro and the yen because the US dollar weakened relative to those currencies. If the US dollar continues to weaken relative to other currencies in which we transact business, our expenses after translation into the US dollar will continue to increase.

The components of operating expenses are detailed below.

		Research and Development
		Expenses for research and development consist primarily of personnel expenses and, to a lesser extent, consulting, depreciation, and costs of prototype materials. Research and development expenses were 26% and 27% of revenue for the first quarter of 2004 and 2003, respectively. In absolute dollars, research and

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		development increased by $4.4 million in the first quarter of 2004 from the first quarter of 2003. Research and development expenses related to our recent acquisitions contributed most of the increased costs. The remaining increase consisted of increased payroll costs from merit increases and additional headcount, offset by the reduction in costs from the eBeam spin off. We believe that the development of new products and the enhancement of existing products are essential to our continued success, and intend to continue to devote substantial resources to research and new product development efforts. Accordingly, we expect that our research and development expenses may increase in absolute dollars and also as a percentage of revenue in the future.
		Sales and Marketing
		Sales and marketing expenses include personnel expenses, costs of 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, Asia, and other locations around the world. Sales and marketing expenses for the three-month period ended March 31, 2004 were $19.0 million or 18% of revenue compared to $14.7 million or 17% of revenue for the three months ended March 31, 2003. The increase in absolute dollars of $4.3 million for the quarter is primarily due to additional marketing costs for the Printcafe, T/R Systems and ADS product lines, but also includes increased payroll costs from merit increases and increased travel and entertainment expenses. The increases were offset in part due to the spin off of eBeam. Sales and marketing expenses, particularly those incurred in Europe where we have a significant presence, were negatively impacted by the weakening US dollar. While the costs in the local currency may have stayed constant, the translated US dollar costs have increased. We expect that our sales and marketing expenses may increase in absolute dollars as we continue to actively promote our products, introduce new products and services, and continue to build our sales and marketing organization, particularly in Europe and Asia Pacific, and as we grow our software solutions and other new product lines which require greater sales and marketing support from us. We also expect that if the US dollar continues to weaken against the euro or other currencies, sales and marketing expenses translated from local currencies and reported in US dollars will increase.
		General and Administrative
		General and administrative expenses consist primarily of personnel expenses and, to a lesser extent, depreciation and facility costs, professional fees, and other costs associated with public companies. General and administrative expenses were $6.6 million or 6% of revenue for the quarter ended March 31, 2004, compared to $5.0 million or 6% of revenue for the quarter ended March 31, 2003. The increase in absolute dollars came from additional costs associated with our recent acquisitions and increased payroll expense from merit increases along with increased regulatory compliance costs. In addition, general and administrative expenses in Europe were negatively impacted by the weakening US dollar, increasing expenses from year to year. While the costs in the local currency, principally the euro, have stayed constant, the translated US dollar costs have increased. We expect that general and administrative costs will increase both as a percentage of revenue and in absolute dollars in 2004 due to additional costs that will be incurred for compliance with the Sarbanes-Oxley Act of 2002 and in order to support our efforts to grow our business in future periods. We also expect that if the US dollar continues to weaken against the euro or other currencies, general and administrative expenses reported in US dollars will increase.
		Amortization of Identified Intangibles and other Acquisition-related Expense
		Amortization of identified intangibles and other acquisition-related expense for the quarter ended March 31, 2004 was $4.5 million compared to $2.5 million for the three months ended March 31, 2003. In-process research and development was $1.0 million for the first quarter of 2004 for the ADS acquisition and $1.2 million for the first quarter of 2003 for the Best acquisition. Amortization of identified intangibles was $3.5 million and $1.3 million for the three months ended March 31, 2004 and 2003, respectively. The quarter over quarter increase was attributable to the amortization of identified intangibles of approximately $2.0 million related to the acquisitions made in the last two quarters.

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Gain on sale of assets

We recognized $3.0 million in the three months ended March 31, 2004 from the sale of our Unimobile business.

Interest and other income, net

Interest income is derived mainly from our short-term investments, net of investment fees. For the three months ended March 31, 2004 interest income was $2.8 million, while for the three months ended March 31, 2003 it was $2.4 million. The increase of $0.4 million was driven by larger invested balances, offset with declining interest rates. Other income was $0.2 million and $0.1 million for the three-month periods ended March 31, 2004 and 2003, respectively.

Interest Expense

Interest expense for the first quarter of 2004 includes the interest expense and debt amortization costs of $1.3 million related to our 1.50% senior convertible debt issued in June 2003. We had minimal interest expense for the first quarter of 2003.

Income Taxes

Our effective tax rate was 32% for the three-month period ended March 31, 2004 and 27% for the three-month period ended March 31, 2003. The rate increased in 2004 due to the in-process research and development write-off related to the ADS acquisition, the expiration of the United States research and development credit on June 30, 2004, decreased investments in tax-exempt securities, and increased income before taxes. In each of these periods, we benefited from tax-exempt interest income, research and development credits, and benefits from foreign sales in achieving a consolidated effective tax rate lower than that prescribed by the respective Federal and State taxing authorities.

Liquidity and Capital Resources

Cash, cash equivalents and short-term investments decreased by $10.3 million to $613.8 million as of March 31, 2004, from $624.1 million as of December 31, 2003. Working capital decreased by $12.2 million to $653.0 million as of March 31, 2004, down from $665.2 million as of December 31, 2003. We invest cash in excess of our operating needs in short-term investments.

Net cash provided by operating activities was $15.8 million for the three-month period ended March 31, 2004. Net income of $11.0 million was adjusted by $6.4 million for non-cash charges of depreciation and amortization, the write-off of in-process research and development cost, bad-debt expense and deferred compensation and $3.0 million related to the gain on the sale of assets. Changes in current assets and liabilities increased cash by $1.4 million, with decreases in accounts receivable, accounts payable and accrued liabilities being offset with increases in income taxes payable, inventories and other current assets.

Sales in excess of purchases of short-term investments were $3.1 million for the three-month period ended March 31, 2004, to provide funds for our common stock repurchase program and acquisitions. In February 2004, we acquired ADS for approximately $11.6 million, net of cash received in the transaction. In March 2004, we sold our Unimobile business and received $5.3 million, with $1.1 million of the cash being placed in an escrow account for 18 months. Our capital expenditures generally consist of investments in computer equipment and furniture for use in our operations. We purchased approximately $1.4 million of equipment during the three-month period ended March 31, 2004, net of retirements.

Net cash used by financing activities of $18.6 million in the three-month period ended March 31, 2004, was the result of $10.3 million from the exercises of common stock options and the issuance of stock under our Employee Stock Purchase Plan, less $28.9 million used for the repurchase of shares of our common stock, including $4.5 million to offset the common stock issued to acquire Printcafe. The Board of Directors authorized $50.0 million for the repurchase of our common stock in 2003, of which $25.6 million remains available. We expect to spend the remaining authorized funds before the end of 2004.

Inventory

Our inventory consists primarily of memory subsystems, processors and ASICs, which are sold to third-party contract manufacturers responsible for manufacturing our products. Should we decide to purchase components and do our

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own manufacturing, or should it become necessary for us to purchase and sell components other than the processors, ASICs or memory subsystems for our contract manufacturers, inventory balances and potentially fixed assets would increase significantly, thereby reducing our available cash resources. Further, the inventory we carry could become obsolete thereby negatively impacting our consolidated financial position and results of operations. We also rely on several sole-source suppliers for certain key components and could experience a significant negative impact on our consolidated financial position and results of operations if such supplies were reduced or not available.

Purchase Commitments

We may be required to compensate our sub-contract manufacturers for components purchased for orders subsequently cancelled by us. We periodically review the potential liability and the adequacy of the related reserve. Our financial condition and results of operations could be negatively impacted if we were required to compensate the sub-contract manufacturers in an amount significantly in excess of the accrued liability.

Legal Proceedings

Over the past several years, Mr. Jan R. Coyle, an individual living in Nevada, has repeatedly demanded that we buy technology allegedly invented by his company, Kolbet Labs. In December 2001, Mr. Coyle threatened to sue us and our customers for allegedly infringing his soon to be issued patent and for allegedly misappropriating his alleged trade secrets. We believe Mr. Coyle’s claims are baseless and completely without merit. On December 11, 2001, we filed a declaratory relief action in the United States District Court for the Northern District of California, asking the Court to declare that we and our customers have not breached any nondisclosure agreement with Mr. Coyle or Kolbet Labs, nor has we infringed any alleged patent claims or misappropriated any alleged trade secrets belonging to Mr. Coyle or Kolbet Labs through our sale of Fiery, Splash or EDOX print controllers. We also sought an injunction enjoining both Mr. Coyle and Kolbet Labs from bringing or threatening to bring a lawsuit against us, our suppliers, vendors, customers and users of our products for breach of contract and misappropriation of trade secrets. On March 26, 2002, the Northern District of California Court dismissed our complaint citing the Court’s lack of jurisdiction over Mr. Coyle. We appealed the Court’s dismissal to the Court of Appeals for the Federal Circuit, who reversed the dismissal of our case and remanded it to the Northern District of California Court. Mr. Coyle and Kolbet Labs subsequently moved to dismiss our complaint under the Declaratory Judgment Act. The Court entered an order granting that dismissal on February 17, 2004. We have filed a notice of appeal for that decision. On February 17, 2004 we filed another declaratory relief action in the Northern District of California against Mr. Coyle and Kolbet Labs. We are pursuing our case against Mr. Coyle and Kolbet Labs.

On February 26, 2002, Mr. Coyle’s company, J & L Electronics, filed a complaint against us 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. We denied all of the allegations and believed this lawsuit to be without merit. On March 28, 2003, the Federal District Judge dismissed the complaint for lack of jurisdiction over us. J & L Electronics appealed the dismissal to the Court of Appeals for the Federal Circuit. On February 9, 2004, the Court of Appeals for the Federal Circuit affirmed the dismissal of J & L Electronics’ complaint. On May 3, 2004, Mr. Coyle’s company, J&L Electronics, Inc., filed a complaint against the Company in the United States District Court for the District Court of Arizona, again alleging patent infringement, breach of non-disclosure agreements, misappropriation of trade secrets, violations of federal antitrust law and related causes of action. The Company continues to believe that these allegations are baseless and completely without merit, and intends to oppose these claims vigorously.

On February 13, 2003, we entered into agreements with Printcafe to facilitate a merger between the two companies. On February 19, 2003, Creo Inc. (a Printcafe shareholder) commenced litigation in the Delaware Court of Chancery against us, Printcafe and certain of Printcafe’s principal officers and directors, challenging those agreements and seeking to restrain us and Printcafe from proceeding to enter into any further agreements with respect to a business merger. On February 21, 2003, the Delaware Court of Chancery denied the temporary restraining order sought by Creo. On February 26, 2003, we and Printcafe entered into a merger agreement providing for our acquisition of Printcafe. Such acquisition was completed on October 21, 2003. In February 2004, Creo agreed to dismiss all claims against all parties with prejudice without any payment by any of the parties. The Court granted an order for dismissal with prejudice on February 19, 2004.

On June 25, 2003, a securities class action complaint was filed against Printcafe Software, Inc., now a wholly-owned subsidiary of ours and certain of Printcafe’s officers in the United States District Court for the Western District of Pennsylvania. The complaint alleges that the defendants violated Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 due to allegedly false and misleading statements in connection with Printcafe’s initial public offering and subsequent press releases. We acquired Printcafe in October 2003 and believe that the lawsuit is without merit and intends to defend ourselves accordingly.

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In addition, we are involved from time to time in litigation relating to claims arising in the normal course of its business.

Off-Balance Sheet Financing

Synthetic Lease Arrangements

In 1997 we entered into an agreement (“1997 Lease”) to lease a ten-story 295,000 square foot building on land owned by us in Foster City, California. In December 1999 we entered into a second agreement (“1999 Lease” and together with the 1997 Lease, the “Leases”) to lease an additional 165,000 square foot building on our Foster City property. These leases were implemented to provide the lowest possible total cost of occupancy for the corporate headquarters.

Both Leases have an initial term of seven years, with options to renew subject to certain conditions. We may, at our 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). We have guaranteed to the lessors a residual value associated with the buildings equal to approximately 82% of the their funding. We may be liable to the lessor for the amount of the residual guarantee if we either fail to renew the lease or do not purchase or locate a purchaser for the leased facilities at the end of the lease term. We must meet certain financial covenant requirements related to cash to debt, fixed charge coverage ratio, leverage ratio and consolidated tangible net worth as defined in the lease agreements. If we maintain pledged collateral, then a limited subset of these covenants must be met. The tangible net worth financial covenant requires us to maintain a minimum tangible net worth as of the end of each quarter. There are other covenants regarding mergers, liens and judgments and lines of business. We are in compliance with all of the covenants, either directly, or through the existence of the pledged collateral. The pledged collateral under the 1997 Lease ($69.9 million at March 31, 2004) has been classified as restricted cash, cash equivalents and short-term investments. We are liable to the lessor for the total amount financed if we default on our covenants (approximately $56.8 million for the 1997 Lease and approximately $43.1 million for the 1999 Lease). We could be required to purchase the building covered by the 1997 Lease if (1) we defaulted on any indebtedness in excess of $10.0 million, (2) it failed to appeal a judgment in excess of $10.0 million, or (3) a creditor has commenced enforcement proceedings on an order for payment of money in excess of $10.0 million. The funds pledged under the 1999 Lease (approximately $43.1 million at March 31, 2004) are in a LIBOR-based interest bearing account and are restricted as to withdrawal at all times. We are considered a Tranche A lender of $35.3 million of the $43.1 million under the 1999 Lease, while the lessor is considered a Tranche B lender for the remaining $7.8 million.

The 1997 lease expires in July 2004. The Company is currently negotiating a new lease, which may not contain the same terms as the current lease. Under both leases we have first loss guarantees to the lessors, which requires us to reimburse the lessor at the end of the lease for declines in the value of these buildings up to approximately 82% of the cost of the construction of the buildings. We have assessed our exposure in relation to the first loss guarantees for both of the facilities under synthetic lease arrangements and have determined there is no deficiency to the guaranteed value at December 31, 2003. We will continue to assess the real estate market conditions to evaluate whether we need to record any reserves under our first loss guarantee obligations. There can be no assurance that we will be able to renew the lease, or if we are able to renew the lease, that we will receive the same terms contained in our current lease. We could be required to pledge additional collateral, which could decrease the cash available for operations. We might be required to meet stricter financial covenants, and if we defaulted under those covenants we could be required to purchase the building. If we were to purchase the building our operating results could be harmed. The payments under the lease could be higher than the current payments, which could harm our operating results.

We are treated as the owner of these facilities for income tax purposes.

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. In December 2003, the FASB completed deliberations of proposed modifications to FIN 46 (“revised interpretations”) resulting in multiple effective dates based upon the nature as well as the creation date of the VIE. VIEs created after January 31, 2003 but prior to January 1, 2004 may be accounted for on the basis of the original interpretation’s provisions. Non-special purpose entities created prior to February 1, 2003 should be accounted for under the revised interpretations provisions no later than December 31, 2003.

Effective July 1, 2003, the Company has applied the accounting and disclosure rules set forth in FIN 46 for VIEs acquired before January 31, 2003. We have evaluated the synthetic lease agreements to determine if the arrangements qualify as variable interest entities under FIN 46. The Company determined that the synthetic lease agreements do qualify as VIEs; however, as it is not the primary beneficiary under FIN 46 it is not required to consolidate the VIEs in the financial statements. The Company has not entered into any arrangement with VIEs created after January 31, 2003.

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Liquidity and Capital Resource Requirements

Based on past performance and current expectations, we believe that our cash and cash equivalents, short-term investments and cash generated from operations will satisfy our working capital needs, capital expenditures, acquisition needs, investment requirements, stock repurchases, commitments (see Notes 9 and 10 of the Notes to the Condensed Consolidated Financial Statements) and other liquidity requirements associated with our existing operations through at least the next 36 months. We believe that the most strategic uses of our cash resources include acquisitions, strategic investments to gain access to new technologies, repurchase of shares of our common stock and working capital. There are no transactions, arrangements and other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of our requirements for capital resources.

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 and essentially all of our employees participate. 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 Options for listed officers; these are defined by the Securities and Exchange Commission for the proxy as the Chief Executive Officer and each of the four other most highly compensated executive officers. We have only three executive officers, including the Chief Executive Officer.

We have implemented a stock trading program for our Board of Directors, corporate executive officers and other insiders, under Rule 10b5-1 of the Securities and Exchange Act of 1934. When there is no material non-public information available, Rule 10b5-1 allows corporate insiders to establish plans that permit prearranged future sales of his or her securities. Under our trading plan, corporate insiders prepare a written plan to sell shares on a prearranged basis over a set period of time. An independent broker then executes the pre-planned trades, according to the plan’s instructions, without regard to any subsequent non-public information the individual might receive. Once the insider’s plan is in place, he or she cannot influence the broker’s trading activities of our stock. Additionally, our insiders that participate in the plan are only allowed to sell our stock through the plan. Currently, the following Section 16 officers and directors are participating in our Rule 10b5-1 stock trading program: Dan Maydan, Guy Gecht, Fred Rosenzweig and Joseph Cutts.

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General Option Information

Summary of Option Activity

In-the-Money and Out-of-the-Money Option Information

(1)

Out-of-the-money options are those options with an exercise price equal to or above the closing price of $24.57 at the end of the quarter.

Executive Options

     Aggregated Option Exercises as of March 31, 2004 and Period End Option Values

(1)		This amount represents the market value of the underlying securities on the exercise date minus the exercise price of such options.
(2)		This amount represents the market value of $24.57 of the underlying securities relating to “in-the-money” options at March 31, 2004 minus the exercise price of such options.

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Factors That Could Adversely Affect Performance

We rely on sales to a relatively small number of OEM partners and to the loss of any of these customers could substantially decrease our revenues.

A significant portion of our revenues are generated by sales of our printer and copier related products to a relatively small number of OEMs. For example, Canon, Xerox and KonicaMinolta each contributed over 10% of our revenues for the three months ended March 31, 2004 and together accounted for approximately 66% of those revenues. During the fiscal year ended December 31, 2003, these same three customers each contributed over 10% of our revenues and together accounted for approximately 72% of our revenues for the period. Because sales of our printer and copier-related products constitute a significant portion of our revenues and there are a limited number of OEMs producing copiers and printers in sufficient volume to be attractive customers for us, we expect that we will continue to depend on a relatively small number of OEM customers for a significant portion of our revenues in future periods. Accordingly, if we lose or experience reduced sales to an important OEM customer, we will have difficulty replacing the revenue traditionally generated from such customer with sales to new or existing OEM customers and our revenues will likely decline significantly.

Because of our recent acquisitions we now must sell our products directly to distributors and to the end-user. If we are unable to effectively manage a direct sales force, sales and revenues could decline.

We have traditionally sold our products to our OEM partners, who in turn sold the product to the end-user. Our marketing focused on manufacturers and distributors of the manufacturers’ equipment, not on the end-user of the product. We now plan to sell our professional printing applications and our enterprise solutions directly to the end-user. If we are unable to develop a sales force and marketing program that can reach the end-users, we are likely to see a decline in revenues from those products.

We do not typically have long term purchase contracts with our customers and our customers have in the past and could at any time in the future, reduce or cease purchasing products from us, harming our operating results and business.

With the exception of certain minimum purchase obligations, we typically do not have long-term volume purchase contracts with our customers, including Canon, Xerox and KonicaMinolta and they are not obligated to purchase products from us. Accordingly, our customers could at any time reduce their purchases from us or cease purchasing our products altogether. In the past, some of our OEM customers have elected to develop products on their own, rather than purchase our products and we expect that customers will continue to make such elections in the future. In addition, since our OEM customers incorporate our products into products they manufacture and sell, any decline in demand for copiers or laser printers and any other negative developments affecting our major customers or the computer industry in general, is likely to harm our results of operations. For example, several of our customers have in the past experienced serious financial difficulties which led to a decline in sales of our products to these customers. If any significant customers should face such difficulties in the future, our operating results could be harmed through, among other things, decreased sales volumes and write-offs of accounts receivables and inventory related to products we have manufactured for these customers’ products.

In addition, a significant portion of our operating expenses are fixed in advance based on projected sales levels and margins, sales forecasts from our OEM customers and product development programs. A substantial portion of our backlog is scheduled for delivery within 90 days or less and our customers may cancel orders and change volume levels or delivery times for product they have ordered from us without penalty. Accordingly, if sales to our OEM customers are below expectations in any given quarter, the adverse impact of the shortfall in revenues on operating results may be increased by our inability to adjust spending in the short term to compensate for this shortfall.

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We rely on our OEM customers to develop and sell products incorporating our technologies and if they fail to successfully develop and sell these products, or curtail or cease the use of our technologies in their products, our business will be harmed.

We rely upon our OEM customers to develop new products, applications and product enhancements utilizing our technologies in a timely and cost-effective manner. Our continued success depends upon the ability of these OEM customers to utilize our technologies while meeting changing end-user customer needs and responding to emerging industry standards and other technological changes. However, we cannot assure you that our OEM customers will effectively meet these requirements. These OEM customers, who are not within our control, are generally not obligated to purchase products from us and we cannot assure you that they will continue to carry our products. For example, our OEM customers have incorporated into their products the technologies of other companies in addition to, or instead of our technologies and will likely continue to do so in the future. If our OEM customers do not effectively market products containing our technologies, our sales revenue will likely be materially and adversely affected.

Our OEM customers work closely with us to develop products that are specific to each OEM customer’s copiers and printers. Many of the products and technologies we are developing require that we coordinate development, quality testing, marketing and other tasks with our OEM customers. We cannot control our OEM customers’ development efforts and coordinating with our OEM customers may cause delays in our own product development efforts that are outside of our control. In addition, our sales revenue and results of operations may be adversely affected if we cannot meet our OEM customers’ product needs for their specific copiers and printers, as well as successfully manage the additional engineering and support effort and other risks associated with such a wide range of products.

Ongoing economic uncertainty has had and may continue to have a negative effect on our business.

The revenue growth and profitability of our business depends significantly on the overall demand for information technology products such as ours that enable printing of digital data. Delays or reductions in information technology spending, such as occurred during 2001-2003, has and could continue to cause a decline in demand for our products and services and consequently harm our business, operating results, financial condition, prospects and stock price.

Our operating results may fluctuate based upon many factors, which could adversely affect our stock price.

We expect our stock price to vary with our operating results and, consequently, fluctuations in our operating results could adversely affect our stock price. Factors that have caused our operating results to fluctuate in the past and may cause future fluctuations include:

•		varying demand for our products, due to seasonality, OEM customer product development and marketing efforts, OEM customer financial and operational condition and general economic conditions;
•		success and timing of new product introductions by us and our OEM customers and the performance of our products generally;
•		volatility in foreign exchange rates, changes in interest rates and availability of bank or financing credit to consumers of digital copiers and printers;
•		price reductions by us and our competitors, which may be exacerbated by competitive pressures caused by economic conditions generally;
•		delay, cancellation or rescheduling of orders or projects;
•		availability of key components, including possible delays in deliveries from suppliers, the performance of third-party manufacturers and the status of our relationships with our key suppliers;
•		potential excess or shortage of employees and location of research and development centers;
•		changes in our product mix such as shifts from higher revenue products to lower revenue products dependant on higher sales volumes;
•		costs associated with complying with any applicable governmental regulations, including substantial costs related to compliance with the Sarbanes-Oxley Act;
•		acquisitions and integration of new businesses;

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•		changes in our business model related to the migration of embedded products to a design-licensed model;
•		costs related to the entry into new markets, such as commercial printing and office equipment service automation;
•		general economic conditions; and
•		other risks described herein.

We face competition from other suppliers as well as our own OEM customers and if we are not able to compete successfully our business may be harmed.

Our industry is highly competitive and is characterized by rapid technological changes. We compete against a number of other suppliers of imaging products and technologies, including our OEM customers themselves. Although we attempt to develop and support innovative products that end customers demand, products or technologies developed by competing suppliers, including our own OEM customers, could render our products or technologies obsolete or noncompetitive.

While many of our OEM customers incorporate our technologies into their end products on an exclusive basis, we do not have any formal agreements that prevent these OEM customers from offering alternative products that do not incorporate our technologies. If, as has occurred in the past, an OEM customer offers products from alternative suppliers, instead of, or in addition to products incorporating our technologies, our market share could decrease, which would likely reduce our revenue and adversely affect our financial results.

In addition, many OEMs in the printer and copier industry, including most of our OEM customers, internally develop and sell products that compete directly with our current products. These OEMs have significant investments in their existing solutions and have substantial resources that may enable them to develop or improve, more quickly than us, technologies similar to ours that are compatible with their own products. Our OEM customers have in the past marketed and likely will continue in the future to market, their own internal technologies and solutions in addition to ours, even when their technologies and solutions are less advanced, have lower performance or cost more than our products. Given the significant financial, marketing and other resources of our larger OEM customers and other significant OEMs in the imaging industry who are not our customers, we may not be able to successfully compete against similar products developed internally by these OEMs, particularly in the black-and-white and embedded color product markets where price competition is most intense and profit margins are low. If we cannot compete successfully against the OEMs’ internally developed products, we will lose sales and market share in those areas where the OEMs choose to compete and our business will be harmed.

Demand for technology, in general, and for products containing our technology that enable black-and-white and color printing of digital data has decreased over the past three years and could decrease in the future, adversely affecting our sales revenue.

Our products are primarily targeted at enabling the printing of black and white and color digital data. Demand for networked printers and copiers containing our technology decreased from 2001 through 2003 due to the global economic downturn. If demand for digital printing products and services containing our technology were to continue to decline, or if the demand for our OEM customers’ specific printers or copiers for which our products are designed were to continue to decline, our sales revenue would likely decrease. Our products are combined with products, such as digital printers and copiers, which are large capital expenditures as well as discretionary purchase items for the end customer. In difficult economic times such as we have recently experienced, spending on information technology typically decreases. As the products in which our products are incorporated are of a more discretionary nature than many other technology products, we may be more adversely impacted by deteriorating general economic conditions than other technology firms outside of our market. The decrease in demand for our products has harmed and could, in the future, continue to harm our results of operations and we do not know whether demand for our products or our customers’ products will increase or improve from current levels.

If we are not able to hire and retain skilled employees, we may not be able to develop products or meet demand for our products in a timely fashion.

We depend upon skilled employees, such as software and hardware engineers, quality assurance engineers and other technical professionals with specialized skills. We are headquartered in the Silicon Valley where competition has historically been intense among companies to hire engineering and technical professionals. In times of professional

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labor imbalances, it may be difficult for us to locate and hire qualified engineers and technical professionals and for us to retain these people. There are many technology companies located near our corporate offices in the Silicon Valley that may try to hire our employees. The movement of our stock price may also impact our ability to hire and retain employees. If we do not offer competitive compensation, we may not be able to recruit or retain employees. We offer a broad-based equity compensation plan based on granting options from stockholder-approved plans in order to be competitive in the labor market. If stockholders do not approve additional shares for these plans or new plans for future grants, it may be difficult for us to hire and retain skilled employees. If we cannot successfully hire and retain employees, we may not be able to develop products or to meet demand for our products in a timely fashion and our results of operations may be harmed.

Recent and proposed regulations related to equity compensation could adversely affect our ability to attract and retain key personnel.

Since our inception, we have used stock options and other long-term equity incentives as a fundamental component of our employee compensation packages. We believe that stock options and other long-term equity incentives directly motivate our employees to maximize long-term stockholder value and, through the use of vesting, encourage employees to remain with our company. The Financial Accounting Standards Board has announced changes to US GAAP that, if implemented, would require us to record a charge to earnings for employee stock option grants and issuances of stock under employee stock purchase plans or ESPPs. This pending regulation would negatively impact our GAAP earnings. For example, recording a charge for employee stock options under SFAS No. 123, Accounting for Stock-Based Compensation would have reduced net income by $17.9 million, $21.8 million and $18.7 million for the years ended December 31, 2003, 2002 and 2001, respectively. For the quarter ended March 31, 2004 our net income would have been reduced by $5.0 million for stock option grants and issuances of stock under our ESPP, net of the tax effect. In addition, new regulations implemented by The Nasdaq National Market requiring shareholder approval for all stock option plans could make it more difficult for us to grant options to employees in the future. To the extent that new regulations make it more difficult or expensive to grant options to employees, we may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could materially and adversely affect our business.

If we are unable to develop new products, or execute product introductions on a timely basis, our future revenue and operating results may be harmed.

Our operating results depend to a significant extent on continual improvement of our existing products and technologies and rapid innovation of new products and technologies by us. Our success depends not only on our ability to predict future requirements, but also to successfully develop and introduce new products that address end customer needs or add additional functionality that end customers will demand. Any delays in the launch or availability of new products we are planning could harm our financial results. During transitions from existing products to new products, customers may delay or cancel orders for existing products. Our results of operations may be harmed if we cannot successfully manage product transitions or provide adequate availability of products after they have been introduced.

We must continue to make significant investments in research and development in order to enhance performance and functionality of our products, including product lines different than our Fiery, Splash, MicroPress and EDOX servers and embedded controllers. We cannot assure you that we will successfully identify new product opportunities, develop and introduce new products to market in a timely manner, or achieve market acceptance of our products. Also, when we decide to develop new products, our research and development expenses generally increase in the short term without a corresponding increase in revenue, which can harm our operating results. Finally, we cannot assure you that products and technologies developed by our own customers and others will not render our products or technologies obsolete or noncompetitive.

If we enter new markets or distribution channels this could result in higher operating expenses that may not be offset by increased revenue.

We continue to explore opportunities to develop product lines different from our current servers and embedded controllers, such as the proofing and print management software, document scanning solutions, mobile printing products, prepress software solutions and web submission tools, among others. We expect to continue to invest funds to develop new distribution and marketing channels for these and additional new products and services, which will increase our operating expenses. We do not know if we will be successful in developing these channels or

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whether the market will accept any of our new products or services or if we will generate sufficient revenues from these activities to offset the additional operating expenses we incur. In addition, even if we are able to introduce new products or services, the lack of marketplace acceptability of these new products or services may adversely impact our operating results.

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.

Most of our current products include software that we must license from Adobe. Specifically, we are required to obtain separate licenses from Adobe for the right to use Adobe PostScript® software in each type of copier or printer used with a Fiery Server or Controller. Although to date we have successfully obtained licenses to use Adobe’s PostScript® software when required, Adobe is not required to and we cannot be certain that Adobe will, grant future licenses to Adobe PostScript® software on reasonable terms, in a timely manner, or at all. In addition, in order to obtain licenses from Adobe, Adobe requires that we obtain from them quality assurance approvals for our products that use Adobe software. Although to date we have successfully obtained such quality assurances from Adobe, we cannot be certain Adobe will grant us such approvals in the future. If Adobe does not grant us such licenses or approvals, if the Adobe licenses are terminated, or if our relationship with Adobe is otherwise materially impaired, we would likely be unable to sell products that incorporate Adobe PostScript® software and our financial condition and results of operations would be significantly harmed. In some products we have introduced substitute software developed internally that does not require any license from Adobe. The costs to continue to develop software internally could increase our research and development expenditures and we may not be able to recapture those costs through increased sales. While we plan on expanding the number of products using internally developed software, there can be no assurance that these products will be accepted in the market.

We depend upon a limited group of suppliers for key components in our products and the loss of any of these suppliers could adversely affect our business.

Certain components necessary for the manufacture of our products are obtained from a sole supplier or a limited group of suppliers. These include processors from Intel and other related semiconductor components. We do not maintain long-term agreements with any of our component suppliers and conduct our business with such suppliers solely on a purchase order basis. Because the purchase of certain key components involves long lead times, in the event of unanticipated volatility in demand for our products, we have been in the past and may in the future be unable to manufacture certain products in a quantity sufficient to meet end user demand. Similarly, as has occurred in the past, in the event that anticipated demand does not materialize, we may hold excess quantities of inventory that could become obsolete. In order to meet projected demand, we maintain an inventory of components for which we are dependent upon sole or limited source suppliers and components with prices that fluctuate significantly. As a result, we are subject to a risk of inventory obsolescence, which could adversely affect our operating results and financial condition. Additionally, the market prices and availability of certain components, particularly memory and Intel designed components, which collectively represent a substantial portion of the total manufactured cost of our products, have fluctuated significantly in the past. Such fluctuations in the future could have a material adverse effect on our operating results and financial condition including a reduction in gross margins.

We are dependent on a limited number of subcontractors, with whom we do not have long-term contracts, to manufacture and deliver products to our customers and the loss of any of these subcontractors could adversely affect our business.

We subcontract with other companies to manufacture our products and we do not have long-term agreements with these subcontractors. We rely on the ability of our subcontractors to produce products to be sold to our customers and while we closely monitor our subcontractors’ performance we cannot assure you that such subcontractors will continue to manufacture our products in a timely and effective manner. The weakened economy has led to the dissolution, bankruptcy or consolidation of some of the subcontractors who are able to manufacture our products, decreasing the available number of subcontractors. If the available number of subcontractors continues to decrease, it is possible that we will not be able to secure appropriate subcontractors to fulfill our demand in a timely manner or at all, particularly if demand for our products increases, or if we lose one or more of our current subcontractors. Fewer subcontractors may also reduce our negotiating leverage regarding product costs. Difficulties experienced by our subcontractors, including financial problems and the inability to make or ship our products or fix quality assurance problems, could harm our business, operating results and financial condition. If we decide to change subcontractors, we could experience delays in setting up new subcontractors which would result in delay in delivery of our products and potentially the cancellation of orders for our products. A high concentration of our products is manufactured at a

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single subcontractor location, Sanmina-SCI in Colorado. Should Sanmina-SCI experience any inability to manufacture or deliver product from this location our business, financial condition and operations could be harmed. Since we do not maintain long-term agreements with our subcontractors, any of our subcontractors could enter into agreements with our competitors that might restrict or prohibit such subcontractors from manufacturing our products or could otherwise lead to an inability of such subcontractor from filling our orders in a timely manner. In such event, we may not be able to find suitable replacement subcontractors and our business, financial condition and operations would likely be harmed.

Seasonal purchasing patterns of our OEM customers have historically caused lower fourth and first quarter revenue from sales of our servers and embedded products, which may negatively impact our results of operations.

Our results of operations have typically followed a seasonal pattern reflecting the buying patterns of our large OEM customers. In the fiscal quarter completed December 31, 2003 and in past fiscal fourth quarters (the quarter ending December 31) our results have been adversely affected because some or all of our OEM customers decrease, or otherwise delay, fourth quarter orders. Over the past several years our OEM customers have lowered channel inventories throughout the year, causing this effect to shift more from the fourth quarter into the first quarter, when our OEM customers typically have lower sales of their own products. In addition, the first fiscal quarter traditionally has been a weaker quarter because our OEM customers focus on training their sales forces and have reduced sales to their customers. The primary reasons for these seasonal patterns are:

•		our OEM customers have historically sought to minimize year-end inventory investment (including the reduction in demand following introductory “channel fill” purchases);
•		the timing of new product releases and training by our OEM customers in the first and fourth quarters; and
•		certain of our OEM customers typically achieve their yearly sales targets before year end and consequently delay further purchases into the next fiscal year (we do not know when our customers reach these sales targets as they generally do not disclose them to us).

As a result of these factors, we believe that period to period comparisons of our operating results are not meaningful and you should not rely on such comparisons to predict our future performance. We anticipate that future operating results may fluctuate significantly due to the continuation or changes in this seasonal demand pattern.

We may make acquisitions that are dilutive to existing stockholders, result in unanticipated accounting charges or otherwise adversely affect our results of operations and result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies or businesses.

     We seek to develop new technologies and products from both internal and external sources. As part of this effort, we have in the past made and will likely continue to make, acquisitions of other companies or other companies’ assets. Acquisitions involve numerous risks, such as:

•		if we issue equity securities in connection with an acquisition, the issuance will generally be dilutive to our existing stockholders, alternatively, acquisitions made entirely or partially for cash will generally reduce our cash reserves;
•		difficulties in integration of operations, employees, technologies, or products and the related diversion of management time and effort to accomplish successful integration;
•		risks of entering markets in which we have little or no prior experience, or entering markets where competitors have stronger market positions;
•		possible write-downs of impaired assets;
•		potential loss of key employees of the acquired company;
•		possible expense overruns;

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•		an adverse reaction by customers, suppliers or partners of the acquired company or EFI;
•		the risk of changes in ratings by stock analysts;
•		potential litigation surrounding transactions;
•		the inability to protect or secure technology rights; and
•		an increase in operating costs.

Mergers and acquisitions of companies are inherently risky and we cannot assure you that our previous or future acquisitions will be successful or will not harm our business, operating results, financial condition, or stock price.

We face risks from our international operations and from currency fluctuations.

Approximately 45% and 50% of our revenue from the sale of products for the three-month periods ended March 31, 2004 and 2003, respectively, came from sales outside North America, primarily to Europe and Japan. Approximately 49% of our revenue from the sale of products for the 2003 fiscal year came from sales outside North America, primarily to Europe and Japan. We expect that sales outside North America will continue to represent a significant portion of our total revenue. We are subject to certain risks because of our international operations. These risks include the regulatory requirements of foreign governments which may apply to our products, as well as requirements for export licenses which may be required for the export of certain technologies. The necessary export licenses may be delayed or difficult to obtain, which could cause a delay in our international sales and hurt our product revenue. Other risks include trade protection measures, natural disasters and political or economic conditions in a specific country or region.

Given the significance of our non-US sales to our total product revenue, we face a continuing risk from the fluctuation of the US dollar versus the Japanese yen, the euro and other major European currencies and numerous Southeast Asian currencies. We typically invoice our customers in US dollars and this may result in our products becoming more expensive in the local currency of our customers, thereby reducing our ability to sell our products. When we do invoice our customers in local currencies, our cash flows and earnings are exposed to fluctuations in interest rates and foreign currency exchange rates between the currency of the invoice and the U.S. dollar. In January 2003, we acquired Best GmbH, whose sales are principally denominated in the euro. Sales from this subsidiary increase our exposure to currency fluctuations. In addition, we have a substantial number of international employees which creates material operating costs denominated in foreign currencies. In Europe, where we have a significant presence, our sales and marketing expenses and general and administrative expenses have risen in part due to the weakened US dollar. We have attempted to limit or hedge these exposures through operational strategies where we consider it appropriate. Our efforts to reduce the risk from our international operations and from fluctuations in foreign currencies or interest rates may not be successful, which could harm our financial condition and operating results.

We may be unable to adequately protect our proprietary information and may incur expenses to defend our proprietary information.

We rely on a combination of copyright, patent, trademark and trade secret protection, nondisclosure agreements and licensing and cross-licensing arrangements to establish, maintain and protect our intellectual property rights, all of which afford only limited protection. We have patents and pending patent applications in the United States and in various foreign countries. There can be no assurance that patents will issue from our pending applications or from any future applications, or that, if issued, any claims allowed will be sufficiently broad to protect our technology. Any failure to adequately protect our proprietary information could harm our financial condition and operating results. We cannot be certain that any patents that have been or may in the future be issued to us, or which we license from third parties, or any other of our proprietary rights will not be challenged, invalidated or circumvented. In addition, we cannot be certain that any rights granted to us under any patents, licenses or other proprietary rights will provide adequate protection of our proprietary information.

     Litigation has been and may continue to be necessary to defend and enforce our proprietary rights. Such litigation, whether or not concluded successfully for us, could involve significant expense and the diversion of our attention and other resources, which could harm our financial condition and operating results.

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We face risks from third party claims of infringement and potential litigation.

Third parties have claimed in the past and may claim in the future that our products infringe, or may infringe, their proprietary rights. Such claims have in the past resulted in lengthy and expensive litigation and could do so in the future. Such claims and any related litigation, whether or not we are successful in the litigation, could result in substantial costs and diversion of our resources, which could harm our financial condition and operating results. Although we may seek licenses from third parties covering intellectual property that we are allegedly infringing, we cannot assure you that any such licenses could be obtained on acceptable terms, if at all.

Our products may contain defects which are not discovered until after shipping.

Our products consist of hardware and software developed by ourselves and others. Our products may contain undetected errors and we have in the past discovered software and hardware errors in certain of our products after their introduction, resulting in warranty expense and other expenses incurred in connection with rectifying such errors. Errors could be found in new versions of our products after commencement of commercial shipments, and any such errors could result in a loss or delay in market acceptance of such products and thus harm our reputation and revenues. In addition, errors in our products (including errors in licensed third party software) detected prior to new product releases could result in delays in the introduction of new products and our incurring additional expense, which could harm our operating results.

The location and concentration of our facilities subjects us to the risk of earthquakes, floods or other natural disasters and public health risks.

Our corporate headquarters, including most of our research and development facilities and manufacturing operations, are located in the San Francisco Bay Area, an area known for seismic activity. This area has also experienced flooding in the past. In addition, many of the components necessary to supply our products are purchased from suppliers based in areas including the San Francisco Bay Area, Taiwan and Japan and are therefore subject to risk from natural disasters. A significant natural disaster, such as an earthquake or a flood, could harm our business, financial condition and operating results.

Our employees, suppliers and customers are located worldwide. We face the risk that our employees, suppliers, or customers, either through travel or contact with other individuals, could become exposed to contagious diseases such as severe acute respiratory syndrome, or SARS. In addition, governments in those regions have from time-to-time imposed quarantines and taken other actions in response to contagious diseases that could affect our operations. If a significant number of employees, suppliers, or customers were unable to fulfill their obligations, due to contagious diseases, actions taken in response to contagious diseases, or other reasons, our business, financial condition and operating results could be harmed.

The value of our investment portfolio will decrease if interest rates increase.

We have an investment portfolio of mainly fixed income securities classified as available-for-sale securities. As a result, our investment portfolio is subject to interest rate risk and will fall in value if market interest rates increase. We attempt to limit this exposure to interest rate risk by investing in securities with maturities of less than three years; however, we may be unable to successfully limit our risk to interest rate fluctuations and this may cause our investment portfolio to decrease in value.

Our stock price has been volatile historically and may continue to be volatile.

The market price for our common stock has been and may continue to be volatile. For example, during the twelve-month period ended March 31, 2004, the price of our common stock as reported on the Nasdaq National Market ranged from a low of $17.11 to a high of $28.81. We expect our stock price to be subject to fluctuations as a result of a variety of factors, including factors beyond our control. These factors include:

•		actual or anticipated variations in our quarterly operating results;
•		announcements of technological innovations or new products or services by us or our competitors;
•		announcements relating to strategic relationships, acquisitions or investments;
•		changes in financial estimates or other statements by securities analysts;

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•		changes in general economic conditions;
•		terrorist attacks and the effects of military engagements;
•		changes in the rating of our debentures or other securities; and
•		changes in the economic performance and/or market valuations of other software and high-technology companies.

Because of this volatility, we may fail to meet the expectations of our stockholders or of securities analysts from time-to-time and the trading prices of our securities could decline as a result. In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the trading prices of equity securities of many high-technology companies. These fluctuations have often been unrelated or disproportionate to the operating performance of these companies. Any negative change in the public’s perception of high-technology companies could depress our stock price regardless of our operating results.

Our stock repurchase program could affect our stock price and add volatility

Any repurchases pursuant to our stock repurchase program could affect our stock price and add volatility. There can be no assurance that the repurchases will be made at the best possible price. The existence of a stock repurchase program could also cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. Additionally, we are permitted and could discontinue our stock repurchase program at any time and any such discontinuation could cause the market price of our stock to decline.

We may not be able to renew our synthetic leases with the same terms.

One of our synthetic leases for our office in Foster City, California, expires in July 2004. There can be no assurance that we will be able to renew the lease, or if we are able to renew the lease, that we will receive the same terms contained in our current lease. We could be required to pledge additional collateral, which could decrease the cash available for operations. We might be required to meet stricter financial covenants, and if we defaulted under those covenants we could be required to purchase the building. If we were to purchase the building our operating results could be harmed. The payments under the lease could be higher than the current payments, which could harm our operating results. We have a first loss guarantees to the lessor, which requires us to reimburse the lessor at the end of the lease for declines in the value of these buildings up to approximately 82% of the cost of the construction of the buildings. Although we have assessed our exposure in relation to the first loss guarantees for the facilities under the lease arrangement and believe there is no deficiency to the guaranteed value at December 31, 2003, there can be no assurance that we will not have to make payments under the first loss guarantee, since the value of our buildings may fluctuate in the future due to the historically volatile nature of the real estate market in the area where our building is located.

Our debt service obligations may adversely affect our cash flow.

In June 2003, we issued $240.0 million in 1.50% convertible senior debentures due in 2023. During the period the debentures are outstanding, we will have debt service obligations on the debentures of approximately $3.6 million per year in interest payments, payable semi-annually. In addition, beginning June 1, 2008, we could be required to pay contingent interest of 0.35% if during any six-month period from June 1 to November 30 and December 1 to May 31, the average market price of the debentures for the five trading days ending on the third trading day immediately preceding the first day of the relevant six-month period equals 120% or more of the principal amount of the debentures.

Our debt service obligations related to the debentures include the following redemption and repurchase terms that could also affect our cash position:

•

On or after June 1, 2008, we may redeem the debentures for cash at any time as a whole, or from time to time in part, at a price equal to 100% of the principal amount of the debenture to be redeemed plus any accrued and unpaid interest, including contingent interest, if any;

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•		On June 1, 2008 a holder may require us to repurchase all or a portion of that holder’s debentures at a repurchase price equal to 100% of the principal amount of those debentures plus accrued and unpaid interest, including contingent interest, if any, to, but not including, the date of repurchase in cash; and
•		A holder may require us to repurchase all or a portion of that holder’s debentures if a fundamental change, as defined in the indenture, occurs prior to June 1, 2008 at 100% of their principal amount, plus any accrued and unpaid interest, including contingent interest, if any to, but not including, the repurchase date. We may choose to pay the repurchase price in cash.

If we issue other debt securities in the future, our debt service obligations will increase. We intend to fulfill our debt service obligations from cash generated by our operations, if any and from our existing cash and investments. If we are unable to generate sufficient cash to meet these obligations and must instead use our existing cash or investments, we may have to reduce, curtail or terminate other activities of our business. We may add lines of credit and obtain other long-term debt and mortgage financing to finance capital expenditures in the future.

Our indebtedness could have significant negative consequences. For example, it could:

	•		increase our vulnerability to general adverse economic and industry conditions as we are required to make interest payments and maintain compliance with financial covenants contained in the debentures regardless of such external conditions;
	•		limit our ability to obtain additional financing due to covenants contained in the debentures and the existing leverage evidenced by the debentures;
	•		require the dedication of a substantial portion of any cash flow from operations to the payment of principal of and interest on, our indebtedness, thereby reducing the availability of such cash flow to fund our growth strategy, working capital, capital expenditures and other general corporate purposes;
	•		limit our flexibility in planning for, or reacting to, changes in our business and our industry by restricting the funds available for use in addressing such changes; and
	•		place us at a competitive disadvantage relative to our competitors with less debt.

Our senior debentures issued in June 2003 are convertible into common stock under certain conditions. If either we or the debt holders convert the debentures into common stock or are required to calculate earnings per share on an “as converted basis,” our earnings per share could decrease.

In June 2003, we issued $240.0 million in 1.50% senior convertible debentures due in 2023. The debentures are convertible into our shares of common stock at an initial conversion rate of 37.8508 shares per $1,000 principal amount of debentures (which represents a conversion price of approximately $26.42 per share) under certain conditions and subject to certain adjustments. Holders may convert their debentures into shares of our common stock prior to 2023 under the following circumstances:

•		during any fiscal quarter after September 30, 2003, if the sale price of our common stock for at least 20 consecutive trading days in the 30 consecutive trading-day period ending on the last trading day of the immediately preceding fiscal quarter exceeds 120% of the conversion price on that 30th trading day;
•		during any five consecutive trading day period immediately following any five consecutive trading day period (the “Debenture Measurement Period”) in which the average trading price for the debentures during that Debenture Measurement Period was less than 97% of the average conversion value for the debentures during such period; however, the debentures may not be converted after June 1, 2018 if on any trading day during such Debenture Measurement Period the closing sale price of shares of our common stock was between the then current conversion price on the debentures and 120% of the then conversion price of the debentures;
•		upon the occurrence of specified corporate transactions, as defined in the indenture; or
•		if we have called the debentures for redemption.

On June 1, 2013 and 2018, a holder may require us to repurchase all or a portion of that holder’s debentures at a repurchase price equal to 100% of the principal amount of those debentures plus accrued and unpaid interest, including contingent interest, if any. We may choose to pay the repurchase price on those dates in cash, in shares of our common stock or a combination of cash and shares of our common stock.

A holder may require us to repurchase all or a portion of that holder’s debentures if a fundamental change, as defined in the indenture, occurs prior to June 1, 2008 at 100% of their principal amount, plus any accrued and unpaid interest, including contingent interest, if any. We may choose to pay the repurchase price in cash, shares of our common

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stock, or if we have been acquired by another company and we are not the surviving corporation, shares of common stock, ordinary shares or American Depositary Shares of the surviving corporation, or a combination of cash and stock.

The debentures are convertible into a maximum of 9,084,192 shares of common stock. The issuance of additional shares of common stock would be dilutive to our earnings per share.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

We are exposed to various market risks, including changes in foreign currency exchange rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes. We may enter into financial instrument contracts to manage and reduce the impact of changes in foreign currency exchange rates. The counterparties to such contracts are major financial institutions. We had no forward foreign exchange contracts outstanding as of March 31, 2004.

Interest Rate Risk

We maintain an investment portfolio of various holdings, types, and maturities. These securities are generally 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). At any time, a sharp rise in interest rates could have a material adverse impact on the fair value of our investment portfolio. Conversely, declines in interest rates could have a material impact on interest earnings for our portfolio. We do not currently hedge these interest rate exposures.

The following table presents the hypothetical change in fair values in the financial instruments we held at March 31, 2004 that are sensitive to changes in interest rates. The modeling technique used measures the change in fair values arising from selected potential changes in interest rates. Market changes reflect immediate hypothetical parallel shifts in the yield curve of plus or minus 100 basis points (BPS) over a twelve-month time horizon.

This table estimates the fair value of the portfolio at a twelve month time horizon:

The fair value of our long-term debt, including current maturities, was estimated to be $270.2 million as of March 31, 2004.

ITEM 4: CONTROLS AND PROCEDURES

As of the end of the quarter ended March 31, 2004, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2004 to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the

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time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting identified in connection with our evaluation as of March 31, 2004 that occurred during such quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

     ITEM 1. LEGAL PROCEEDINGS

     The information set forth under Note 10 in the notes to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q is incorporated herein by reference.

ITEM 2. CHANGE IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

Purchases of Equity Securities

Issuer Purchases of Equity Securities

(in thousands, except per share amounts)

(1)		On March 21, 2003 we filed an S-4 registration statement in connection with our acquisition of Printcafe Software, Inc. In that document we announced that we intended to repurchase approximately the same number of shares of our common stock that we issued in connection with the acquisition. On October 21, 2003 we completed the acquisition of Printcafe and issued 201,897 shares of common stock. In November 2003, we began repurchasing shares in the open market under this program. We completed purchasing shares under this program in January 2004, having repurchased a total of 201, 897 shares.
(2)		On November 18, 2003 we announced that our Board of Directors had approved $50.0 million for the repurchase of our outstanding common stock during the next twelve months and began repurchasing shares under this program in January 2004.

     ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

     ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

     ITEM 5. OTHER INFORMATION

Not applicable.

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     ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits

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	**		Items that are management contracts or compensatory plans or arrangements required to be filed as exhibits pursuant to Item 14 (c) of Form 10-K.
	+		The Company has received confidential treatment with respect to portions of these documents.
	(1)		Filed as an exhibit to the Company’s Registration Statement on Form S-1 (No. 33-50966) and incorporated herein by reference.
	(2)		Filed as an exhibit to the Company’s Registration Statement on Form S-1 (File No. 33-57382) and incorporated herein by reference.
	(3)		Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (File No. 000-18805) and incorporated herein by reference.
	(4)		Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 000-18805) and incorporated herein by reference.
	(5)		Filed as an exhibit to the Company’s Registration Statement on Form S-8 (File No. 333-88135) and incorporated herein by reference.
	(6)		Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 000-18805) and incorporated herein by reference.
	(7)		Filed as an exhibit (a) (1) to the Company’s Schedule TO-I on September 17, 2001 and incorporated herein by reference.
	(8)		Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 000-18805) and incorporated herein by reference.
	(9)		Filed as an exhibit to the Company’s Quarterly Report on Form 10Q for the quarter ended June 30, 2003 (File No. 18805) and incorporated herein by reference.
	(10)		Filed as an exhibit to the Company’s Quarterly Report on Form 10Q/A for the quarter ended June 30, 2003 (File No. 18805) and incorporated herein by reference.
	(11)		Filed as an exhibit to the Company’s Quarterly Report on Form 10Q for the quarter ended September 30, 2003 (File No. 18805) and incorporated herein by reference.
	(12)		Filed as an exhibit to the Company’s Registration Statement on Form S-8 on January 20, 2004 and incorporated herein by reference

(b)

Reports on Form 8-K

     On January 27, 2004, EFI filed a report on Form 8-K dated January 27, 2004 reporting under Item 12 that on January 27, 2004, EFI issued a press release regarding its financial results for its fiscal year ended December 31, 2003. The press release was furnished (not filed) as an exhibit to the report.

On February 9, 2004, EFI filed a report on Form 8-K dated February 5, 2004, reporting under Item 5 that on February 5, 2004 EFI issued a press release regarding the acquisition of ADS Communications, Inc. EFI announced in the press release that the acquisition would not have a significant impact on the company’s recently released revenue outlook or overall 2004 financial results. The press release was filed as an exhibit to the report.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ELECTRONICS FOR IMAGING, INC.
Date: May 10, 2004			/s/ Guy Gecht
			Guy Gecht
			Chief Executive Officer (Principal Executive Officer)

			/s/ Joseph Cutts
			Joseph Cutts
			Chief Financial Officer (Principal Financial and Accounting Officer)

39

EXHIBIT INDEX