Electronics For Imaging (EFII) 10-Q 2001 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number:    0-18805

ELECTRONICS FOR IMAGING, INC.
(Exact name of registrant as specified in its charter)

Delaware	94-3086355
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

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 o

The number of shares of Common Stock outstanding as of October 31, 2001 was 53,766,518.

An Exhibit Index can be found on Page 25.

ELECTRONICS FOR IMAGING, INC.

INDEX

				Page No.
PART I – Financial Information
Item 1.	Condensed Consolidated Financial Statements
		Condensed Consolidated Balance Sheets September 30, 2001 and December 31, 2000		3
		Condensed Consolidated Statements of Income Three and Nine Months Ended September 30, 2001 and 2000		4
		Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2001 and 2000		5
		Notes to Condensed Consolidated Financial Statements		6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		23
PART II – Other Information
Item 1.		Legal Proceedings	23
Item 2.		Changes in Securities and Use of Proceeds	23
Item 3.		Defaults Upon Senior Securities	24
Item 4.		Submission of Matters to a Vote of Security Holders	24
Item 5.		Other Information	24
Item 6.		Exhibits and Reports on Form 8-K	24
Signatures			25

PART I               Financial Information

     ITEM 1.    Condensed Consolidated Financial Statements

Electronics for Imaging, Inc.
Consolidated Balance Sheets
(unaudited)

(In thousands, except per share amounts)		September 30, 2001			December 31, 2000
Assets
Current assets:
Cash and cash equivalents	$	168,854		$	102,804
Short-term investments		269,472			250,799
Accounts receivable, net		66,829			72,006
Inventories		14,580			27,076
Other current assets		27,335			43,166
Total current assets		547,070			495,851
Property and equipment, net		53,457			51,456
Restricted investments		36,918			14,134
Other assets		83,974			92,949
Total assets	$	721,419		$	654,390
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	45,875		$	49,252
Accrued and other liabilities		45,089			50,483
Income taxes payable		27,998			6,199
Total current liabilities		118,962			105,934
Long-term obligations, less current portion		2,972			3,140
Commitments and Contingencies (Note 8)
Stockholders’ equity:
Preferred stock, $.01 par value; 5,000 shares authorized; none         issued and outstanding		—			—
Common stock, $.01 par value; 150,000 shares authorized;         53,755 and 52,685 shares outstanding, respectively		582			572
Additional paid-in capital		259,624			240,202
Treasury stock, at cost, 4,478 shares		(99,959	)		(99,959	)
Accumulated other comprehensive income		2,496			420
Retained earnings		436,742			404,081
Total stockholders' equity		599,485			545,316
Total liabilities and stockholders' equity	$	721,419		$	654,390

See accompanying notes to consolidated financial statements.

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Electronics for Imaging, Inc.
Consolidated Statements of Income
(unaudited)

		Three MonthsEnded September 30,						Nine MonthsEnded September 30,
(In thousands, except per share amounts)		2001			2000			2001			2000
Revenue	$	127,024		$	153,182		$	412,054		$	456,874
Cost of revenue		68,049			79,683			226,108			236,819
Gross profit		58,975			73,499			185,946			220,055
Operating expenses:
Research and development		23,278			25,843			75,017			67,796
Sales and marketing		14,024			16,243			44,880			48,545
General and administrative		6,198			6,439			19,284			17,843
Amortization of goodwill and other acquisition-related charges		3,053			—			9,186			—
Total operating expenses		46,553			48,525			148,367			134,184
Income from operations		12,422			24,974			37,579			85,871
Other income, net		4,788			4,944			13,058			16,071
Income before income taxes		17,210			29,918			50,637			101,942
Provision for income taxes		(6,110	)		(9,873	)		(17,976	)		(33,641	)
Net income	$	11,100		$	20,045		$	32,661		$	68,301
Net income per basic common share	$	0.21		$	0.37		$	0.61		$	1.22
Basic weighted average shares		53,675			53,969			53,362			55,780
Net income per diluted common share	$	0.20		$	0.37		$	0.60		$	1.19
Diluted weighted average shares		54,694			54,698			54,613			57,313

See accompanying notes to consolidated financial statements.

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Electronics for Imaging, Inc.
Consolidated Statements of Cash Flows
(unaudited)

		Nine Months Ended September 30,
(In thousands)		2001			2000
Cash flows from operating activities:
Net income	$	32,661		$	68,301
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		20,895			10,767
Change in reserve for bad debt		(540	)		992
Deferred income tax		1,200			(23	)
Changes in operating assets and liabilities:
Accounts receivable		5,717			(9,032	)
Inventories		12,497			(6,258	)
Receivable from subcontract manufacturers		12,647			(9,983	)
Other current assets		1,991			(3,038	)
Accounts payable and accrued liabilities		(9,229	)		14,600
Income taxes payable		24,804			(7,101	)
Net cash provided by operating activities		102,643			59,225
Cash flows from investing activities:
Purchases and sales / maturities of short-term investments, net		(16,813	)		(53,044	)
Net purchases of restricted investments		(22,600	)		—
Investment in property and equipment, net		(13,731	)		(11,922	)
Purchase of other assets		(159	)		594
Net cash provided by (used for) investing activities		(53,303	)		(64,372	)
Cash flows from financing activities:
Repayment of long-term obligations		(159	)		(607	)
Issuance of common stock		16,869			16,451
Repurchase of common stock		—			(83,687	)
Net cash provided by (used for) financing activities		16,710			(67,843	)
Increase (decrease) in cash and cash equivalents		66,050			(72,990	)
Cash and cash equivalents at beginning of year		102,804			163,824
Cash and cash equivalents at end of period	$	168,854		$	90,834

       See accompanying notes to consolidated financial statements.

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Electronics for Imaging, Inc.
Notes to unaudited Consolidated Financial Statements

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 September 30, 2001, have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended December 31, 2000, contained in the Company’s Annual Report to Stockholders. 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 generally accepted accounting principles. The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements referred to above and the notes thereto.

The preparation of the interim condensed consolidated financial statements in conformity with generally accepted accounting principles for such financial statements 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 periods ended September 30, 2001 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

In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS")No. 133 "Accounting for Derivative Instruments and Hedging". This statement establishes accounting and reporting standards for derivative instruments and for hedging activities and requires, among other things, that all derivatives be recognized as either assets or liabilities in the statement of financial position and measured at fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities – Deferral of Effective Date of FASB Statement No. 133". SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. The Company adopted SFAS No. 133 on January 1, 2001 and the adoption of this pronouncement has not had a material impact on the Company’s financial position and results of operations.

3.      Earnings Per Share

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands except per share amounts, unaudited)	2001		2000		2001		2000
Net income available to common shareholders	$	11,100	$	20,045	$	32,661	$	68,301
Shares
Basic shares		53,675		53,969		53,362		55,780
Effect of Dilutive Securities		1,019		729		1,251		1,533
Diluted shares		54,694		54,698		54,613		57,313
Earnings per common share
Basic EPS	$	0.21	$	0.37	$	0.61	$	1.22
Diluted EPS	$	0.20	$	0.37	$	0.60	$	1.19

Options to purchase 7,610,145 and 7,138,928 shares of common stock outstanding as of September 30, 2001 and 2000, respectively, were not included in the computations of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares for the periods then ended.

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4.    Comprehensive Income

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

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, unaudited)		2001		2000			2001			2000
Net income	$	11,100	$	20,045		$	32,661		$	68,301
Market valuation of investments		935		—			2,121			479
Currency translation adjustment		32		(11	)		(45	)		(41	)
Comprehensive income	$	12,067	$	20,034		$	34,737		$	68,739

5.      Mergers and Acquisitions

2000 Acquisitions

On October 23, 2000, the Company acquired Splash Technology Holdings, Inc. ("Splash") for total consideration of approximately $159.7 million, comprised of $146.8 million in cash, $6.0 million for the fair value of stock options assumed and $6.9 million of capitalized transaction-related costs. 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. Amortization of goodwill and other intangibles related to the acquisition of Splash was $3.0 million and $9.1 million for the three and nine months ended September 30, 2001, respectively. At September 30, 2001 the unamortized portion of goodwill and other intangibles totaled $67.3 million and is being amortized over estimated lives ranging from 4 to 7 years.

2001 Acquisitions

The Company acquiredthe variable printing group of FAIR in February 2001 for $0.6 million in cash. The Consolidated Financial Statements include the operating results of the acquired business from the date of acquisition. Pro forma results of operations for this acquisition have not been presented because the effects of this acquisition were not material.

The unaudited pro forma information set forth below represents the revenue, net income and earnings per share of the Company and Splash as if the acquisition were effective on January 1, 2000, and includes certain pro forma adjustments, including the adjustment of amortization expense to reflect purchase price allocations, the adjustment of interest income to reflect net cash used for the purchase and the related income tax effects of these adjustments.

	Three Months Ended September 30,		Nine Months Ended September 30,
(In thousands, unaudited)	2001		2000
Revenue	$	158,605	$	508,521
Net income	$	2,794	$	48,973
Basic earnings per common share	$	0.05	$	0.90
Diluted earnings per common share	$	0.05	$	0.87

The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated at the beginning of the period presented.

6.      Balance Sheet Components

	September 30,			December 31,
(In thousands, unaudited)	2001			2000
Accounts receivable:
Accounts receivable	$	68,506		$	74,436
Less reserves and allowances	$	(1,677	)	$	(2,430	)
	$	66,829		$	72,006

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6.      Balance Sheet Components (continued)

(In thousands, unaudited)	September 30, 2001			December 31, 2000
Inventories:
Raw materials	$	11,919		$	25,928
Finished goods		2,661			1,148
	$	14,580		$	27,076
Other current assets:
Receivable from subcontract manufacturers	$	6,264		$	18,911
Deferred income taxes, current portion		16,492			17,695
Other		4,579			6,560
	$	27,335		$	43,166
Property and equipment:
Land and land improvements	$	32,890		$	28,930
Equipment and purchased software		48,694			70,413
Furniture and leasehold improvements		11,783			16,354
Buildings		3,943			—
		97,310			115,697
Less accumulated depreciation and amortization		(43,853	)		(64,241	)
	$	53,457		$	51,456
Other assets:
Deferred income taxes, non-current portion	$	15,031		$	15,031
Goodwill		53,782			53,406
Other intangibles		26,200			29,432
Accumulated amortization of goodwill and intangibles		(12,233	)		(6,560	)
Other		1,194			1,640
	$	83,974		$	92,949
Accrued and other liabilities:
Accrued compensation and benefits	$	14,660		$	15,019
Accrued product-related obligations		10,141			13,427
Accrued royalty payments		6,894			8,564
Other accrued liabilities		13,394			13,473
	$	45,089		$	50,483

7.      New Accounting Pronouncements

FAS 141
In July 2001, FASB issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires the purchase method of accounting for business combinations initiated after September 30, 2001 and eliminates the pooling-of-interests method. We believe that the adoption of SFAS No. 141 will not have a significant impact on our financial statements.

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FAS 142
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets", which is effective for fiscal years beginning after March 15, 2001. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon adoption for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. We are currently assessing but have not yet determined the full impact of SFAS No. 142 on our financial position and results of operations. However, upon adoption of the standard, we will cease amortizing goodwill. During the three and nine months ended September 30, 2001 goodwill and other intangibles amortization expense totaled $3.1 million and $9.3 million, respectively. Net unamortized goodwill and other intangibles at September 30, 2001 is $67.7 million.

FAS 144

On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of."SFAS No. 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30.SFAS No. 144 develops one accounting model for long-lived assets that are to be disposed of by sale. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We are still assessing whether the adoption of SFAS No. 144 will have a material effect on our consolidated financial statements.

8.      Legal Proceedings

The Company and certain principal officers and directors were named as defendants in class action complaints filed in both the California Superior Court of the County of San Mateo on December 15, 1997, and the United States District Court for the Northern District of California on December 31, 1997 on behalf of purchasers of the common stock of the Company during the class period from April 10, 1997, through December 11, 1997. Additionally, in January 1999, two class action complaints were filed, and subsequently consolidated into one case, in the United States District Court for the Northern District of California against Splash and certain of its officers on behalf of purchasers of the common stock of Splash during the class period from January 7, 1997 through October 13, 1998.The complaints allege violations of securities laws during the class period. On August 27, 2001, the federal court judge granted the Company’s motion to dismiss the plaintiff’s claim against Splash and certain of its officers. The plaintiffs have filed a notice of appeal with the Ninth Circuit Court of Appeals. Management believes the lawsuits are without merit. However, due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the litigation. Any unfavorable outcome of the litigation could have an adverse impact on the Company’s financial condition and results of operations.

On August 31, 2000, after the announcement of the merger agreement between Splash and the Company, a class action lawsuit was filed against Splash and its directors. The Plaintiffs, Splash and the Company have agreed in principle to enter into a settlement agreement that would resolve all outstanding disputes and dismiss the case with prejudice. The parties are currently finalizing the details of the settlement agreement. The Company and Splash deny any wrongdoing whatsoever, but agreed to the settlement to eliminate the burden and expense of further litigation. In addition, the Company is involved from time to time in litigation relating to claims arising in the normal course of its business.

9.      Subsequent Events

The Company commenced a voluntary offer on September 17, 2001 to exchange stock options granted between December 1, 1999 and May 31, 2000 under the Company’s 1990 Stock Plan and/or 1999 Equity Incentive Plan for new stock options to purchase the Company’s common stock under the Company’s 1999 Equity Incentive Plan. Under the program, employees holding options eligible for exchange were given the opportunity to exchange their existing eligible options for new options to purchase two-thirds the number of shares of common stock as were subject to the tendered options. Employees electing to tender options under this program were required to tender all eligible options.

Approximately 2,515,551 of 2,590,825 options available for exchange were tendered under the program. On October 12, 2001, those options were accepted and cancelled by the Company. The Company will grant new stock options, in lieu of the tendered options, on a two-for-three basis to the affected employees on or promptly after the first trading day that is at least six months and one day after the date the tendered options were accepted for exchange and cancellation. The exercise price of the new options will be equal to the last reported sale price of the Company’s common stock on the Nasdaq National Market on the day prior to the date of grant.

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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 the Management’s Discussion and Analysis and the audited consolidated financial statements of the Company and related notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000. Results for the nine months ended September 30, 2001 are not necessarily indicative of the results expected for the entire fiscal year ending December 31, 2001. All assumptions, anticipations, expectations and forecasts contained herein are forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those discussed here. For a more complete discussion of factors which might impact the Company’s results, please see the section entitled "Factors that Could Adversely Affect Performance" below and in the Company’s 2000 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.

Results of Operations

The following tables set forth items in the Company’s consolidated statements of income as a percentage of total revenue for the three and nine months ended September 30, 2001 and 2000 and the percentage change from 2001 over 2000. These operating results are not necessarily indicative of results for any future period.

	Three Months ended September 30,				% change 2001 over		Nine months ended September 30,				% change 2001 over
	2001		2000		2000		2001		2000		2000
Revenue	100	%	100	%	(17	)%	100	%	100	%	(10	)%
Cost of revenue	54	%	52	%	(15	)%	55	%	52	%	(5	)%
Gross profit	46	%	48	%	(20	)%	45	%	48	%	(16	)%
Research and development	18	%	17	%	(10	)%	18	%	15	%	11	%
Sales and marketing	11	%	11	%	(14	)%	11	%	11	%	(8	)%
General and administrative	5	%	4	%	(4	)%	5	%	4	%	8	%
Amortization of goodwill and other acquisition- related charges	2	%	—	%	—	%	2	%	—	%	—	%
Operating expenses	36	%	32	%	(4	)%	36	%	30	%	11	%
Income from operations	10	%	16	%	(50	)%	9	%	18	%	(56	)%
Other income, net	4	%	3	%	(3	)%	3	%	4	%	(19	)%
Income before income taxes	14	%	19	%	(42	)%	12	%	22	%	(50	)%
Provision for income taxes	5	%	6	%	(38	)%	4	%	7	%	(47	)%
Net income	9	%	13	%	(45	)%	8	%	15	%	(52	)%

Revenue

Revenue decreased by 17% to $127.0 million in the three month period ended September 30, 2001, compared to $153.2 million in the three month period ended September 30, 2000. Revenue decreased by 10% to $412.1 million in the nine month period ended September 30, 2001, compared to $456.9 million in the nine month period ended September 30, 2000. The decrease in revenue for both the three month and nine month periods were primarily due to a decline in average selling prices due to changes in product mix as well as lower demand due to the weakening global economic situation.

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The Company’s revenue is principally derived from three major categories. The first category is made up of stand-alone servers which connect digital color copiers with computer networks. The second category consists of embedded desktop controllers, bundled color solutions and chipsets primarily for the office market. The third category consists of controllers for digital black and white products.

The following is a break-down of categories by 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.

Revenue	Three Months Ended September 30,								%		Nine Months Ended September 30,								%
(in thousands)	2001				2000				change		2001				2000				change
Stand-alone Servers Connecting     to Digital Color Copiers	$	50,879	40	%	$	67,666	44	%	(25	)%	$	163,951.	40	%	$	218,269	48	%	(25	)%
Embedded Desktop Controllers,     Bundled Color Solutions     & Chipset Solutions		39,750	31	%		33,801	22	%	18	%		123,754	30	%		90,797	20	%	36	%
Controllers for Digital     Black and White Solutions		20,741	16	%		37,052	24	%	(44	)%		81,228	20	%		100,702	22	%	(19	)%
Spares, Licensing     & Other misc. sources		15,654	12	%		14,663	10	%	6	%		43,121	10	%		47,106	10	%	(8	)%
Total Revenue	$	127,024	100	%	$	153,182	100	%	(17	)%	$	412,054	100	%	$	456,874	100	%	(10	)%

	Three Months Ended September 30,				Nine Months Ended September 30,
Volume	2001		2000		2001		2000
Stand-alone Servers Connecting    to Digital Color Copiers	12	%	14	%	10	%	18	%
Embedded Desktop Controllers,    Bundled Color Solutions    & Chipset Solutions	53	%	47	%	53	%	43	%
Controllers for Digital    Black and White Solutions	27	%	35	%	31	%	35	%
Spares, Licensing    & Other misc. sources	8	%	4	%	6	%	4	%
Total Volume	100	%	100	%	100	%	100	%

The category of stand-alone servers connecting to digital color copiers made up 41% and 44% of total revenue and 12% and 14% of total unit volume for the three month periods ended September 30, 2001 and 2000, respectively. For the nine month period ended September 30, 2001, stand-alone servers made up 40% of total revenue and 10% of total unit volume compared to 48% of total revenue and 18% of total unit volume for the same nine month period one year ago. Overall revenues have decreased in this category, as the relatively higher prices of products in this category have discouraged purchasers during the economic slowdown. In some cases, customers are purchasing embedded products with less functionality but lower prices than stand-alone servers. The products in this category continue to offer higher margins relative to the other product lines.

The category of embedded desktop controllers made up 31% of total revenue and 53% of total unit volume in the second quarter of 2001 compared to 22% of total revenue and 47% of total unit volume in the second quarter of 2000. This category made up 30% of total revenue and 53% of total unit volume and 20% of total revenue and 43% of total unit volume for the nine months ended September 30, 2001 and 2000, respectively. These products, except for the chipset solutions, are generally characterized by lower unit prices and associated margins than the traditional stand-alone server line of products. The chipset solutions can be characterized by lower unit prices but significantly higher per unit margins compared to the traditional stand-alone server line of products. The increase

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in both revenue and volume in this category can be attributed to companies obtaining high-quality color printing while still maximizing their capital budgets.

The digital black and white controller category made up 16% of total revenue and 27% of total unit volume in the three month period ended September 30, 2001. In the three month period ended September 30, 2000, it made up 24% of total revenue and 35% of total unit volume. For the nine month period ended September 30, 2001 this category made up 20% of total revenue and 31% of total unit volume, compared to 22% of total revenue and 35% of total unit volume for the same nine month period a year ago. This product category can be characterized by lower unit prices and associated margins, but much higher unit volumes than the Company has experienced in its traditional stand-alone server and embedded controller line of products. Many of the Company’s OEM partners design and manufacture digital black and white controllers that do not utilize the Company’s technology, thus limiting their purchase of the Company’s products in this category.The Company also believes that more customers are moving to high quality color printers as print speed improves and unit costs decrease.

Spares, licensing revenue, eBeam and other miscellaneous sources generated 12% and 10% of total revenue for the three months ended September 30, 2001 and 2000, respectively. For the nine months ended September 30, 2001 and 2000, this category represented 10% of total revenue. As a percentage of total unit volume this category represented 8% and 4% for the three months ended September 30, 2001 and 2000, respectively and 6% and 4% for the nine months ended September 30, 2001 and 2000.

To the extent these categories do not grow over time in absolute terms, or if the Company is not able to meet demand for higher unit volumes, it could have a material adverse effect on the Company’s operating results.There can be no assurance that any new products will be qualified by all the OEMs, that they will successfully compete, be accepted by the market, or otherwise be able to effectively replace the volume of revenue and/or income from the older products.

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

Shipments by geographic area for the three months and nine months period ended September 30, 2001 and September 30, 2000 were as follows:

	Three Months Ended										Nine Months Ended
	September 30								%		September,30,								%
(in thousands)	2001				2000				change		2001				2000				change
North America	$	67,915	54	%	$	79,855	52	%	(15	)%	$	202,361	49	%	$	225,545	49	%	(10	)%
Europe		38,609	30	%		43,496	28	%	(11	)%		145,083	35	%		153,530	34	%	(6	)%
Japan		15,647	12	%		24,548	16	%	(36	)%		50,473	12	%		62,629	14	%	(19	)%
Rest of World		4,853	4	%		5,283	4	%	(8	)%		14,136	4	%		15,169	3	%	(7	)%
	$	127,024	100	%	$	153,182	100	%	(17	)%	$	412,054	100	%	$	456,874	100	%	(10	)%

Reflecting the overall slow-down in the global economy, sales to all areas decreased in both the three months and nine months ended September 30, 2001 and 2000 as compared to the same periods one year ago. The percentages shipped to each area for the nine months year over year comparison remain relatively consistent. Changes in worldwide economic and political conditions affecting countries in which the Company and its suppliers and customers operate may have an adverse impact on the Company'’s results of operations in the future.

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

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Substantially all of the revenue for the last three years was attributable to sales of products through the Company’s OEM channels with such partners as Canon, Danka, Epson, Fuji-Xerox, Hewlett-Packard, Konica, Lanier, Minolta, Océ, Ricoh, Sharp, Toshiba, Xerox and others. During 2001, the Company has continued to work on both increasing the number of OEM partners, and expanding the size of existing relationships with OEM partners. The Company relied on four OEM customers for 79% of its revenue in aggregate for the nine month period ended September 30, 2001, while three OEM customers generated 71% of its revenue in aggregate for the nine month period ended September 30, 2000, respectively. No assurance can be given that the Company’s relationships with these OEM partners will continue. In the event that any of these OEM relationships are scaled back or discontinued, the Company may experience a significant negative impact on its consolidated financial position and results of operations.

The Company continues to work on the development of products utilizing the Fiery, Splash and EDOX architecture and other products and intends to continue to introduce new generations of server and controllerproducts and other new product lines with current and new OEMs in 2001 and beyond. No assurance can be given that the introduction or market acceptance of new, current or future products will be successful.

Cost of Revenue

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

Gross Margins

The Company’s gross margins were 46% and 48% for the three month periods ended September 30, 2001 and 2000, respectively. For the nine months ended September 30, 2001 and 2000 gross margins were 45% and 48%, respectively. The decrease in gross margin was attributable to a change in product mix, with products with lower margins, such as embedded color controllers and digital black and white controllers,comprising a larger share of the total sales.

The Company expects that sales of products with relatively lower margins will continue to increase as a percentage of revenue. Such products include embedded products for both desktop printers and copiers, embedded controllers for black-and-white copiers and older products for which prices are reduced during product transitions.If such sales increase as a percentage of the Company’s revenue, gross margins may decline. In addition, the Company expects to be subject to pressures to reduce prices, and as a result, gross margins for all of its products may be lower and therefore the Company’s ability to maintain current gross margins may not continue. Some costs are fixed irrespective of manufacturing volume and as such lower product volumes have a negative impact on gross margins.

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

Operating Expenses

Operating expenses decreased by 4% in the three month period ended September 30, 2001 compared to the three month period ended September 30, 2000. Operating expenses as a percentage of revenue amounted to 36% and 32% for the three month periods ended September 30, 2001 and September 30, 2000, respectively. Operating expenses decreased $5.0 million in absolute dollars before an increase of $3.1 million for the amortization of goodwill and purchased intangibles related to acquisitions. For the nine month periods ended September 30, 2001 and 2000 operating expenses as a percentage of revenue were 36% and 30%, respectively. The nine month period ended September 30, 2001 reflects an 11% increase in operating expenses over the nine month period ended September 30, 2000. The increase in operating expenses in absolute dollars of $14.2 million, was primarily caused by costs associated with hiring additional full time employees (a net increase of 86 people at September 30, 2001 over September 30, 2000) to support product

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development and to implement an enterprise resource planning system as well as $9.2 million for the amortization of goodwill and purchased intangibles related to acquisitions.

The Company anticipates that operating expenses may continue to grow and increase both in absolute dollars and as a percentage of revenue.

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 $23.3 million or 18% of revenue for the three month period ended September 30, 2001 compared to $25.8 million or 17% of revenue for the three month period ended September 30, 2000. Expense reductions were primarily related to reductions in recruiting and hiring. For the nine month period ended September 30, 2001 research and development expenses were $75.0 million or 18% of revenue compared to $67.8 million or 15% of revenue for the nine month period ended September 30, 2000, or a 11% increase. The Company believes that the development of new products and the enhancement of existing products are essential to its continued success, and intends to continue to devote substantial resources to research and new product development efforts. Accordingly, the Company expects that its research and development expenses may to increase in absolute dollars and also as a percentage of revenue.

Sales and Marketing

Sales and marketing expenses include personnel expenses, costs for trade shows, marketing programs and promotional materials, sales commissions, travel and entertainment expenses, depreciation, and costs associated with sales offices in the United States, Europe, Japan and other locations around the world. Sales and marketing expenses for the three month period ended September 30, 2001 were $14.0 million or 11% of revenue compared to $16.2 million or 11% of revenue for the three months ended September 30, 2000. For the nine month period ended September 30, 2001 sales and marketing expenses were $44.9 million or 11% of revenue while for the same nine month period a year ago the sales and marketing expenses were $48.5 million or 11% of revenue.

The Company expects that its sales and marketing expenses may increase in absolute dollars and possibly also as a percentage of revenue as it continues to actively promote its products, introduce new products and services and continue to build its sales and marketing organization, particularly in Europe and Asia Pacific, including Japan. This increase might not proportionally increase with increases in volume if the Company’s sales continue to gravitate toward desktop and embedded products, which require less sales and marketing support from the Company as the OEM partners take over this role.

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 $6.2 million or 5% of revenue for the three month period ended September 30, 2001, compared to $6.4 million or 4% of revenue for the three month period ended September 30, 2000. For the nine month periods ended September 30, 2001 and 2000 operating expenses in absolute dollars and as a percentage of revenue were $19.3 million and 5% and $17.8 million and 4%, respectively. The 8% increase in the nine month period ended September 30, 2001 was primarily due to the increase in headcount. The Company expects that its general and administrative expenses may continue to increase in absolute dollars and possibly as a percentage of revenue in order to support the Company’s efforts to grow its business.

Amortization of Goodwill and Purchased Intangibles

Amortization of goodwill and other intangibles were $3.1 million or 2% of revenue for the three months ended September 30, 2001 and $9.2 million or 2% of revenue for the nine months ended September 30, 2001. At September 30, 2001 the unamortized portion of goodwill and other intangibles totaled $67.7 million and is being amortized over estimated lives ranging from 4 to 7 years. SFAS No. 142, issued in July, 2001, requires, among other things, the discontinuance of goodwill amortization for fiscal years beginning after March 15, 2001. The Company is currently assessing but has not determined the full impact of SFAS No. 142 on our financial position and results of operations. Any adjustments as a

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result of the initial implementation of SFAS No. 142 impairment tests will be recorded as a cumulative effect of change in accounting principle effective January 1, 2002.

Other Income

Other income relates mainly to interest income and expense, and gains and losses on foreign currency transactions. Other income of $4.8 million for the three month period ended September 30, 2001 decreased by 3% from $4.9 million for the three month period ended September 30, 2000. For the nine month period ended September 30, 2001 other income was $13.1 million or 3% of revenue compared to $16.1 million or 4% of revenue for the nine month period ended September 30, 2000, or a decrease of 19%. Interest income has decreased during 2001 as interest rates have fallen and the average investment balance decreased after the Company consummated the purchase of Splash and invested $100 million in repurchasing its common stock in 2000.

Income Taxes

The Company’s effective tax rate was 35.5% for the three and nine month periods ended September 30, 2001 and 33% for the three and nine month periods ended September 30, 2000. The rate increased as a result of the non-deductible write-offs of intangibles related to the acquisition of Splash. In each of these periods, the Company benefited from tax-exempt interest income, foreign sales, and the utilization of research and development credits in achieving a consolidated effective tax rate lower than that prescribed by the respective Federal and State taxing authorities. The Company’s tax rate is based on current tax law and current estimates of earnings and is subject to change in future quarters.

Liquidity and Capital Resources

Cash, cash equivalents and short-term investments increased by $84.7 million to $438.3 million as of September 30, 2001, from $353.6 million as of December 31, 2000. In addition, the company has $36.9 million of restricted investments as of September 30, 2001, up from $14.1 million as of December 31, 2000. Working capital increased by $38.2 million to $428.1 million as of September 30, 2001, up from $389.9 million as of December 31, 2000. These increases are primarily the result of net income, changes in balance sheet components and the exercise of employee stock options.

Net cash provided by operating activities increased from $59.2 million for the nine months ended September 30, 2000 to $102.6 million for the nine month period ended September 30, 2001. The increase has been driven by timely collection of accounts receivables, inventory management, and an increase in taxes payable. Net cash used for investing activities was $53.3 million for the nine months ended September 30, 2001 while the nine month period ended September 30, 2000 reflected net cash used for investing activities of $64.4 million. During 2000 the Company invested its excess cash in short-term investments, mostly municipal securities. Purchases in excess of sales of short-term and restricted investments were $39.4 million for the nine month period ended September 30, 2001 compared to purchases in excess of sales of $53.0 million for the nine month period ended September 30, 2000. The Company’s capital expenditures generally consist of investments in computers and related peripheral equipment and office furniture for use in the Company’s operations. The Company purchased approximately $13.7 million of land, facilities, equipment and furniture during the nine month period ended September 30, 2001.

Net cash provided by financing activities of $16.7 million in the nine month period ended September 30, 2001 was primarily the result of exercises of common stock options and the tax benefits to the Company associated with those exercises. In the nine month period ended September 30, 2000 net cash used for financing activities was $67.8 million, the net of cash received from the exercises of common stock options and the $83.7 million repurchase of common stock.

In 1997, the Company purchased a 35-acre parcel of land in Foster City, California and began development of a corporate campus. In July 1999 the Company completed construction of a ten-story, 295,000 square foot building funded under a lease agreement entered into in 1997 ("1997 Lease") and began making rent payments. Also in conjunction with the 1997 Lease, the Company has entered into a separate ground lease with the lessor of the building for approximately 35 years.

In December 1999 the Company entered into a second agreement (the "1999 Lease" and together with the 1997 Lease, the "Leases") to lease a maximum of 543,000 square feet of additional facilities, to be constructed adjacent to the first building discussed above. As of September 30, 2001, the lessor has funded $34.5 million of a maximum commitment of $137.0 million for the construction of the facilities, with the portion of the committed amount actually used for construction to be determined by the Company. Rent obligations for the building will bear a direct relationship to the carrying cost of the commitments drawn down. Construction of the facilities began in January 2000 and is scheduled for completion in December 2002. In connection with the 1999 Lease, the Company entered

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into a lease of the related parcels of land in Foster City with the lessor of the buildings for a nominal rate and for a term of 30 years. If the Company does not renew the building lease, the ground lease converts to a market rate.

Both Leases have an initial term of seven years, with options to renew subject to certain conditions. The Company may, at its option, purchase the facilities during or at the end of the term of the lease for the amount expended by the respective lessor to construct the facilities. 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 defaults on a covenant, fails to renew the lease, or does not purchase or locate a purchaser for the leased building at the end of the lease term. During the terms of the Leases the Company must maintain a minimum tangible net worth. In addition, the Company has pledged certain marketable securities, which are in proportion to the amount drawn under each lease. Under the 1997 Lease, the pledged collateral ($71.7 million at September 30, 2001) may be withdrawn at any time, but withdrawal results in an increase to the lease rate and the imposition of additional financial covenant restrictions. The funds pledged under the 1999 Lease ($36.9 million at September 30, 2001) may be invested by the Company in certain securities, however the funds are restricted as to withdrawal at all times.

The Company’s inventory consists primarily of memory subsystems, processors and ASICs, which are sold to third-party contract manufacturers responsible for manufacturing the Company’s products. Should the Company decide to purchase components and do its own manufacturing, or should it become necessary for the Company to purchase and sell components other than the processors, ASICs or memory subsystems for its contract manufacturers, inventory balances and potentially fixed assets would increase significantly, thereby reducing the Company’s available cash resources. During 2001, the Company initiated a program to decrease the number of contract manufacturers it uses. The Company reimbursed the contract manufacturers whose services were dropped for the cost of the inventory the manufacturers could not use in other products. If the Company continues to consolidate contract manufacturers, it could be liable for additional inventory reimbursement. The inventory the Company carries could become obsolete thereby negatively impacting the Company’s consolidated financial position and results of operations. The Company also relies on several sole-source suppliers for certain key components and could experience a significant negative impact on its consolidated financial position and results of operations if such supplies were reduced or not available.

The Company, along with its directors and certain officers and employees, has been named in class action lawsuits filed in both the San Mateo County Superior Court and the United States District Court for the Northern District of California. The lawsuits are all related to the precipitous decline in the trading price of the Company’s stock that occurred in December 1997. The Company believes the lawsuits are without merit and intends to contest them vigorously, but there can be no assurance that if damages are ultimately awarded against the Company, the litigation will not adversely affect the Company’s results of operations.

Splash, along with former Splash officers, has been named in class action lawsuits filed in the United States District Court for the Northern District of California. The lawsuits are related to a decline in Splash’s stock price during 1997. The Company became successor to the lawsuits when it acquired Splash in October 2000. On August 27, 2001, the federal court judge granted the Company’s motion to dismiss the plaintiff’s claim against Splash and certain of its officers. The plaintiffs have filed a notice of appeal with the Ninth Circuit Court of Appeals.The Company believes the lawsuits are without merit and intends to contest them vigorously, but there can be no assurance that if damages are ultimately awarded against the Company, the litigation will not adversely affect the Company’s results of operations

On August 31, 2000, after the announcement of the merger agreement between Splash and the Company, a class action lawsuit was filed against Splash and its directors. The Plaintiffs, Splash and the Company have agreed in principle to enter into a settlement agreement that would resolve all outstanding disputes and dismiss the case with prejudice. The parties are currently finalizing the details of the settlement agreement. The Company and Splash deny any wrongdoing whatsoever, but agreed to the settlement to eliminate the burden and expense of further litigation. In addition, the Company is involved from time to time in litigation relating to claims arising in the normal course of its business. The Company believes that the ultimate resolution of such claims will not materially affect the Company’s business or financial condition.

The Company believes that its existing capital resources, together with cash generated from continuing operations will be sufficient to fund its operations and meet capital requirements through at least 2001.

Euro Assessment

Eleven of the fifteen member countries of the European Union have established fixed conversion rates between their existing sovereign currencies and the Euro and have adopted the Euro as a common currency as of January 1, 1999. The Euro is trading on currency exchanges and is available for non-cash transactions. The conversion to the Euro is not expected to have a material adverse effect on the operating results of the Company as the Company predominantly invoices in US Dollars. The Company is currently in

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the process of evaluating the reporting requirements in the respective countries and the related system, legal and taxation requirements. The Company expects that required modifications will be made on a timely basis and that such modifications will not have a material adverse impact on the Company’s operating results. There can be no assurance, however, that the Company will be able to complete such modifications to comply with Euro requirements, which could have a material adverse effect on the Company’s operating results.

Factors That Could Adversely Affect Performance

Our performance may be adversely affected by the following factors:

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

Because we sell our products primarily to our OEM partners, we rely on high sales volumes to a relatively small number of customers. We expect that we will continue to depend on these OEM partners for a significant portion of our revenues. If we lose an important OEM or we are unable to recruit additional OEMs, our revenues may be materially and adversely affected. We cannot assure you that our major customers will continue to purchase our products at current levels or that they will continue to purchase our products at all. In addition, our results of operations could be adversely affected by a decline in demand for copiers or laser printers, other factors affecting our major customers, in particular, or the computer industry in general. Xerox, our second largest customer, has experienced serious financial difficulties in their business. If Xerox continues to face such difficulties, our short-term revenues and profitability could be materially and adversely affected through, among other things, decreased sales volumes and write-offs of accounts receivables and inventory related to Xerox products.

We rely upon our OEM partners to develop new products, applications and product enhancements in a timely and cost-effective manner. Our continued success depends upon the ability of these OEMs to meet changing customer needs and respond to emerging industry standards and other technological changes. However, we cannot assure you that our OEMs will effectively meet these technological challenges. These OEMs may incorporate into their products the technologies of other companies or their own technologies in addition to, or instead of our products. These OEMs may introduce and support products that are not compatible with our products. We rely on these OEMs to market our products with their products, and if these OEMs do not effectively market our products our sales revenue may be materially and adversely affected. With the exception of certain minimum purchase obligations, these OEMs are not obligated to purchase products from us. We cannot assure you that our OEMs will continue to carry our products.

Our OEMs work closely with us to develop products that are specific to each OEM’s copiers and printers. Many of the products we are developing require that we coordinate development, quality testing, marketing and other tasks with our OEMs. We cannot control our OEMs’ development efforts and coordinating with our OEMs may cause delays that we cannot manage by ourselves. In addition, our sales revenue and results of operations may be adversely affected if we cannot meet our OEMs’ 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.

We are pursuing, and will continue to pursue, the business of additional copier and printer OEMs. However, because there are a limited number of OEMs producing copiers and printers in sufficient volume to be attractive customers for us, we expect that customer concentration will continue to be a risk.

We establish expenditure levels for operating expenses based on projected sales levels and margins, and expenses are relatively fixed in the short term. Accordingly, if sales 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.

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 will depend to a significant extent on continual improvement of existing technologies and rapid innovation of new products and technologies. Our success depends not only on our ability to predict future requirements, but also to develop and introduce new products that successfully address customer needs. Any delays in the introduction 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 adversely affected if we cannot successfully manage product transitions or provide adequate availability of products after they have been introduced.

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We must continue to make significant investments in research and development in order to enhance performance and functionality of our products, including product lines other than our Fiery, Splash 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, and achieve market acceptance of our products. Also, if we decide to develop new products, our research and development expenses may increase in the short term without a corresponding increase in revenue. Finally, we cannot assure you that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive.

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

Under our license agreements with Adobe, a separate license must be granted from Adobe to us for each type of copier or printer used with one of our servers or controllers. If Adobe does not grant us such licenses or approvals, if the Adobe license agreements are terminated, or if our relationship with Adobe is otherwise impaired, our financial condition and results of operations may be harmed. To date, we have successfully obtained licenses to use Adobe’s PostScript™ software for our products, where required. However, we cannot assure you that Adobe will continue to grant future licenses to Adobe PostScript™ software on reasonable terms, in a timely manner, or at all. In addition, we cannot assure you that Adobe will continue to give us the quality assurance approvals we are required to obtain from Adobe for the Adobe licenses.

If the demand for products that enable printing of digital data decreases, our sales revenue may decrease

Our products are primarily targeted at enabling the printing of digital data. If demand for this service declines, or if the demand for our OEMs specific printers or copiers for which our products are designed should decline, our revenue may be adversely affected. Although demand for networked printers and copiers has increased in recent years, we cannot assure you that such demand will continue, nor can we assure you that the demand will continue for the specific OEM printers and copiers that utilize our products.We believe that demand for our products may also be affected by a variety of economic conditions and considerations, and we cannot assure you that demand for our products will continue at current levels.

We sell products that are large capital expenditures as well as discretionary purchase items. In difficult economic times spending on information technology is often decreased. As our products are of a more discretionary nature than many other technology products, we may be more adversely impacted than other technology firms. We are subject to economic sensitivity that has harmed our results of operations.

If we enter new markets or distribution channels this could result in delayed revenues or higher operating expenses

We continue to explore opportunities to develop product lines different from our current servers and embedded controllers, such as our new line of Velocity software products, eBeam, PrintMe Network, and EFI Professional Services. We expect to invest funds to develop new distribution and marketing channels for these new products and services. We do not know if we will be successful in developing these channels or whether the market will accept any of our new products or services. In addition, even if we are able to introduce new products or services, these products and services may adversely impact the Company’s operating results.

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

Our industry is highly competitive and is characterized by rapid technological changes. We compete against a number of other suppliers of imaging products. We cannot assure you that products or technologies developed by competing suppliers will not render our products or technologies obsolete or noncompetitive.

While many of our OEMs sell our products on an exclusive basis, we do not have any formal agreements that prevent the OEMs from offering alternative products. If an OEM offers products from alternative suppliers, our market share could decrease, which could reduce our revenue and negatively affect our financial results.

Many of our OEM partners themselves internally develop and supply products similar to our current products. These OEMs may be able to develop similar products that are compatible with their own products more quickly than we can. These OEMs may choose to market their own products, even if these products are technologically inferior, have lower performance or cost more. We cannot assure you that we will be able to continue to successfully compete against similar products developed internally by our OEMs or

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against their financial and other resources. If we cannot compete successfully against our OEMs’ internally developed products, our business may be harmed.

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. We are located in the Silicon Valley where competition among companies to hire engineering and technical professionals may be intense. 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 nearby 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. If we cannot successfully hire and retain employees, we may not be able to develop products timely or to meet demand for our products in a timely fashion and our results of operations may be adversely impacted.

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, such fluctuations could adversely affect our stock price. Operating results may fluctuate due to:

varying demand for our products;

success and timing of new product introductions;

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;

delay, cancellation or rescheduling of orders;

product performance;

availability of key components, including possible delays in the deliveries from suppliers;

the status of our relationships with our OEM partners;

the performance of third-party manufacturers;

the status of our relationships with our key suppliers;

the financial and operational condition of OEM partners and key suppliers;

potential excess or shortage of skilled employees;

changes in product mix; and

general economic conditions.

Many of our products, and the related OEM copiers and printers, are purchased utilizing lease contracts or bank financing. If prospective purchasers of digital copiers and printers are unable to obtain credit, or interest rate changes make credit terms undesirable, this may significantly reduce the demand for digital copiers and printers, negatively impacting our revenues and operating results.

Typically we do not have long-term volume purchase contracts with our customers, and a substantial portion of our backlog is scheduled for delivery within 90 days or less. Our customers may cancel orders and change volume levels or delivery times for product they have ordered from us without penalty. However, a significant portion of our operating expenses are fixed in advance, and we plan these expenditures based on the sales forecasts from our OEM customers and product development programs. If we were unable to adjust our operating expenses in response to a shortfall in our sales, it could harm our quarterly financial results.

We attempt to hire additional employees to match growth in projected demand for our products. If we project a higher demand than materializes, we will hire too many employees and incur expenses that we need not have incurred and our margins may be lower. If we project a lower demand than materializes, we will hire too few employees, we may not be able to meet demand for our products and our sales revenue may be lower. If we cannot successfully manage our growth, our results of operations may 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 3 years. We may be unable to successfully limit our risk to interest rate fluctuations and this may cause our investment portfolio to decrease in value.

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Our stock price has been and may continue to be volatile

Our common stock, and the stock market generally, have from time to time experienced significant price and volume fluctuations. The market prices for securities of technology companies have been especially volatile, and fluctuations in the stock market are often unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of our common stock. Our common stock price may also be affected by the factors discussed above in this section as well as:

Fluctuations in our results of operations, revenues or earnings or those of our competitors;

Failure of such results of operations, revenues or earnings to meet the expectations of stock market analysts and investors;

Changes in stock market analysts’ recommendations regarding us;

Real or perceived technological advances by our competitors;

Political or economic instability in regions where our products are sold or used; and

General market and economic conditions.

We face risks from our international operations and from currency fluctuations

Approximately 51% of our revenue from the sale of products for the nine month periods ended September 30, 2001 and 2000, came from sales outside North America, primarily to Europe and Japan. We expect that sales to international destinations will continue to be 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.

We believe that adverse economic conditions in other parts of the world may also limit demand for our products. The move to a single European currency, the Euro, and the resulting central bank management of interest rates to maintain fixed currency exchange rates among the member nations may lead to economic conditions which adversely impact sales of our products.

Given the significance of our export sales to our total product revenue, we face a continuing risk from the strengthening of the U.S. dollar versus the Japanese yen, the Euro and other major European currencies, and numerous Southeast Asian currencies, which could cause lower unit demand and the need to lower average selling prices for our products because of the reduced strength of local currencies. Either of these events could harm our revenues and gross margin. Although we typically invoice our customers in U.S. dollars, 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. We attempt to limit or hedge these exposures through operational strategies and financial market instruments where we consider it appropriate. To date we have mostly used forward contracts to reduce our risk from interest rate and currency fluctuations. However, 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

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 patent applications pending in the United States and in various foreign countries. There can be no assurance that patents will issue from these 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 may 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.

From time to time, litigation may 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.

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

Third parties may claim that our products infringe, or may infringe, their proprietary rights.Such claims could result in lengthy and expensive litigation.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.Although we may seek licenses from third parties covering intellectual property that we are allegedly infringing, we cannot guarantee 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 when first introduced or when new versions are released, and we have in the past discovered software and hardware errors in certain of our new products after their introduction. There can be no assurance that errors would not be found in new versions of our products after commencement of commercial shipments, or that any such errors would not result in a loss or delay in market acceptance 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 incurring of additional expense, which could harm our operating results.

Seasonal purchasing patterns of our OEM customers have historically caused lower fourth quarter revenue, which may negatively impact the stock price

Our results of operations have typically followed a seasonal pattern reflecting the buying patterns of our large OEM customers. In the past, our fiscal fourth quarter results have been adversely affected because some or all of our OEM customers wanted to decrease, or otherwise delay, fourth quarter orders.In addition, the first fiscal quarter traditionally has been a weaker quarter because our OEM partners focus on training of their sales forces.The primary reasons for this seasonal pattern are:

Our OEM partners 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 partners; and

Certain of our OEM partners 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 partners reach these sales targets as they generally do not share them with 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 this seasonal demand pattern.

We may make future acquisitions and acquisitions involve numerous financial risks

We seek to develop new technologies and products from both internal and external sources. As part of this effort, we may make, and have in the past made, acquisitions ofother companies or other companies’ technology assets.Acquisitions involve numerous risks, including the following:

Difficulties in integration of operations, technologies, or products;

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; and

Potential loss of key employees of the acquired company

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

We may incur losses on our equity investments

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We invest in the equity securities of privately held companies, many of which can still be considered in the startup or development stages. These investments are inherently risky as the market for the technologies or products they have under development are typically in the early stages and may never materialize. We could lose all or part of our entire initial investment in these companies.

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

Our corporate headquarters, including most of our research and development facilities and manufacturing operations, are located in the San Francisco Bay Area of Northern California, 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 subject to risk from natural disasters, based in areas including the San Francisco Bay Area, Taiwan, and Japan. A significant natural disaster, such as an earthquake or a flood, could harm our business, financial condition, and operating results.

We are dependent on sub-contractors to manufacture and deliver products to our customers

We subcontract with other companies to manufacture our products. We rely on the ability of our subcontractors to manufacture 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. We also can not assure you that difficulties experienced by our subcontractors, such as interruptions in a subcontractor’s ability to make or ship our products, or fix quality assurance problems, would not harm our business, operating results, or 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.

We depend upon a limited group of suppliers for key components in our products

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 may not maintain long-term agreements with any of our suppliers of components. Because the purchase of certain key components involves long lead times, in the event of unanticipated volatility in demand for our products, we could be unable to manufacture certain products in a quantity sufficient to meet end user demand, or we may hold excess quantities of inventory. 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. These fluctuations could result in a reduction in gross margins.

We are in the process of implementing a new Enterprise Resource Planning System

The Company is in the initial stages of implementing a new corporate wide enterprise resource planning ("ERP") system to replace its current system. The Company has scheduled implementation of the first phase of the new ERP system and training of personnel to use the system to be completed during the year 2002. The implementation of a new ERP system requires full commitment of management and the dedication and utilization of significant internal as well as external resources in managing the project, process redesigns, system integration and employee training. Historically, many companies have experienced difficulties in implementing ERP systems. These difficulties include cost overruns, push-outs of implementation deadlines, process and operations bottlenecks, failure to execute operating plans, including revenue impairment due to inability to ship products, and abandonment of the effort altogether. The Company must effectively manage its planning and execution of the implementation of the system and the training of personnel throughout the Company. Any failure to effectively manage the Company’s efforts or process and operations designs would adversely affect the Company’s financial condition and results of operations.

We face decreased revenues in light of ongoing economic uncertainty

The revenue growth and profitability of our business depends significantly on the overall demand for products that enable printing of digital data. Softening demand for these products caused by ongoing economic uncertainty has resulted, and may further result, in decreased revenues, earnings levels or growth rates or inventory write downs. The global economy has weakened and market

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conditions continue to be challenging. This has resulted in individuals and companies delaying or reducing expenditures, such as for information technology. Further delays or reductions in information technology spending will have a material adverse effect on demand for our products and services, and consequently on our business, operating results, financial condition, prospects and stock price.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

Market Risk

The Company is exposed to various market risks, including the 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. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. The Company enters into financial instrument contracts to manage and reduce the impact of changes in foreign currency exchange rates.The counterparties are major financial institutions.

Foreign Exchange Contracts

The Company has utilized forward foreign exchange contracts from time to time to hedge the currency fluctuations in intercompany accounts receivable and payable transactions between the Company and its Japanese subsidiary denominated in foreign currencies, thereby limiting the Company’s risk that would otherwise result from changes in exchange rates. . Foreign exchange gains and losses on intercompany balances and the offsetting losses and gains on forward foreign exchange contracts are reflected in the income statement. At September 30, 2001 the Company had no outstanding forward foreign exchange contracts.

Interest Rate Risk

The fair value of the Company’s cash portfolio at September 30, 2001, approximated carrying value. Market risk was estimated as the potential decrease in fair value resulting from an instantaneous hypothetical 100 basis-point increase in interest rates for any debt instruments in the Company’s investment portfolio. As of September 30, 2001, the Company’s cash and short-term investment portfolio includes debt securities of $268.1 million subject to interest rate risk. A 100 basis-point increase in market interest rates would result in a decrease of fair value of approximately $2.7 million.

The fair value of the Company’s long-term debt, including current maturities, was estimated to be $3.3 million as of September 30, 2001, and equaled the carrying value. The Company’s long-term debt requires interest payments based on a variable rate and therefore is subject to interest rate risk. A 10% fluctuation in interest rates would not have a material effect on the fair value of the outstanding long-term debt of the Company as of September 30, 2001.

PART II    Other Information

      ITEM 1.    LEGAL PROCEEDINGS

The information set forth under Note 8 contained in the "Notes to the unaudited Consolidated Financial Statements" of this Quarterly Report on Form 10Q is incorporated herein by reference.

      ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS

Stock Option Exchange Program

The Company commenced a voluntary offer on September 17, 2001 to exchange stock options granted between December 1, 1999 and May 31, 2000 under the Company’s 1990 Stock Plan and/or 1999 Equity Incentive Plan for new stock options to purchase the Company’s common stock under the Company’s 1999 Equity Incentive Plan. Under the program, employees holding options eligible for exchange were given the opportunity to

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exchange their existing eligible options for new options to purchase two-thirds the number of shares of common stock as were subject to the tendered options. Employees electing to tender options under this program were required to tender all eligible options.

Approximately 2,515,551 of 2,590,825 options were tendered for exchange under the program. On October 12, 2001, those options were accepted and cancelled by the Company. The Company will grant new stock options, in lieu of the tendered options, on a two-for-three basis to the affected employees on or promptly after the first trading day that is at least six months and one day after the date the tendered options were accepted for exchange and cancellation. The exercise price of the new options will be equal to the last reported sale price of the Companys common stock on the Nasdaq National Market on the date prior to the date of grant date.

      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.

      ITEM 6.    Exhibits and Reports on Form 8-K

(a)  Exhibits*
		*    Exhibits to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 and the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 are incorporated herein by reference.
(b)  Reports on Form 8-K
	Not applicable.

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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:  November 13, 2001
		/s/ Guy Gecht
		Guy Gecht
		Chief Executive Officer
		(Principal Executive Officer)
		/s/ Joseph Cutts
		Joseph Cutts
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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EXHIBIT INDEX*

No.	Description
*   Exhibits to the Company’ s Annual Report on Form 10-K for the year ended December 31, 2000 and the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001are incorporated herein by reference

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