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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549



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FORM 10-K



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(Mark One)

|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2005



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission File Number: 0-18805



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ELECTRONICS FOR IMAGING, INC.

(Exact
name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 94-3086355                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|303 Velocity Way, Foster City, CA                              |  | 94404                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(650) 357- 3500

(Registrants telephone number, including area code)



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|                                                            |  |                             
|----------------------------------------------------------- |  | ----------------------------
|Securities registered pursuant to Section 12(b) of the Act: |  | None.                       
|                                                            | 
|                                                            |  | (Title of Class)            
|Securities registered pursuant to Section 12(g) of the Act: |  | Common Stock, $.01 Par Value



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Indicate by check mark if the registrant is a well-know seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No ̈

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.    Yes ̈No  x

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

Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act).



|                           |  |                    |  |                       
|-------------------------- |  | ------------------ |  | ----------------------
|Large accelerated filer  x |  | Accelerated filer ̈ |  | Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).    Yes ̈No  x

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant computed by reference to the price at which
the common stock was last sold on June 30, 2005.

Common Stock, $.01 par value: $873,544,927 **

The number of shares outstanding of each of the registrants classes of common stock as of February 28, 2006.

Common Stock, $.01 par value: 57,005,389

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held on June 7, 2006 are incorporated by reference into Part III hereof.



|** | Based upon the last trade price of the Common Stock reported on the Nasdaq National Market on June 30, 2005. Excludes approximately 14,731,254 shares of common stock held by
Directors, Officers and holders known to the Registrant to hold 5% or more of the Registrants outstanding Common Stock on December 31, 2005. Exclusion of shares held by any person should not be construed to indicate that such person
possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that such person is controlled by or under common control with the Registrant.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

PART I

This Annual Report on Form 10-K includes certain registered trademarks and tradenames of Electronics for Imaging, Inc., its subsidiaries (collectively, EFI or the Company) and others.
Auto-Count, ColorCal, ColorWise, Command WorkStation, EDOX, EFI, Fiery, the Fiery logo, MicroPress, Printcafe, PrinterSite, Prograph, Proteus, Spot-On, Bestcolor, AutoCal, Digital StoreFront, DocStream, Fiery Link, FreeForm, Hagen OA, Intelligent
Device Management, Logic, OneFlow, PrintFlow, PrintMe, PrintSmith Site, PrintSmith, PSI Flexo, PSI, SendMe, Splash, VisualCal, the EFI logo, Essential to Print, Best, the Best logo, Colorproof, PhotoXposure, Remoteproof, Screenproof, UltraVu,
PressVu, and VUTEk are trademarks of the Company. All other terms and product names may be registered trademarks or trademarks of their respective owners, and are hereby acknowledged.

Certain of the information contained in this Annual Report on Form 10-K, including without limitation, statements made under this Part I, Item 1
Business and Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations and Item 7A, Quantitative and Qualitative Disclosures about Market Risk which are
not historical facts, may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended and is subject to risks
and uncertainties and actual results or events may differ materially. When used herein, the words anticipate, believe, estimate, expect, intend, will, may,
should, plan, potential, seek, continue and similar expressions as they relate to the Company or its management are intended to identify such statements as forward-looking
statements. Such statements reflect the current views of the Company and its management with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, the Companys actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Important factors
that could cause the Companys actual results to differ materially from those included in the forward-looking statements made herein include, without limitation, those factors discussed in Item 1 BusinessCompetition, in
Item 1A and elsewhere in this Annual Report on Form 10-K and in the Companys other filings with the Securities and Exchange Commission, including the Companys most recent Quarterly Report on Form 10-Q. The Company assumes no
obligation to revise or update these forward-looking statements to reflect actual results, events or changes in factors or assumptions affecting such forward-looking statements.

Item 1: Business.

Filings

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

We also make available free of charge through our Internet website (http://www.efi.com) our Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the SEC.



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General

EFI was incorporated in Delaware in 1989 and in 1992 we made our initial public offering of stock. Our stock is traded on the NASDAQ National Market under the symbol EFII. Our corporate offices are located at 303 Velocity Way, Foster
City, California 94404.

We are a world leader in digital controllers, superwide format printers and inks, and print management solutions.
Our award-winning technologies offer integrated document management tools from creation to print, including high fidelity color Fiery print controllers that can output up to 2000 pages per minute; VUTEk superwide digital inkjet printers and UV and
solvent inks capable of printing on flexible and rigid substrates; powerful print production workflow and management information software solutions for increased performance and cost efficiency; and an array of corporate printing solutions. Our
integrated solutions and award-winning technologies are designed to automate print and business processes, streamline workflow, provide profitable value-added services and produce accurate digital output across the range of digital printing from
office to high-end production to super-wide digital inkjet printing.

Products and Services

Controllers

Headlined by EFIs flagship Fiery
brand, our core controller technologies transform digital copiers and printers into networked printing devices. Once networked, EFI-powered printers and copiers can be shared across workgroups, departments, the enterprise and the Internet to quickly
and economically produce high-quality color and black & white documents. Our print controllers provide solutions for a broad range of the printing marketfrom entry level desktop printers to production level digital copiers.

Our main controller solutions are listed in the table below.



|           |  |                                                                             |  |                                                                                                                                                      
|---------- |  | --------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|Platform   |  | OEM                                                                         |  | User Environment                                                                                                                                     
|           |  |                                                                            
|Fiery      |  | Canon, Ikon, Oce ́, Ricoh, Konica Minolta, Toshiba, Xerox, Sharp, Fuji Xerox |  | Print for Pay, Corporate Repograhic Departments, Graphic Arts, Advertising Agencies, Transactional Printers, Commercial Printers, Office
Environments
|           |  |                                                                            
|Splash     |  | Xerox                                                                       |  | Graphic Arts, Advertising Agencies                                                                                                                   
|           |  |                                                                            
|Micropress |  | Canon, Danka, Ikon, Konica Minolta, Ricoh                                   |  | Corporate Repographic Departments, Commercial Printers                                                                                               



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Inkjet Products

In June 2005 we acquired VUTEk Inc., the leading manufacturer of superwide format digital inkjet printers. The printers are used by billboard graphics printers, commercial photo labs, large sign shops, graphic screen
printers and digital graphics providers to print billboards, building wraps, banners, art exhibits, point of purchase signage and other large displays. The VUTEk printers are divided into two categories, printers using solvent inks and those using
UV (ultra violet) curable inks. The principle printers and their features are summarized in the following table:



|             |  |                       |  |                                                                                                                                              |  |                                                                                                                    
|------------ |  | --------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------
|Printer Type |  | Models                |  | Capabilities                                                                                                                                 |  | Applications                                                                                                       
|             |  |                       | 
|Solvent      |  |       UltraVU Series |  |       Printing widths of 1.5 to
5.0 meters       Four, six and eight colors       Flexible substrates       Solvent ink                  |  |       Banners       Billboards       Exhibition signage       Fleet graphics       Building wraps       Flags
|             |  |                       | 
|UV           |  |       PressVu Series |  |       Printing widths up to 1.8
to 3.2 meters       Four, six and eight colors       Flexible and rigid substrates       UV curable inks |  |       Point of purchase
signage       Backlit displays       Exhibition signage       Photo-quality graphics   

We also manufacture the inks used in the VUTEk printers. Each VUTEk ink is custom made for each
VUTEk printer to provide optimum performance on that machine.

Professional Printing Applications

In an effort to provide our customers with end-to-end print solutions, we have developed technology that enhances printing workflow and makes printing
operations more powerful, productive and easier to manage from one centralized user interface. Most of the our software solutions have been developed with the express goal of automating print processes and streamlining workflow via open, integrated
and interoperable EFI products, services and solutions.

Our production workflow solutions enhance productivity across the production
printing job cycle, from pre-press to digital or offset print production. EFIs consistent, intuitive user interfaces are designed to reduce the potential for operator error, reduce training times, streamline complex job cycles, and decrease
job completion time in order to improve maximum productivity and profitability.

Our proofing software allows professional printers to
accurately and affordably proof color documents before sending them to an offset or digital printing press. By skipping traditional proofing methods, professional printers save time and reduce costs, without sacrificing the quality of their final
printed product.

Our enterprise resource planning (ERP) and collaborative supply chain software print management solutions are designed to
enable printers and print buyers to improve productivity and customer service while reducing costs. Procurement applications for print buyers and print producers facilitate web-based collaboration across the print supply chain. Customers recognize
that print management information systems, or PMIS, are essential to improving their business practices and profitability and we are continuing to focus on making EFIs PMIS solutions the industry standard globally.



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Our software offerings currently include:



|                                              |  |                                                                                                      |  |                                                                                                             
|--------------------------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------
|Product Name                                  |  | Description                                                                                          |  | User                                                                                                        
|                                              |  |                                                                                                     
|ColorProof                                    |  | Digital color proofing solutions offering fast, flexible workflow, power, and expandability.         |  | Digital, commercial and hybrid printers, prepress providers, publishers, creative agencies and photographers
|                                              |  |                                                                                                     
|EFI Hagen, EFI Logic, EFI PSI, EFI PrintSmith |  | Collect, organize, and present critical information to improve process control and profit potential. |  | Commercial, publishing, digital, in-plant, print for pay, large format and specialty printers               
|                                              |  |                                                                                                     
|Digital Store Front, PrinterSite              |  | Web interface to manage print transactions between customer and printer                              |  | Commercial, publishing, digital, in-plant, print for pay, large format and specialty printers               

Growth and Expansion Strategies

Our overall objective is to continue to introduce new generations of controller products as well as expand our offerings in professional printing software
applications and large format inkjet products as well as other new product lines related to digital printing, workflow and print management. With respect to our current products, our primary goal is to offer best of breed, end-to-end solutions that
are interoperable and conform to open standards to allow customers to choose the most efficient solutions for their business. Our strategy to accomplish these goals consists of four key elements.

Proliferate and Expand Product Lines

We intend to
continue to develop new controller products that are scalable, meaning products that continue to meet the changing needs of the user as their business grows. Our products offer a broad range of features and functionality when connected
to, or integrated with, digital color and black-and-white copiers, as well as desktop color laser printers. Historically, we sold products that supported digital color copiers but have since expanded our line of controllers to drive a wide range of
output devices including black-and-white printing systems and copiers.

We intend to develop platform enhancements that advance the
performance and usability of our software applications that provide cohesive, end-to-end solutions for our customers. In 2005 we launched a new version of EFI Logic, which offers significant customization along with enhancements to reporting,
accounting and purchasing that can be used on our application server provider (ASP) model for customers that do not want to maintain their own web-site. A new version of Prograph, our job management system, was introduced in 2005 with a
feature that provides computer-aided press planning and with a simplified architecture that provides for easier and faster installations.

Our acquisition of VUTEk in mid-2005 added printers to our product line-up. The super-wide format inkjet printers and the inks have increased our penetration into the graphics printing market. Shortly after acquisition, VUTEk released the
PressVu 320/400, a UV-curing, 3.2-meter flatbed rigid and roll-to-roll printer. We plan on continuing to introduce new VUTEk printers that advance the speeds and quality available to our customers so they may meet the growing needs of their
customers. In addition, new platforms will increasingly target new output types allowing us to penetrate additional markets with our product lineup.

We also continue to explore acquisition possibilities as a way to expand our product lineup and customer base. Although there can be no assurance that acquisitions will be successful, we have found them to be a good
vehicle to continue the growth of our product offerings beyond purely organic development.



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Develop and Expand Relationships with Key Industry Participants

Our customer relationships are our most important assets. We have established relationships with leading printer and copier industry companies, including
Canon, Fuji Xerox, Konica Minolta, Oki, Océ, Ricoh, Sharp, Toshiba and Xerox, who we collectively refer to as our OEM customers. Sales to each of the listed OEM customers accounted for at least 1% of our controller revenues in 2005.
Additionally, we have established relationships with many leading distribution companies in the office, graphic arts and commercial print industries such as IKON, Presstek, Enovation, Pitman and others for our Fiery products and Nazdar and 3M for
our VUTEk products, who distribute our products. We seek to establish new relationships in pursuit of the goal of offering our controller products as well as our software technology for optimizing the management and creation of documents in a
variety of print environments. Our relationships with our OEM customers are based upon business relationships we have established over time. However, our agreements with such OEM customers generally do not require them to make any future purchases
from us and our OEM customers are generally free to purchase products from our competitors or build their own and cease purchasing our products at any time, for any reason or no reason.

We also have established relationships with many of the leading print providers globally, such as R.R. Donnelly, Consolidated Graphics and Cenveo
Anderson Lithograph. These direct sales relationships, along with dealer arrangements, are vital for our understanding of the end markets for our products and serve as a source of future product development ideas. In many cases our products are
customized for the needs of large customers yet maintain the common intuitive interfaces that EFI is known for around the world. Our software and inkjet products are sold both direct and via distribution arrangements to all sizes of printers.

Establish Enterprise Coherence and Leverage Industry Standardization

In our development of new products and platforms, we seek to establish coherence across our entire product line by designing products that provide a consistent look and feel to the end-user. We believe
cross product coherence can create higher productivity levels as a result of shortened learning curves. Additionally, we believe the end-to-end coherence that end-users can achieve using EFI products for all of their digital printing and imaging
needs leads to a lower total cost of ownership by providing one source for sales, support and training. We believe that our effort to achieve coherence engenders goodwill among our OEM customers and other customers and end-users of our products and
assists in the development of new strategic relationships and markets for us. We also advocate open architecture utilizing industry-established standards to provide inter-operability across a range of digital printing devices and software
applications, ultimately providing end-users more choice and flexibility in their selection of products. For example, in 2005, we offered a free download to our Fiery server and MIS customers that allows them to connect their EFI systems to Adobe
Creative Suite 2 Premium Edition, providing creation-to-fulfillment Job Definition Format (JDF) integration.

Leverage Technology and Industry Expertise
to Expand the Scope of Products, Channels and Markets

We have assembled, organically and through acquisitions, an experienced team of
technical and sales and marketing personnel with backgrounds in color reproduction, digital pre-press, image processing, management information systems, networking and software and hardware engineering as well as market knowledge of enterprise
printing, graphic arts and commercial printing. By applying our expertise in these areas, we expect to continue to expand the scope and sophistication of our products and gain access to new markets and channels of distribution.

Significant Relationships

We have established and
continue to build and expand relationships with our OEMs and distributors of digital printing technology, in order to benefit from their products, distribution channels and marketing resources. Our customers include domestic and international
manufacturers, distributors and sellers of color and black-and-white digital copiers, wide-format printers and desktop color printers. We work closely with our OEM customers with the aim of developing solutions that incorporate leading technology
and that work optimally in



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conjunction with such companies products. The top 7 revenue-generating OEMs or distributors, in alphabetical order, that we sold products to in 2005
were, Canon, Fuji Xerox, Ikon Office Solutions, Konica Minolta, Océ, Ricoh and Xerox. Together, sales to Canon, Xerox and Konica Minolta accounted for approximately 48% of our 2005 revenue, with sales to each of these three customers
accounting for more than 10% of our revenue. 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.

We customarily enter into development and distribution agreements with our OEM customers. These agreements can be terminated under a range of
circumstances and often upon relatively short notice. The circumstances under which an agreement can be terminated vary from agreement to agreement and there can be no assurance that our OEM customers will continue to purchase products from us in
the future, despite such agreements. Furthermore, our agreements with our OEM customers generally do not commit such customers to make future purchases from us and they could decline to purchase products from us in the future and could purchase
products from our competitors or build the products themselves. We recognize the importance of, and work hard to maintain, our relationships with our customers. However, our relationships with our customers are affected by a number of factors
including, among others: competition from other suppliers, competition from internal development efforts by the customers themselves and changes in general economic, competitive or market conditions such as changes in demand for our or the
OEMs products, or fluctuations in currency exchange rates. There can be no assurance that we will continue to maintain or build the relationships we have developed to date. See Item 1A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.

We have a
continuing relationship pursuant to a license agreement with Adobe and license PostScript® software from Adobe for use in many of our controller solutions. This relationship is important because each of our controller solutions requires page description language software such as that provided by
Adobe in order to operate. Adobes PostScript®
software is widely used to manage the geometry, shape and typography of hard copy documents and Adobe is a leader in providing page description software. 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 it quality assurance approvals for our products that use Adobe
software. 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. If that occurred, we would
have to reestablish our own competing software as a viable alternative for Adobe Postscript and our financial condition and results of operations would be significantly harmed for a period of time.

Our VUTEk printers are constructed with inkjet printheads which are manufactured by a limited number of suppliers. If we were to experience difficulty
obtaining printheads, our production would be limited and our revenues would be harmed. We manufacture inks for use in our printers and rely upon a sole supplier for certain pigments used in the inks. Our ink sales, which represented approximately
6% of our total revenues in 2005, would decline significantly if we were unable to obtain the pigments needed. In addition, since the warranties on the ink delivery systems are voided if non-VUTEk produced inks are used, our printer sales and
customer relationships could be harmed.

Distribution and Marketing

Our primary distribution method for our controller solutions is to sell them to our OEMs. Our OEMs in turn sell these products to OEM-affiliated and independent distributors/dealers/resellers and end-users for use
with the



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OEMs copiers or printers as part of an integrated printing system. See Item 1AWe rely on sales to a relatively small number of OEM
customers and the loss of any of these customers could substantially decrease our revenues.

Our primary distribution method for
our EDOX, DocStream and MicroPress servers, our EFI Proofing Solutions and our EFI Workflow software products is to sell them directly to our authorized distributors/dealers/resellers who in turn sell the solutions to end users either in a stand
alone form or bundled with other solutions they offer. Primary customers with whom we have established distribution agreements include Presstek, Enovation, Pitman and others. There can be no assurance that we will continue to successfully distribute
our products through these channels.

Our Print Management Information Solutions are primarily sold directly to the end user by EFIs
own sales force. To distribute our VUTEk printers and ink, we utilize a direct sales force located in North America and Europe and distributors for the rest of our global distribution. Any interruption of the distribution methods could negatively
impact us in the future.

We promote all of our products through public relations, direct mail, advertising, promotional material, trade
shows and ongoing customer communication programs. Approximately 70% of our sales leads for the inkjet printers are generated from tradeshows and any interruption in our trade show participation could materially impact our revenue and profitability.

Research and Development

Research and
development costs for 2005, 2004 and 2003 were $109,525, $111,134 and $96,697, respectively. As of December 31, 2005, 781 of our 1,723 full-time employees were involved in research and development. We believe that development of new products
and enhancement of existing products are essential to our continued success and management intends to continue to devote substantial resources to research and new product development. We expect to make significant expenditures to support our
research and development programs for the foreseeable future.

We are developing products to support additional color and black-and-white
printing devices including desktop printers, high-end color copiers, digital black-and-white copiers and multifunctional devices. We are also developing new software applications designed to maximize workflow efficiencies and to meet the needs of
the graphic arts and commercial print professional, including proofing solutions and print management information systems solutions. We also expect to continue to develop new platforms of inkjet print technologies in order to meet the needs of
existing and future markets. See Growth and Expansion StrategiesProliferate and Expand Product Lines. Substantial additional work and expense will be required to complete and bring to market each of the products currently
being developed by us. See Item 1A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.

Manufacturing

We utilize sub-contractors to
manufacture our controller products. These sub-contractors work closely with us to promote low costs and high quality in the manufacture of our products. Sub-contractors purchase components needed for our products from third parties. We are
completely dependent on the ability of our sub-contractors to produce products sold by us and although we supervise our sub-contractors, there can be no assurance that such sub-contractors will perform efficiently or effectively. In previous years,
a high concentration of our products was manufactured at a single sub-contractor location, Sanmina-SCI in Colorado. As of December 31, 2005, we have moved our manufacturing to Celestica Inc. in Toronto, Canada. Should Celestica experience any
inability or unwillingness 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 sub-contractors, any of our sub-contractors
could enter into agreements with our competitors that might restrict or prohibit such sub-contractors from manufacturing our products or could otherwise lead to an inability of such sub-contractor from filling our orders in a timely manner.



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Our VUTEk printers and ink are manufactured at our Meredith, New Hampshire facility. Meredith is not
located in a major metropolitan area, and we have encountered difficulties in hiring and retaining adequate skilled labor and management. We also face the risk of our New Hampshire labor force unionizing. Most of the components used in the
manufacturing of the printers and the inks are available from multiple suppliers, except for the inkjet printheads and the pigments for our inks. If we were unable to obtain the printheads currently used, we would be required to redesign our
printers to use different printheads. If we were to change pigments, we would be required to reformulate and test the inks. Our solvent-based inks are formulated with hazardous materials. The storage, use and disposal of those materials must meet
various environmental regulations.

A significant number of the components necessary for the manufacture of our controller products are
obtained from a sole supplier or a limited group of suppliers. These include processors from Intel and other related semiconductor components. We depend largely on the following sole and limited source suppliers for our components and manufacturing
services:



|                  |  |                                             
|----------------- |  | --------------------------------------------
|Supplier          |  | Components                                  
|Intel             |  | Central processing units, or CPUs; chip sets
|Toshiba           |  | ASICs                                       
|LSI Logic         |  | ASICs                                       
|Texas Instruments |  | Digital signal processors, or DSPs          
|Celestica Inc.    |  | Contract manufacturing                      
|Transmeta         |  | CPU                                         

We do not maintain long-term agreements with any of our suppliers of components and conduct our
business with such suppliers solely on a purchase order basis. If any of our sole or limited source suppliers were unwilling or unable to supply us with the components for which we rely on them, we may be unable to continue manufacturing our
products utilizing such components.

The absence of agreements with our suppliers also subjects us to fluctuations in pricing, a factor we
believe is partially offset by the fact that our suppliers benefit from selling as many components to us as possible. Many of our components are similar to those used in personal computers, and the demand and price fluctuations of personal computer
components could affect our component costs. Because the purchase of key components involves long lead times, in the event of unanticipated volatility in demand for our products, we may 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 of components with prices that fluctuate significantly. We
cannot assure you that at any given time we will have sufficient inventory to enable us to meet demand which would harm our financial results. As a result of our acquisition of VUTEk in 2005, our inventory has increased, however, it still represents
less than 3% of our total assets and less than 6% of our total revenue at December 31, 2005.

Human Resources

As of December 31, 2005, we employed 1,723 full-time individuals. Of the 1,723 total employees, approximately 399 were in sales and marketing, 211
were in management and administration, 333 were in manufacturing and 781 were in research and development. Of the total number of employees, we had approximately 1,356 employees located in U.S. and Canadian offices and 367 employees located in
international offices including employees based in the United Kingdom, The Netherlands, Germany, Belgium, Japan, France, Italy, Spain, Australia, Korea, Singapore, Brazil, Mexico, Sweden, India, China and Hong Kong. Our employees are not represented
by any collective bargaining organization and we have never experienced a work stoppage. However, there can be no assurance that collective bargaining, work stoppage or other employment related issues will not arise, particularly at our New
Hampshire manufacturing facilities.



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Competition

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

Our controller products are split into two product categories: (i) stand-alone print servers which are connected to digital copiers and other
peripheral devices and (ii) embedded and design-licensed solutions which are used in digital copiers, desktop laser printers and multifunctional devices. Our primary competitor for the stand-alone color servers is Kodak although Kodak currently
sells to a limited number of OEMs, while EFI serves many industry leaders. Our OEM customers themselves, as well as third party vendors Peerless Systems and Zoran Corporation, are the principal competitors for the embedded and design-licensed
color solutions. Our digital black-and-white solutions face competition from Peerless and our OEM customers. Our market position vis-a-vis internally-developed controllers is small, however, we are the largest third party controller vendor. We
believe that our advantages include our continuously advancing technology, time-to-market, brand recognition, end-user loyalty, sizable installed base, number of products supported, price driven by lower developmental costs and market knowledge. A
significant disadvantage is our lack of control of the distribution channels. We do, however, provide a variety of features as well as a unique look and feel to our OEMs products to differentiate their products from those of their
competitors.

The VUTEk line of super-wide inkjet printers competes with printers produced by Inca, NUR, Durst, Scitex Vision and Gandi
throughout most of the world. There are Chinese and Korean printer manufacturers in the marketplace, but their products are typically sold in their domestic markets and are not perceived as alternatives in most other markets. Although we recommend
that our inks be used in the VUTEk printers, users can purchase solvent-based inks from other ink manufacturers. The third-party inks are typically priced at a lower price than our proprietary inks, however, they may not provide the same quality and
the use of third-party inks voids the ink delivery system warranty. We believe that our broad product line and leading technology provide a competive advantage.

Our Professional Printing Applications category, which includes our Workflow, Proofing, Print Management Information Software and Web Submission Tools, faces competition from software application vendors that
specifically target the printing industry, which are typically small, privately-owned companies and from larger vendors, such as Heidelberg and others, who currently offer or are seeking to develop printer-focused enterprise resource planning
products. We believe that the principal competitive factors affecting our market include adoption by significant number of print buyers and printers, product quality and performance, customer service, core technology, product features, price,
inter-operability and the value of services.

There can be no assurance that we will be able to continue to advance our technology and
products or to compete effectively against other companies product offerings and any failure to do so could have a material adverse effect upon our business, operating results and financial condition.

Intellectual Property Rights

We rely on a
combination of patent, copyright, trademark and trade secret laws, non-disclosure agreements and other contractual provisions to establish, maintain and protect our intellectual property rights, all of which afford only limited protection. As of
December 31, 2005, the Company had 165 issued U.S. patents, up from 132 at December 31, 2004, 85 pending U.S. patent applications and various foreign counterpart patents and



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applications. 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. In 2005, 2 patent applications were filed, down from 18 in 2004. In addition, 1 patent expired with the remaining issued U.S. patents expiring between May 9, 2006 and
June 30, 2023. Our failure to obtain or maintain patent protection may make it easier for our competitors to offer equivalent or superior technology. In addition, third parties may independently develop similar technology without
misappropriation of our trade secrets or breach of other proprietary rights. Any failure by us to take all necessary steps to protect our trade secrets or other intellectual property rights and failure to enforce these rights may have a material
adverse effect on our ability to compete in our markets.

We have registered certain trademarks, which include, among others, our EFI, EFI
and Design, Electronics For Imaging (stylized), Fiery, Fiery and Design, Fiery Driven, Fiery Driven and Design, Fiery Spark and Design, Colorcal, ColorWise, Command Workstation, Bestcolor, EDOX, MicroPress, Mousitometer, Printcafe, PrinterSite,
PrintMe, Splash. Spot-On and RIP-While-Print trademarks and have applied for registration of certain additional trademarks, in the United States and/or in foreign jurisdictions. We will continue to evaluate the registration of additional trademarks
as appropriate. Any failure by us to properly register or maintain our trademarks or to otherwise take all necessary steps to protect our trademarks may diminish the value associated with our trademarks. Our products include software sold pursuant
to shrink wrap licenses that are not signed by the end user and, therefore, may be unenforceable under the laws of certain jurisdictions. In addition, the laws of some foreign countries, including several in which we operate or sell our
products, do not protect intellectual property and proprietary rights to as great an extent as do the laws of the United States.

From time
to time, litigation may be necessary to defend and enforce our proprietary rights. Such litigation, whether or not concluded successfully for us, could involve significant expense and the diversion of managements attention and other resources.
See Item 1AWe may be unable to adequately protect our proprietary information and may incur expenses to defend our proprietary information.

Financial Information About Foreign and Domestic Operations and Export Sales

See Note 12 of the Notes to Consolidated
Financial Statements. See also Item 1AWe face risks from our international operations and from currency fluctuations.

Item 1a: Risk Factors

All amounts in this item are presented in thousands, except for per share amounts.

Our controller products are sold to a relatively small number of OEM partners and the loss of any of these customers could substantially decrease
our hardware revenues.

A significant portion of our revenues are and have been generated by sales of our printer and copier related
products to a relatively small number of OEMs. For example, Canon, Xerox and Konica Minolta each contributed over 10% of our revenues for the year ended December 31, 2005 and together accounted for approximately 48% of those revenues during the
same period. During the fiscal year ended December 31, 2004, these same three customers each contributed over 10% of our revenues and together accounted for approximately 61% of our revenues for the year. Because sales of our printer and
copier-related products constitute a significant portion of our revenues and there is 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 contoller revenues in future periods. Accordingly, if we lose or experience reduced sales to an important OEM customer, we will have difficulty replacing the revenue
previously generated from such customer with sales to new or existing OEM customers and our revenues will likely decline significantly.



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The market for our super-wide-format printers is very competitive.

The printing equipment industry is extremely competitive. Our VUTEk products compete against several companies that market digital printing systems based
on electrostatic, drop-on-demand and continuous drop-on-demand inkjet, airbrush and other technologies and printers utilizing solvent and UV curable ink. Two of our largest competitors, Scitex Vision and Inca, were recently acquired by Hewlet
Packard (HP) and Dainippon Screen (Screen), respectively. Both HP and Screen have greater resources to develop new products and technologies and market those products. They could also exert downward pressure on product
pricing to gain market share.

We have also witnessed the recent growth of local Chinese and Korean markets where local competitors are
developing, manufacturing and selling inexpensive printers, mainly to the local Chinese and Korean markets. These Chinese and Korean manufacturers have also begun penetrating the international market and have partnered with other super-wide format
printer manufacturers. Our ability to compete depends on factors both within and outside of our control, including the price, performance and acceptance of our current printers and any products we develop in the future. We also face competition from
existing conventional wide format and super-wide format printing methods, including screen printing and offset printing. Our competitors could develop new products, with existing or new technology, that could be more competitive in our market than
our printers. We cannot assure you that we can compete effectively with any such products.

We face strong competition in the market for
printing supplies such as ink.

We compete with independent manufacturers in the ink market. We cannot guarantee that we will be able to
remain the exclusive or even principal ink manufacturer for our printers. The loss of ink sales to our installed base of printers could adversely impact our revenues and gross margins. The solvent inks are relatively easy to clone, and additional
manufacturers could increase pressure on us to reduce prices or divert customers away from us.

We do not typically have long term
purchase contracts with our OEM customers and our OEM 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 OEM customers, including
Canon, Xerox and Konica Minolta 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, including reduced demand for the products sold by our OEM customers,
would likely 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 controller 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 controller technologies in a timely and cost-effective manner. Our continued success in the server industry
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 challenges. 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 or internally developed technologies 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 and successfully market products containing our technologies, our 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 or the timing of these efforts and coordinating with our OEM customers may cause delays in our own product development efforts that are
outside of our control. If our OEM customers delay the release of their products, our revenue and results of operations may be adversely affected. In addition, our 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, which in turn depends on a variety of macro- and micro-economic conditions. Delays or reductions in information technology spending, which has occurred in the past, could 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.

Stock prices of high technology companies
such as ours tend to be volatile as a result of various factors, including variations in operating results and, consequently, fluctuations in our operating results could adversely affect our stock price. Factors that have caused our operating
results and share price to fluctuate in the past and that 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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | shifts in customer demand to lower cost products;
| | - |  | -------------------------------------------------



| |  |  | success and timing of new product introductions by us and our OEM customers and the performance of our products generally;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | success and timing of new VUTEk product introductions;
| | - |  | ------------------------------------------------------



| |  |  | 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;
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| |  |  | substitution of third-party inks for our own ink products by users of our super-wide format inkjet printers;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | delay, cancellation or rescheduling of orders or projects;
| | - |  | ----------------------------------------------------------



| |  |  | availability of key components and licenses, 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 or gross margin products to lower revenue or gross margin products dependant on higher sales volumes, such as our VUTEk
products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | costs associated with complying with any applicable governmental regulations, including substantial costs related to compliance with the Sarbanes-Oxley Act of 2002
(SOX);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | acquisitions and integration of new businesses;
| | - |  | -----------------------------------------------



| |  |  | changes in our business model related to the migration of embedded products to a design-licensed model;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | costs related to our 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.

The
digital printing marketplace 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 incorporating technology 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 these OEMs selling similar products
that they develop internally. 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.



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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 or acquire product lines different from our
current controllers, such as proofing and print management software, document scanning solutions, super-wide format inkjet printers, 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 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, if customers do not accept these
new products or services or if we are not able to price such products or services competitively, our operating results will likely suffer.

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 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 it 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.

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 and inkjet printheads for our
super-wide format printers. 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. If we are unable to continue to procure these sole-sourced
components from our current suppliers, we will have to qualify other sources, if possible, or design our products so that they no longer require these components. We cannot assure you that other sources of these components exist or will be willing
to supply us on reasonable terms or at all, or that we will be able to design around these components. Therefore any unavailability of supply of these components could harm our business. 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 demand. Further, 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.



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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. In the past a weakened economy 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 were to again decrease, it is possible that we would 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. The existence of fewer subcontractors may also reduce our negotiating leverage potentially resulting in higher
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 finding, qualifying and commencing business with 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 Fiery controller products is manufactured at a single subcontractor location, Celestica in Toronto, Ontario, Canada. Should Celestica experience any inability to, or refuse 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 subcontractors 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.

We may face increased risk of inventory obsolescence related
to our super-wide format inkjet printers and ink.

We procure raw materials and build our super-wide printers and ink products based on
our sales forecasts. If we do not accurately forecast demand for our products we may end up with excess inventory, or we may lose sales because we do not have the correct products available for sale. If we have excess printers or other products we
may have to lower prices to stimulate demand. We may also run the risk that our inventory of raw materials may become obsolete. Our ink products have a defined shelf life. If we do not sell the ink before the end of its shelf life it will no longer
be sellable and will have to be expensed.

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 and additionally have research and development offices in India. Competition in both locations has
historically been intense amongst companies hiring engineering and technical professionals. In times of professional labor imbalances, it has in the past and is likely in the future to 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 and our operations in India 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 when necessary to enable us to offer compensation competitive with those offered by other companies seeking the same employees, it may be difficult for us to hire and retain skilled employees. The FASB has
announced changes to US GAAP that will require us to record a charge to earnings for employee stock option grants and issuances of stock under employee stock purchase plans, or ESPPs which will



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negatively impact our GAAP earnings. For example, recording a charge for employee stock options and ESPP under SFAS No. 123, Accounting for
Stock-Based Compensation would have reduced net income by $12,746, $16,913 and $17,829 for the years ended December 31, 2005, 2004 and 2003, respectively. Limiting our stock option grants and ESPP could make it difficult to successfully
hire and retain employees which could affect our ability to develop products or to meet demand for our products in a timely fashion and our results of operations may be harmed.

We acquired VUTEk, Inc., a privately-held provider of super-wide format digital printers for approximately $289,150 in June 2005. Acquisitions involve
risks and if we are unable to mitigate those risks our business will be harmed.

Our acquisition of VUTEk was our largest acquisition to
date. Our purchase was made in cash and we will experience a loss of interest income as our cash balances have been reduced. In addition, we have decreased our cash balances which could impair our financial condition and our ability to expend cash
on other activities. We cannot assure you that we will be able to raise additional funds if and when needed on acceptable terms or at all.

If we are unable to retain the key employees of VUTEk, the operations of the acquired company could be materially adversely impacted. Prior to the acquisition of VUTEk, we did not have experience in manufacturing and marketing super-wide
format printers and ink products and as such we may not be able to effectively manage the VUTEk operations. If VUTEks principal suppliers, many of whom have no previous relationship with us, were to refuse to continue providing materials, we
would be forced to find alternate supply sources, which could possibly lead to increased costs of operations.

We do not have pre-existing
relationships with the customers of VUTEk, and they may decide to discontinue purchasing from us. This would result in a loss of revenue and prevent us from obtaining the expected benefits of the acquisition.

Our acquisition of VUTEk in June 2005 increased the chance that we will experience additional bad debt expense.

Historically, our products have been sold to OEM customers who present little credit risk. Our VUTEk products are sold to a broader base of customers,
many of whom are smaller and potentially less credit-worthy. In addition, some of these customers may be located overseas where it may be hard to contact them if we have collection issues. If we are unable to collect accounts receivable in a timely
manner, we may experience an increase in bad debt expense.

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 must now
sell our professional printing applications and our super-wide-format inkjet printers and ink 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 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 may be dilutive to our existing stockholders, alternatively, acquisitions made entirely or partially
for cash (such as our acquisition of VUTEk) will reduce our cash reserves;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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;
| | - |  | --------------------------



| |  |  | 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 or the prior actions of the acquired company, such as the Printcafe litigation;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | the inability to protect or secure technology rights; and
| | - |  | ---------------------------------------------------------



| |  |  | increases 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 currency fluctuations.

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 US dollar. 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 have considered it appropriate in the past. 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. In 2005, the impact from currency exchange differences was not material.

Approximately 46% and 45% of our revenue from the sale of products for the years ended December 31, 2005 and 2004, respectively, 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 face risks from our international operations.

We are subject to certain risks because of our
international operations. Changes to and compliance with a variety of foreign laws and regulations that may increase our cost of doing business and our inability or failure to obtain required approvals could harm our international and domestic
sales. Protectionist trade legislation in either the United States or other countries, such as a change in the current tariff structures, export compliance laws or other trade policies, could adversely affect our ability to sell or to manufacture in
international markets. Some of our sales to international customers are made under export licenses that must be obtained from the United States Department of Commerce (DOC) and certain transactions require prior approval of the DOC. Changes in
governmental regulation and our inability or failure to obtain required approvals, permits or registrations could harm our international and domestic sales and adversely affect our revenues, business and operations. Any violations could result in
fines and penalties, including prohibiting us from exporting our products to one or more countries, and could materially and adversely affect our business.



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Moreover, local laws and customs in many countries differ significantly from those in the United States.
We incur additional legal compliance costs associated with our international operations and could become subject to legal penalties in foreign countries if we do not comply with local laws and regulations, which may be substantially different from
those in the United States. In many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by United States regulations applicable to us such as the Foreign Corrupt
Practices Act. Although we implement policies and procedures designed to ensure compliance with these laws, there can be no assurance that all of our employees, contractors and agents, as well as those companies to which we outsource certain of our
business operations, including those based in or from countries where practices which violate such United States laws may be customary, will not take actions in violation of our policies. Any such violation, even if prohibited by our policies, could
have a material adverse effect on our business.

Other risks include natural disasters and political or economic conditions in a specific
country or region. In addition, many countries in which we derive revenues do not currently have comprehensive and highly developed legal systems, particularly with respect to the protection of intellectual property rights, which, among other
things, can result in the prevalence of infringing products and counterfeit goods in certain countries, which could harm our business and reputation.

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. In addition, as different areas of our business change or mature, from time to time we
evaluate our patent portfolio and make decisions either to pursue or not to pursue specific patents and patent applications related to such areas. Abandoning or choosing not to pursue certain of our patents, patentable applications and failing to
file applications for potentially patentable inventions, may harm our business by, among other things, enabling our competitors to more effectively compete with us, reducing the potential claims we can bring against third parties for patent
infringement and limiting our potential defenses to intellectual property claims brought by third parties.

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.

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.



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We may be subject to environmental related liabilities due to our use of hazardous materials and
solvents.

We mix ink used in some of our printers with solvents and other hazardous materials. Those materials are subject to various
governmental regulations relating to their transfer, handling, packaging, use and disposal. We store the ink at warehouses worldwide, including Europe and the United States, and shipping companies ship it at our direction. We face potential
responsibility for problems such as spills that may arise when we ship the ink to customers. While we customarily obtain insurance coverage typical for this kind of risk, if we fail to comply with these laws or an accident involving our ink waste or
solvents occurs, then our business and financial results could be harmed.

Future sales of our hardware products in European Union
member nations (EU) could be limited after July 1, 2006 due to the enactment of the EU Restriction of Hazardous Substances in Electrical and Electronic Equipment (ROHS).

From July 1, 2006 forward, new electrical and electronic equipment sold into EU nations must not contain lead, mercury, cadmium, hexavalent
chromium, polybrominated biphenyls (PBBs) or polybrominated diphenyl ethers (PBDEs). These must be replaced by other substances. Manufacturers must comply with significant, and potentially costly, compliance requirements in order to meet
the ROHS deadline. Some of our products may not be converted before the deadline and we will not be allowed to sell those products in the EU until the products are made fully compliant.

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 shipment 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.

Actual or perceived security vulnerabilities in our products could adversely affect our revenues.

Maintaining the security of our software and hardware products is an issue of critical importance to our customers and for us. There are individuals and
groups who develop and deploy viruses, worms and other malicious software programs that could attack our products. Although we take preventative measures to protect our products, and we have a response team that is notified of high-risk malicious
events, these procedures may not be sufficient to mitigate damage to our products. Actual or perceived security vulnerabilities in our products could lead some customers to seek to return products, to reduce or delay future purchases or to purchase
competitive products. Customers may also increase their expenditures on protecting their computer systems from attack, which could delay or reduce purchases of our products. Any of these actions or responses by customers could adversely affect our
revenues.

System failures or system unavailability could harm our business.

We rely on our network infrastructure, internal technology systems and our internal and external websites for our development, marketing, operational,
support and sales activities. Our hardware and software systems related to such activities are subject to damage from malicious code released into the public Internet through recently discovered vulnerabilities in popular software programs. These
systems are also subject to acts of vandalism and to potential disruption by actions or inactions of third parties. Any event that causes failures or interruption in our hardware or software systems could harm our business, financial condition and
operating results.



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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,
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, flood or typhoon, 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 (SARS) or avian bird flu. 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.

We may be subject to the risk of loss due to fire because the materials we use in the manufacturing process of our inks are flammable.

We use flammable materials in the manufacturing processes of our inks and may therefore be subject to the risk of loss arising from fires. The risk of fire associated with these materials cannot be completely
eliminated. Moreover, we have one main facility that manufactures these inks, which increases our exposure to such risk in case this facility is destroyed or materially damaged as a result of fire or otherwise. We maintain insurance policies to
reduce losses caused by fire, including business interruption insurance. If this facility is damaged or otherwise ceases operations as a result of a fire, it would reduce manufacturing capacity and, consequently, may reduce revenues and adversely
affect our business.

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 December 31, 2005, the price of our common stock as reported on the Nasdaq National Market ranged from a low of $16.07 to a high of $28.55. 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 or annual operating results;
| | - |  | ------------------------------------------------------------------------------



| |  |  | our failure to meet analyst expectations
| | - |  | ----------------------------------------



| |  |  | announcements of technological innovations or new products or services by us or our competitors;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | announcements relating to strategic relationships, acquisitions or investments;
| | - |  | -------------------------------------------------------------------------------



| |  |  | announcements by our customers regarding their businesses or the products in which our products are included;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | 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 or natural disasters;
| | - |  | -------------------------------------------------------------------------------



| |  |  | changes in the rating of our debentures or other securities;
| | - |  | ------------------------------------------------------------



| |  |  | changes in the economic performance and/or market valuations of other software and high-technology companies; and
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | commencement of litigation or adverse results in pending litigation.
| | - |  | --------------------------------------------------------------------

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 to and could discontinue our stock repurchase program at any time and any such discontinuation could cause the market price of our stock to decline.

Under regulations required by the Sarbanes-Oxley Act of 2002, an adverse opinion on internal controls over financial reporting could be issued by our
auditors, and this could have a negative impact on our stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that we
establish and maintain an adequate internal control structure and procedures for financial reporting and assess on an on-going basis the design and operating effectiveness of our internal control structure and procedures for financial
reporting. Our auditors, an independent registered public accounting firm, are required to attest audit both the design and operating effectiveness of our internal controls over financial reporting and managements assessment of the design
and the effectiveness of its internal controls for financial reporting. Although no known material weaknesses are believed to exist at this time, it is possible that material weaknesses could be identified. If we are unable to remediate
the weaknesses, our management would be required to conclude that our internal controls over financial reporting were not effective and our auditors would be required to issue an adverse opinion on our internal controls over financial reporting. It
is uncertain what impact an adverse opinion would have upon our stock price. In addition to their inherent limitations, internal controls over financial reporting and the audit of such controls by our auditors may not prevent or detect
misstatements, errors, omissions, or fraud.

A reduction in our net income as reported on our financial statements could increase the
likelihood of identifying a material weakness in our internal controls.

The threshold for determining whether or not we have a material
weakness in our internal controls and procedures as defined by the Sarbanes-Oxley Act is, in part, based on our generally accepted accounting principles, or GAAP, net income. Lowered GAAP net income, with an associated lowered materiality threshold,
may increase our risk of having to disclose control weaknesses. For example, continued acquisitions, and the associated amortization of intangibles, will increase our amortization expenses and in the future may lower our GAAP earnings which
would result in a lower materiality threshold for internal control testing. A lower materiality threshold requires us to test more areas of the business. As the number of areas tested increases, the statistical chance of discovering a material
weakness increases.



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Our debt service obligations may adversely affect our cash flow.

In June 2003, we issued $240,000 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 $3,600 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 nine-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 nine-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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ----------------------------------------------------------------------------------

Item 1B: Unresolved Staff Comments

None.



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##### Table of Contents

Item 2: Properties

The following table sets forth the location, size and use of each of our principal facilities:



|                               |  |                |  |            |  |                                                                                        
|------------------------------ |  | -------------- |  | ---------- |  | ---------------------------------------------------------------------------------------
|Location                       |  | Square footage |  |            |  | Principal uses                                                                         
|Foster City California         |  | 458,000        |  | Leased (1) |  | Corporate offices, design and engineering, product testing, customer service           
|Meredith, New Hampshire        |  | 163,000        |  | Owned      |  | Manufacturing (VUTEk printers and ink), design and engineering, sales, customer service
|Norcross, Georgia              |  | 111,000        |  | Leased (2) |  | Design and engineering                                                                 
|Bangalore, India               |  | 69,167         |  | Leased     |  | Design and engineering, sales, administrative and support services                     
|Minneapolis, Minnesota         |  | 43,682         |  | Owned      |  | Design and engineering, customer service,                                              
|Scottsdale, Arizona            |  | 29,232         |  | Leased     |  | Administrative services, customer service                                              
|Ratingen, Germany              |  | 27,438         |  | Leased     |  | Software engineering, sales, customer service                                          
|Pittsburgh, Pennsylvannia      |  | 25,997         |  | Leased     |  | Software engineering, sales                                                            
|Lebanon, New Hampshire         |  | 22,137         |  | Leased     |  | Software engineering                                                                   
|Schiphol-Rijk, The Netherlands |  | 16,695         |  | Leased     |  | European corporate offices, sales, support services                                    
|Parsippany, New Jersey         |  | 11,960         |  | Leased     |  | Design and engineering                                                                 
|Tokyo, Japan                   |  | 6,405          |  | Leased     |  | Sales, design and engineering                                                          

---

|(1) | Approximately 47,139 square feet are sub-leased.
|--- | ------------------------------------------------

|(2) | Approximately 59,000 square feet are sub-leased.
|--- | ------------------------------------------------

Our
Foster City, California offices are located on approximately 35 acres of land which we own. We also lease a number of additional domestic and international sales offices. For additional information on our lease obligations see Item 7,
Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources.

We believe that our facilities, in general, are adequate for our present needs. We do not expect that, if the need arises, we would experience difficulties in obtaining additional space at favorable rates.

Item 3: Legal Proceedings.

Legal Proceedings

As more fully discussed below, from time to time we may be involved in a variety of claims, lawsuits, investigations and
proceedings relating to contractual disputes, securities law, intellectual property law, and employment law. We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be
reasonably estimated. We assess our potential liability by analyzing our litigation and regulatory matters using available information. We develop our views on estimated losses in consultation with inside and outside counsel, which involves an
analysis of potential results, assuming a combination of litigation and settlement strategies. Because of the uncertainties related to both the amount and range of loss on the pending litigation matters, we are unable to predict the liability
that could finally result from a range of possible unfavorable outcomes. We have reserved the estimated amount that we reasonably expect to pay for the cases discussed. However, our estimate could be wrong, and we could pay more or less
than our current accrual. Litigation can be costly, diverting managements attention and could, upon resolution, have a



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##### Table of Contents

material adverse effect on our business, results of operations, financial condition and cash flow of the Company. In addition, we are normally involved
in other litigation matters relating to various claims that arise in the normal course of our business.

Leggett & Platt,
Inc. and L&P Property Management Company v. VUTEk, Inc.: On May 17, 2005, Leggett & Platt, Inc., or L&P, and its patent holding subsidiary brought a patent infringement action against VUTEk, a company acquired by us in
June 2005, in the United States District Court in the Eastern District of Missouri. We believe that the L&P infringement claims are demonstrably false, and we will vigorously seek summary adjudication of non-infringement against
L&Ps claims. On June 29, 2005, we answered L&Ps complaint and counter-claimed, asking the court to find that L&P had no objective or subjective basis for bringing the action and that the asserted patent is invalid
and not infringed. A Markman hearing has been scheduled in April 2006, with the case set for trial in March 2007.

Citiline Holdings, Inc. v. Printcafe Software, Inc., Marc Olin, Joseph Whang, Amos Michelson, et al.:On June 25, 2003, a securities class action complaint was filed against Printcafe Software, Inc., a our wholly owned
subsidiary acquired in October 2003 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. In June 2004, an amended complaint was filed in the action adding additional
Printcafe directors as defendants. The parties have reached an agreement in principle to fully and finally resolve this litigation, subject to the Courts approval of the proposed class action settlement. The parties executed a
written Stipulation and Agreement of Compromise and Settlement in September 2005 and jointly moved for the Courts preliminary approval of the settlement. On December 20, 2005, the Court preliminarily approved the proposed
settlement, certified the settlement class and directed the issuance of notice. In accordance with class action procedures, the court also scheduled a final hearing in April 2006 to consider final approval of the settlement.

US Bureau of Industry and Security (BIS) Export Investigation

EFI recently learned that there is an open investigation by the US Bureau of Industry and Security (BIS) under the US Departments of Commerce relating to VUTEks compliance with the export regulations in
connection with several export sales to Syria in 2004. The investigation was initiated in January 2005, prior to EFIs acquisition of VUTEk in June 2005. At present, we believe that these matters will be resolved solely with
administrative penalties and without a significant adverse effect to on our on-going business. However, there is no assurance that these matters will not have an unforeseen outcome that could impair the conduct of our business with our sales
outside the United States and Canada.

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

None.



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##### Table of Contents

PART II

Item 5:    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.

Our common stock has traded on the Nasdaq National Market under the symbol EFII since October 2, 1992. The
table below lists the high and low sales price during each quarter the stock was traded in 2005 and 2004.



|     |  |      |       |      |   |       |  |    |       |    |   |       |  |    |       |    |   |       |  |   |       |  |   |      
|---- |  | ---- | ----- | ---- | - | ----- |  | -- | ----- | -- | - | ----- |  | -- | ----- | -- | - | ----- |  | - | ----- |  | - | -----
|     |  | 2005 |       | 2004
|     |  | Q1   |       | Q2   |   | Q3    |  | Q4 |       | Q1 |   | Q2    |  | Q3 |       | Q4
|High |  | $    | 18.14 |      | $ | 21.43 |  | $  | 25.37 |    | $ | 28.55 |  | $  | 28.81 |    | $ | 28.57 |  | $ | 28.26 |  | $ | 18.92
|Low  |  |      | 16.07 |      |   | 16.12 |  |    | 19.50 |    |   | 21.48 |  |    | 23.70 |    |   | 23.06 |  |   | 15.00 |  |   | 15.91

As of February 6, 2006, there were 220 stockholders of record. Because many of such shares
are held by brokers and other institutions on behalf of stockholders, we are unable to provide the actual number of stockholders represented by these record holders. However, we estimate the number of stockholders represented by brokers and other
institutions to be approximately 100,000.

We have never paid cash dividends on our capital stock. We currently anticipate that we will
retain all available funds for our business and will not pay any cash dividends in the foreseeable future.

Equity Compensation Plan Information

Information regarding our equity compensation plans may be found in Item 12 of this annual report on Form 10-K and is incorporated
herein by this reference.

Purchases of Equity Securities

Issuer Purchases of Equity Securities

(in thousands, except per share amounts)



|                    |  |                                      |  |                                 |  |                                                                                   |  |                                                                                           |       
|------------------- |  | ------------------------------------ |  | ------------------------------- |  | --------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- | ------
|Period              |  | (a) Total Number of Shares purchased |  | (b) Average PricePaid per Share |  | (c) Total Number ofShares Purchased as Part of PubliclyAnnounced Plans
orPrograms |  | (d) Approximate Dollar Value of Shares thatMay Yet Be PurchasedUnder the Plans orPrograms
|October 1-31, 2005  |  |                                     |  |                                |  |                                                                                  |  | $                                                                                         | 98,937
|November 1-30, 2005 |  |                                     |  |                                |  |                                                                                  |  | $                                                                                         | 98,937
|December 1-31, 2005 |  |                                     |  |                                |  |                                                                                  |  | $                                                                                         | 98,937
|                    |  |                                      |  |                                 |  |                                                                                   |  |                                                                                           |       
|Total               |  |                                     |  |                                |  |                                                                                  |  |                                                                                           |       
|                    |  |                                      |  |                                 |  |                                                                                   |  |                                                                                           |       

---

|(1) | On August 26, 2004 we announced that our Board of Directors had approved $100,000 to be used for the repurchase of our outstanding common stock. We began repurchasing shares
under this program in August 2004 and as of December 31, 2005 we had repurchased 53,061 shares. Our buy back program is limited by SEC regulations and by trading windows set by Company policy.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Although we have had a buy-back program in place since August 2004, we did not repurchase any shares in 2005. In February 2006, we again started to
repurchase our shares.



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##### Table of Contents

Item 6: Selected Financial Data.

All amounts in this item are in thousands, except per share amounts and ratios.

The following table summarizes selected consolidated financial data as of and for the five years ended December 31, 2005. This information should be
read in conjunction with the audited consolidated financial statements and related notes thereto.



|                                                                                                     |  |                                            |           |   |      |   |           |      |  |   |           |   |  |      |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                                                     |  | As of and for the years ended December 31, |          
|(in thousands, except per share amounts and ratios)                                                  |  | 2005                                       |           |   | 2004 |   |           | 2003 |  |   | 2002      |   |  | 2001 |        
|Operations                                                                                           |  |                                            |           |   |      |   |           |      |  |   |           |   |  |      |         |   |  |   |         |  
|Revenue                                                                                              |  | $                                          | 468,501   |   |      | $ | 394,604   |      |  | $ | 379,587   |   |  | $    | 350,185 |   |  | $ | 517,608 |  
|Cost of revenue                                                                                      |  |                                            | 179,490   |   |      |   | 138,382   |      |  |   | 148,054   |   |  |      | 167,685 |   |  |   | 282,113 |  
|                                                                                                     |  |                                            |           |   |      |   |           |      |  |   |           |   |  |      |         |   |  |   |         |  
|Gross profit                                                                                         |  |                                            | 289,011   |   |      |   | 256,222   |      |  |   | 231,533   |   |  |      | 182,500 |   |  |   | 235,495 |  
|Operating expenses:                                                                                  |  |                                            |           |   |      |   |           |      |  |   |           |   |  |      |         |   |  |   |         |  
|Research and development                                                                             |  |                                            | 109,525   |   |      |   | 111,134   |      |  |   | 96,697    |   |  |      | 89,973  |   |  |   | 98,116  |  
|Sales and marketing                                                                                  |  |                                            | 81,854    |   |      |   | 74,711    |      |  |   | 61,597    |   |  |      | 50,624  |   |  |   | 56,767  |  
|General and administrative                                                                           |  |                                            | 34,007    |   |      |   | 27,264    |      |  |   | 21,690    |   |  |      | 21,778  |   |  |   | 25,456  |  
|Real estate related charges                                                                          |  |                                            |          |   |      |   | 14,394    |      |  |   |          |   |  |      |        |   |  |   |        |  
|Amortization of goodwill and identifiable intangibles and other acquisition-related charges (1), (2) |  |                                            | 71,734    |   |      |   | 14,690    |      |  |   | 19,670    |   |  |      | 4,391   |   |  |   | 12,255  |  
|Restructuring charges                                                                                |  |                                            | 2,685     |   |      |   |          |      |  |   |          |   |  |      |        |   |  |   |        |  
|Share-based compensation expense                                                                     |  |                                            | 1,929     |   |      |   |          |      |  |   |          |   |  |      |        |   |  |   |        |  
|                                                                                                     |  |                                            |           |   |      |   |           |      |  |   |           |   |  |      |         |   |  |   |         |  
|Total operating expenses                                                                             |  |                                            | 301,734   |   |      |   | 242,193   |      |  |   | 199,654   |   |  |      | 166,766 |   |  |   | 192,594 |  
|                                                                                                     |  |                                            |           |   |      |   |           |      |  |   |           |   |  |      |         |   |  |   |         |  
|(Loss) income from operations                                                                        |  |                                            | (12,723   | ) |      |   | 14,029    |      |  |   | 31,879    |   |  |      | 15,734  |   |  |   | 42,901  |  
|Interest and other income, net:                                                                      |  |                                            |           |   |      |   |           |      |  |   |           |   |  |      |         |   |  |   |         |  
|Interest and other income                                                                            |  |                                            | 14,489    |   |      |   | 12,779    |      |  |   | 11,489    |   |  |      | 11,540  |   |  |   | 17,661  |  
|Interest expense                                                                                     |  |                                            | (5,010    | ) |      |   | (5,632    | )    |  |   | (2,886    | ) |  |      | (54     | ) |  |   | (190    | )
|Litigation settlement income (charges), net                                                          |  |                                            |          |   |      |   | 58        |      |  |   | 2,408     |   |  |      | (4,409  | ) |  |   |        |  
|Gain on sale of product line                                                                         |  |                                            |          |   |      |   | 2,994     |      |  |   |          |   |  |      |        |   |  |   |        |  
|Loss on equity investment                                                                            |  |                                            |          |   |      |   |          |      |  |   | (1,562    | ) |  |      |        |   |  |   |        |  
|                                                                                                     |  |                                            |           |   |      |   |           |      |  |   |           |   |  |      |         |   |  |   |         |  
|Total interest and other income, net                                                                 |  |                                            | 9,479     |   |      |   | 10,199    |      |  |   | 9,449     |   |  |      | 7,077   |   |  |   | 17,471  |  
|                                                                                                     |  |                                            |           |   |      |   |           |      |  |   |           |   |  |      |         |   |  |   |         |  
|(Loss) income before income taxes                                                                    |  |                                            | (3,244    | ) |      |   | 24,228    |      |  |   | 41,328    |   |  |      | 22,811  |   |  |   | 60,372  |  
|(Provision for) benefit from income taxes                                                            |  |                                            | (823      | ) |      |   | 13,791    |      |  |   | (14,820   | ) |  |      | (6,843  | ) |  |   | (21,432 | )
|                                                                                                     |  |                                            |           |   |      |   |           |      |  |   |           |   |  |      |         |   |  |   |         |  
|Net (loss) income                                                                                    |  | $                                          | (4,067    | ) |      | $ | 38,019    |      |  | $ | 26,508    |   |  | $    | 15,968  |   |  | $ | 38,940  |  
|                                                                                                     |  |                                            |           |   |      |   |           |      |  |   |           |   |  |      |         |   |  |   |         |  
|Earnings per share                                                                                   |  |                                            |           |   |      |   |           |      |  |   |           |   |  |      |         |   |  |   |         |  
|Net (loss) income per basic common share (3)                                                         |  | $                                          | (0.07     | ) |      | $ | 0.71      |      |  | $ | 0.49      |   |  | $    | 0.29    |   |  | $ | 0.73    |  
|                                                                                                     |  |                                            |           |   |      |   |           |      |  |   |           |   |  |      |         |   |  |   |         |  
|Net (loss) income per diluted commonshare (3), (5)                                                   |  | $                                          | (0.07     | ) |      | $ | 0.64      |      |  | $ | 0.47      |   |  | $    | 0.29    |   |  | $ | 0.71    |  
|                                                                                                     |  |                                            |           |   |      |   |           |      |  |   |           |   |  |      |         |   |  |   |         |  
|Shares used in computing net (loss) income per basic common share (3)                                |  |                                            | 54,425    |   |      |   | 53,898    |      |  |   | 53,789    |   |  |      | 54,256  |   |  |   | 53,468  |  
|Shares used in computing net (loss) income per diluted common share (3), (5)                         |  |                                            | 54,425    |   |      |   | 63,996    |      |  |   | 60,138    |   |  |      | 54,852  |   |  |   | 54,605  |  
|                                                                                                     |  |                                            |           |   |     
|Financial Position                                                                                   |  |                                            |           |   |      |   |           |      |  |   |           |   |  |      |         |   |  |   |         |  
|Cash, cash equivalents and short-term investments                                                    |  | $                                          | 469,616   |   |      | $ | 659,559   |      |  | $ | 624,112   |   |  | $    | 498,370 |   |  | $ | 451,207 |  
|Working capital                                                                                      |  |                                            | 460,384   |   |      |   | 618,056   |      |  |   | 665,193   |   |  |      | 470,054 |   |  |   | 438,020 |  
|Total assets                                                                                         |  |                                            | 1,082,528 |   |      |   | 1,017,877 |      |  |   | 1,013,661 |   |  |      | 727,106 |   |  |   | 702,987 |  
|Long-term obligations, less current portion (4)                                                      |  |                                            | 240,000   |   |      |   | 240,000   |      |  |   | 240,236   |   |  |      | 278     |   |  |   | 331     |  
|Stockholders equity                                                                                 |  | $                                          | 706,699   |   |      | $ | 667,560   |      |  | $ | 654,813   |   |  | $    | 634,067 |   |  | $ | 606,567 |  
|                                                                                                     |  |                                            |           |   |     
|Ratios and Benchmarks (unaudited)                                                                    |  |                                            |           |   |      |   |           |      |  |   |           |   |  |      |         |   |  |   |         |  
|Current ratio                                                                                        |  |                                            | 4.4       |   |      |   | 6.6       |      |  |   | 6.6       |   |  |      | 6.1     |   |  |   | 5.6     |  
|Inventory turns                                                                                      |  |                                            | 8.8       |   |      |   | 22.2      |      |  |   | 23.1      |   |  |      | 24.3    |   |  |   | 15.5    |  
|Full-time employees                                                                                  |  |                                            | 1,723     |   |      |   | 1,424     |      |  |   | 1,382     |   |  |      | 927     |   |  |   | 917     |  
|Days Sales Outstanding (DSO)                                                                         |  |                                            | 42.1      |   |      |   | 45.6      |      |  |   | 44.5      |   |  |      | 41.9    |   |  |   | 46.0    |  



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---

|(1) | We expensed in-process research and development costs of $45,300, $1,000 and $13,220 in the years ended December 31, 2005, 2004 and 2003, respectively. See Note 3 of Notes to
Consolidated Financial Statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets(SFAS 142). SFAS 142
requires among other things, the discontinuance of goodwill amortization and provisions for the reclassification of certain existing recognized intangibles to goodwill. Upon the adoption of SFAS 142, we ceased amortizing goodwill and reclassified
net intangibles and deferred tax liabilities relating to acquired workforce totaling $900 to goodwill. In 2001 goodwill amortization expense was $7,611 and acquired workforce amortization was $550.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | See Note 1 of Notes to Consolidated Financial Statements.
|--- | ---------------------------------------------------------

|(4) | In June 2003 we issued $240,000 of 1.50% Senior Convertible Debt. See Note 7 of Notes to Consolidated Financial Statements.
|--- | ---------------------------------------------------------------------------------------------------------------------------

|(5) | In accordance with EITF 04-08, we have included 9,084 shares of common stock contingently issuable under our 1.50% Senior Convertible Debentures in our fully diluted shares for 2003
and 2004. The previously reported earnings per fully diluted share for the year ended 2003 was $0.48 and the fully diluted shares for 2003 were 54,839.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations.

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

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

All amounts in this section are presented in thousands, except for per share amounts.

Overview

Key financial results for 2005 were as
follows:



| |  |  | Our consolidated revenues increased by approximately 19% from 2004 to $468,501. This was the result of the addition of the VUTEk product line. Those increases were partially offset
by slight decreases in revenue from our professional printing applications and controllers.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The VUTEk acquisition added approximately $15,682 to our operating income before charges for in-process research and development and the amortization of the VUTEk acquired
intangibles.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The addition of the VUTEk product line in 2005 and our software acquisitions in 2003 have helped us achieve the
goal of decreased reliance on OEM sales. In 2002 our non-OEM sales accounted for approximately 7% of our total sales. In the fourth quarter of 2005, we saw our non-OEM sales increase to 45%.

Critical Accounting Policies

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



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The following are believed to be our critical accounting policies and estimates:



| |  |  | revenue recognition;
| | - |  | --------------------



| |  |  | estimating allowance for doubtful accounts, inventory allowances and other allowances;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | accounting for income taxes;
| | - |  | ----------------------------



| |  |  | valuation of long-lived and intangible assets and goodwill;
| | - |  | -----------------------------------------------------------



| |  |  | business combinations and
| | - |  | -------------------------



| |  |  | determining functional currencies for the purposes of consolidating our international operations.
| | - |  | -------------------------------------------------------------------------------------------------

Revenue recognition.We derive our revenue primarily from product revenue, which includes hardware (controllers, design-licensed solutions,
and inkjet printers and ink), software and royalties. We also receive services and support revenue from software license maintenance agreements, customer support and training and consulting. As described below, significant management judgments and
estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences could result in the amount and timing of our revenue for any period if our management made different judgments or utilized
different estimates.

We recognize revenue in accordance with the provisions of SEC Staff Accounting Bulletin Revenue Recognition(SAB104) and, if applicable, Emerging Issues Task Force 00-21 Revenue Arrangements with Multiple Deliverables(EITF 00-21) for the sale of controllers, printers, and ink. As such, revenue is generally recognized when
persuasive evidence of an arrangement exists, the product has been delivered or services have been rendered, the fee is fixed or determinable and collection of the resulting receivable is reasonably assured.

We use either a purchase order or signed contract as evidence of an arrangement. Sales through some of our OEMs are evidenced by a master agreement
governing the relationship together with purchase orders on a transaction-by-transaction basis. Our arrangements do not generally include acceptance clauses. Delivery for hardware generally occurs when product is delivered to the customers
common carrier. In some instances, we also sell products where the terms included in sales arrangements result in different timing for revenue recognition, assuming all other recognition criteria are met: a) if title and risk of loss is
transferred at the customers destination (CIP Destination), revenue is recognized when the product(s) arrives at the customer site; and b) if title is retained after product delivery until payment is received, revenue is recognized at the time
when passage of title occurs upon payment receipt. We assess whether the fee is fixed or determinable based on the terms of the contract or purchase order. We assess collection based on a number of factors, including past transaction history
with the customer and the credit-worthiness of the customer. We do not request collateral from our customers. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes
reasonably assured, which is generally upon receipt of cash.

We license our software primarily under perpetual licenses. Revenue from
software consists of software licensing, post-contract customer support and professional consulting. We apply the provisions of Statement of Position 97-2, Software Revenue Recognition(SOP 97-2), as amended by Statement of
Position 98-9, Modification of SOP 97-2, Software Recognition, With Respect to Certain Transactions, and if applicable, SAB 104 and EITF 00-21 to all transactions involving the sale of software products and hardware transactions where the
software is not incidental.

When several elements, including software licenses, post-contract customer support and professional services,
are sold to a customer through a single contract, the revenue from such multiple-element arrangements are allocated to each element using the residual method in accordance with SOP 98-9. Revenue is allocated to the support elements and
professional service elements of an agreement using vendor specific objective evidence of fair value (VSOE) and to the software license portion of the agreements using the residual method. We have established VSOE of the fair value of
our professional services based on the rates charged to our customers in



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stand alone orders. We have also established VSOE of fair value for post-contract customer support based on substantative renewal rates. Accordingly,
software license fees are recognized under the residual method for arrangements in which the software is licensed with maintenance and/or professional services, and where the maintenance and professional services are not essential to the
functionality of the delivered software. Revenue allocated to software licenses is recognized when the following four basic criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or
determinable and collectibility is probable. Revenue allocated to post-contract support is recognized ratably over the term of the support contract (typically one to two years), assuming the four basic criteria are met. We also have subscription
arrangements where the customer pays a fixed fee and receives services over a period of time. We recognize revenue from the subscriptions ratably over the service period. Any upfront setup fees associated with our subscription arrangements
are recognized ratably, generally over one year.

Allowance for doubtful accounts, inventory allowances and other allowances and
accruals. To determine the need for an allowance for doubtful accounts, management must make estimates of the collectibility of our accounts receivables. To do so, management analyzes accounts receivable and historical bad debts, customer
concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Our accounts receivable balance was $67,926, net of allowance for
doubtful accounts and sales returns of $4,306 as of December 31, 2005.

Similarly, management must make estimates of potential future
inventory obsolescence and purchase commitments to measure the need for inventory allowances. Management analyzes current economic trends, changes in customer demand and the acceptance of our products when evaluating the adequacy of such allowances.
Significant management judgments and estimates must be made and used in connection with establishing the allowances in any accounting period. Material differences may result in the amount and timing of our income for any period if management made
different judgments or utilized different estimates. Our inventory balance was $25,874, net of allowance of $6,457 as of December 31, 2005.

We accrue for estimated legal expenses, including potential regulatory fines when the likelihood of the incurrence of the related costs is probable and management has the ability to estimate such costs. Until both of these conditions are
met, the related legal expenses are recorded as incurred. The material assumptions we use to estimate the amount of legal expenses include:



| |  |  | The monthly legal expense incurred by our external attorneys on the particular case being evaluated,
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | communication between our external attorneys and us on the expected duration of the lawsuit and the estimated expenses during that time,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our strategy regarding the lawsuit,
| | - |  | -----------------------------------



| |  |  | the deductible amounts under the insurance policies, and
| | - |  | --------------------------------------------------------



| |  |  | past experiences with similar lawsuits.
| | - |  | ---------------------------------------

The outcome of
any particular lawsuit cannot be predicted, and if the outcome is different than expected, our income could be materially impacted, either positively or negatively.

We have from time to time set up allowances or accruals for uncertainties related to revenues and for potential unfavorable outcomes from disputes with customers or vendors. Management bases its estimates for the
allowances or accruals on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances.

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



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consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. If we believe that
recovery of these deferred assets is not likely, we must establish a valuation allowance. To the extent we either establish or increase a valuation allowance in a period, we must include an expense within the tax provision in the statement of
income.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and
liabilities, and any valuation allowance recorded against our net deferred tax assets. We have maintained a valuation allowance of $1,952 as of December 31, 2005 for foreign tax credits resulting from the 2003 acquisition of Best. If
actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance that could materially impact our financial position and results of operations.

Net deferred tax assets as of December 31, 2005 were $26,051.

Valuation of long-lived and intangible assets and goodwill.In 2002 we adopted SFAS 142, Goodwill and Other Intangible Assets. In lieu of amortization, we are required to perform an annual
impairment review of our goodwill. We completed our annual review in the third quarter of 2005, based upon July 1, 2005 balances, with no impairment of goodwill indicated as a result of the review. We assess the impairment of identifiable
intangibles and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable or that the life of the asset may need to be revised. Factors we consider important which could trigger an
impairment review include the following:



| |  |  | significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | significant negative industry or economic trends;
| | - |  | -------------------------------------------------



| |  |  | significant decline in our stock price for a sustained period; and
| | - |  | ------------------------------------------------------------------



| |  |  | our market capitalization relative to net book value.
| | - |  | -----------------------------------------------------

When we determine that the carrying value of goodwill, intangibles or long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected
discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Net intangible assets, goodwill and long-lived assets amounted to $343,389 as of
December 31, 2005. No adjustments to the lives of the other intangible assets have been made since the adoption of SFAS 142.

Business combinations.We allocate the purchase price of acquired companies to the tangible and intangible assets acquired, liabilities assumed, as well as in-process research and development based on their estimated fair
values. We engage independent third-party appraisal firms to assist in determining the fair values of intangible assets acquired. Such a valuation requires management to make significant estimates and assumptions, especially with respect to
intangible assets.

Management makes estimates of fair value based upon assumptions believed to be reasonable. These estimates are based on
historical experience and information obtained from the management of the acquired companies. Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows; acquired developed technologies
and patents; expected costs to develop the in-process research and development into commercially viable products and estimating cash flows from the projects when completed; the acquired companys brand awareness and market position, as well as
assumptions about the period of time the acquired brand will continue to be used in the combined companys product portfolio; and discount rates. These estimates are inherently uncertain and unpredictable. Assumptions may be incomplete or
inaccurate, and unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumption, estimates or other actual results.



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Other estimates associated with the accounting for acquisitions include severance costs and the costs of
vacating duplicate facilities. These costs are based upon estimates made by management and are subject to refinement. To estimate these costs, we utilize assumptions of the number of employees that will involuntarily terminate employment and of
future costs to operate and eventually vacate duplicate facilities. Estimated costs may change as additional information becomes available regarding the assets acquired and liabilities assumed and as management continues its assessment of the
pre-merger operations.

Our financial projections may ultimately prove to be inaccurate and unanticipated events and circumstances may
occur. Therefore, no assurance can be given that the underlying assumptions used to forecast revenues and costs to develop such projects will transpire as projected.

Determining functional currencies for the purpose of consolidating our international operations.We have a number of foreign subsidiaries which together account for approximately 26% of our net revenues,
approximately 10% of our total assets and approximately 9% of our total liabilities as of December 31, 2005.

Based on our assessment
of the factors discussed below, we consider the United States dollar to be the functional currency for each of our international subsidiaries except for our Japanese subsidiary, EFI KK, for which we consider the Japanese yen to be the
subsidiarys functional currency and our German subsidiary, EFI Germany GmbH, for which we consider the euro to be the subsidiarys functional currency.

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

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



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Results of Operations

The following tables set forth items in our consolidated statements of income as a percentage of total revenue for 2005, 2004 and 2003 and the year-to-year percentage change from 2005 over 2004 and from 2004 over
2003, respectively. These operating results are not necessarily indicative of results for any future period.



|                                            |  |                          |   |  |                |   |  |                |   |  |          |   |  |      |  
|------------------------------------------- |  | ------------------------ | - |  | -------------- | - |  | -------------- | - |  | -------- | - |  | ---- | -
|                                            |  |                          |   |  |                |   |  |                |   |  | % change |  
|                                            |  | Years ended December 31, |   |  | 2005 over 2004 |   |  | 2004 over 2003 |  
|                                            |  | 2005                     |   |  | 2004           |   |  | 2003           |   |  |         
|                                            |  | %                        |   |  | %              |   |  | %              |   |  | %        |   |  | %    |  
|Revenue                                     |  | 100                      |   |  | 100            |   |  | 100            |   |  | 19       |   |  | 4    |  
|Cost of revenue                             |  | 38                       |   |  | 35             |   |  | 39             |   |  | 30       |   |  | (7   | )
|                                            |  |                          |   |  |                |   |  |                |   |  |          |   |  |      |  
|Gross profit                                |  | 62                       |   |  | 65             |   |  | 61             |   |  | 13       |   |  | 11   |  
|Operating expenses:                         |  |                          |   |  |                |   |  |                |   |  |          |   |  |      |  
|Research and development                    |  | 23                       |   |  | 28             |   |  | 25             |   |  | (1       | ) |  | 15   |  
|Sales and marketing                         |  | 18                       |   |  | 19             |   |  | 16             |   |  | 10       |   |  | 21   |  
|General and administrative                  |  | 7                        |   |  | 7              |   |  | 6              |   |  | 25       |   |  | 26   |  
|Stock compensation expense                  |  |                         |   |  |               |   |  |               |   |  |         |   |  |     |  
|Restructuring charges                       |  | 1                        |   |  |               |   |  |               |   |  |         |   |  |     |  
|Real estate related charges                 |  |                         |   |  | 3              |   |  |               |   |  | (100     | ) |  | nm   |  
|In-process research and development charge  |  | 10                       |   |  |               |   |  | 3              |   |  | nm       |   |  | (92  | )
|Amortization of identified intangibles      |  | 6                        |   |  | 4              |   |  | 2              |   |  | 93       |   |  | 112  |  
|                                            |  |                          |   |  |                |   |  |                |   |  |          |   |  |      |  
|Total operating expenses                    |  | 65                       |   |  | 61             |   |  | 52             |   |  | 25       |   |  | 21   |  
|                                            |  |                          |   |  |                |   |  |                |   |  |          |   |  |      |  
|(Loss) income from operations               |  | (3                       | ) |  | 4              |   |  | 9              |   |  | (191     | ) |  | (56  | )
|Interest and other income:                  |  |                          |   |  |                |   |  |                |   |  |          |   |  |      |  
|Interest income and other income            |  | 3                        |   |  | 3              |   |  | 3              |   |  | 13       |   |  | 11   |  
|Interest expense                            |  | (1                       | ) |  | (1             | ) |  | (1             | ) |  | (11      | ) |  | 95   |  
|Gain on sale of product line                |  |                         |   |  | 1              |   |  |               |   |  | nm       |   |  | nm   |  
|Litigation settlement income (charges), net |  |                         |   |  |               |   |  | 1              |   |  |         |   |  | (98  | )
|Loss on equity investment                   |  |                         |   |  |               |   |  | (1             | ) |  |         |   |  | 100  |  
|                                            |  |                          |   |  |                |   |  |                |   |  |          |   |  |      |  
|Total interest and other income, net        |  | 2                        |   |  | 3              |   |  | 2              |   |  | (7       | ) |  | 8    |  
|                                            |  |                          |   |  |                |   |  |                |   |  |          |   |  |      |  
|(Loss) income before income taxes           |  | (1                       | ) |  | 7              |   |  | 11             |   |  | (113     | ) |  | (41  | )
|(Provision for) benefit from income taxes   |  |                         |   |  | 3              |   |  | (4             | ) |  | (106     | ) |  | (193 | )
|                                            |  |                          |   |  |                |   |  |                |   |  |          |   |  |      |  
|Net (loss) income                           |  | (1                       | ) |  | 10             |   |  | 7              |   |  | (111     | ) |  | 43   |  
|                                            |  |                          |   |  |                |   |  |                |   |  |          |   |  |      |  

---

nm = not meaningful

Revenue

Our revenue in 2005 was principally derived
from four major categories. The first category, Controllers, is primarily made up of stand-alone servers, which connect digital copiers with computer networks, and embedded desktop controllers, bundled solutions and design-licensed
solutions primarily for the office market and commercial printing. This category includes our Fiery, Splash, Edox, and MicroPress color and black and white controller products. The second category, Inkjet Products, consists of sales of
the super-wide format inkjet printers and inks, and parts and services revenue from the newly acquired VUTEk business. The third category, Professional Printing Applications, or PPA, consists of software technology focused on printing
workflow, print management information systems, proofing and web submission and job tracking tools. The fourth category of miscellaneous revenue consists of spares, scanning solutions, and field dispatching solutions. We previously considered the
stand-alone servers and the embedded products each as separate categories.



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The following is a break-down of revenue by category in dollars.



|                                   |  |                          |         |                |     |      |                |         |  |     |  |   |         |   |     |  |    |   |  |     |  
|---------------------------------- |  | ------------------------ | ------- | -------------- | --- | ---- | -------------- | ------- |  | --- |  | - | ------- | - | --- |  | -- | - |  | --- | -
|                                   |  |                          |         | % change       |    
|                                   |  | Years ended December 31, |         | 2005 Over 2004 |     |      | 2004 Over 2003 |        
|Revenue                            |  | 2005                     |         | 2004           |     | 2003 |                |        
|                                   |  | $                        |         | %              |     | $    |                | %       |  | $   |  | % |         | % |     |  | %  |  
|Controllers                        |  | $                        | 274,015 |                | 59  |      | $              | 292,833 |  | 74  |  | $ | 318,884 |   | 84  |  | (6 | ) |  | (8  | )
|Inkjet Products                    |  |                          | 86,913  |                | 18  |      |                |        |  |    |  |   |        |   |    |  |   |   |  |    |  
|Professional Printing Applications |  |                          | 71,375  |                | 15  |      |                | 68,484  |  | 17  |  |   | 21,782  |   | 6   |  | 4  |   |  | 214 |  
|Miscellaneous                      |  |                          | 36,198  |                | 8   |      |                | 33,287  |  | 9   |  |   | 38,921  |   | 10  |  | 9  |   |  | (14 | )
|                                   |  |                          |         |                |     |      |                |         |  |     |  |   |         |   |     |  |    |   |  |     |  
|Total Revenue                      |  | $                        | 468,501 |                | 100 |      | $              | 394,604 |  | 100 |  | $ | 379,587 |   | 100 |  | 19 |   |  | 4   |  
|                                   |  |                          |         |                |     |      |                |         |  |     |  |   |         |   |     |  |    |   |  |     |  

Revenue was $468,501 in 2005, compared to $394,604 in 2004 and $379,587 in 2003, which resulted in
a 19% increase in 2005 versus 2004 and an 4% increase in 2004 compared to 2003. The major factor contributing to the overall higher revenue in 2005 over 2004 was a $86,913 increase attributable to the VUTEk acquisition, offsetting a decrease in
controller sales of $18,818.

In our controller category, the decrease in 2005 over 2004 of $18,818 was due to a 12.4% reduction in
volumes, partially offset by a 6.8% increase in the average selling price. In the second half of 2005 a number of new server and embedded controllers products were launched by our OEM customers and total controller revenue has increased by 24%
over the second half of 2004, while unit volume has increased by 11% for the same period.

Our high-end servers showed a 9% increase in the
average selling price, while the average selling price of our low-end and black-and-white servers were stable. For embedded controllers, the average selling price has increased by 11% in 2005 as the product mix moved from chipsets, which typically
sell for a lower unit price but carry a higher margin, to the higher priced, board-based products. We anticipate that in 2006 the mix will move back to more chipsets and fewer board-based products.

Revenue in the inkjet products category represents seven months of VUTEk operations. On a pro forma basis, combining the pre-acquisition revenue of
$57,991 with post-acquisition revenue would result in annual revenues of $144,904. Approximately 30% of the inkjet product revenues since our acquisition were generated from sales of inks.

The professional printing applications experienced a modest increase of 4% in 2005 over 2004. Within this category are the products we acquired from
Printcafe and Best GmbH as well as certain software products that were developed by EFI to enhance our server products, such as our Graphic Arts Package and products to optimize the workflow in printshops such as Oneflow and Balance. The
software applications in this category generate higher margins, favorably impacting our margins. We continue to see strong market acceptance of these products and we believe we will experience further incremental growth.

The miscellaneous category of revenue consists of individually small items in our product portfolio, as well as spares. It includes products such as
DocSend (our scanning solution) and ADS (our dispatch software). Total revenue generated from these products has increased by 28% in 2005 over 2004, while the remaining products in the miscellaneous category decreased by 1% over the same period.

We believe that price reductions for all of our products may affect revenues in the future. We have made and may in the future make price
reductions for our products in order to drive demand and remain competitive. 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. If we are not able to compensate for lower gross margins that may result from price reductions with an increased volume of sales, our results of operations could be adversely
affected.



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Shipments by geographic area for the years ended December 31, 2005, 2004 and 2003 were as follows:



|               |  |                          |         |                |     |      |                |         |  |     |  |   |         |   |     |  |     |   |  |    |  
|-------------- |  | ------------------------ | ------- | -------------- | --- | ---- | -------------- | ------- |  | --- |  | - | ------- | - | --- |  | --- | - |  | -- | -
|               |  |                          |         | % change       |    
|               |  | Years ended December 31, |         | 2005 over 2004 |     |      | 2004 over 2003 |        
|(in thousands) |  | 2005                     |         | 2004           |     | 2003 |                |        
|               |  | $                        |         | %              |     | $    |                | %       |  | $   |  | % |         | % |     |  | %   |  
|North America  |  | $                        | 250,605 |                | 54  |      | $              | 217,069 |  | 55  |  | $ | 192,326 |   | 51  |  | 15  |   |  | 13 |  
|Europe         |  |                          | 137,310 |                | 29  |      |                | 105,168 |  | 27  |  |   | 113,914 |   | 30  |  | 31  |   |  | (8 | )
|Japan          |  |                          | 47,125  |                | 10  |      |                | 56,799  |  | 14  |  |   | 57,231  |   | 15  |  | (17 | ) |  | (1 | )
|Rest of World  |  |                          | 33,461  |                | 7   |      |                | 15,568  |  | 4   |  |   | 16,116  |   | 4   |  | 115 |   |  | (3 | )
|               |  |                          |         |                |     |      |                |         |  |     |  |   |         |   |     |  |     |   |  |    |  
|Total          |  | $                        | 468,501 |                | 100 |      | $              | 394,604 |  | 100 |  | $ | 379,587 |   | 100 |  | 19  |   |  | 4  |  
|               |  |                          |         |                |     |      |                |         |  |     |  |   |         |   |     |  |     |   |  |    |  

Revenue from the inket product category from the VUTEk acquisition in May 2005, along with the
introduction of new controller products in the second half of 2005, fueled the increase in revenue in North America, Europe and Rest of World from 2005 to 2004. The decrease in Japan in 2005 over 2004 reflects the reduction in chipset solutions sold
into Japan in the second half of 2005 for manufacturing for redistribution around the world.

As shipments to some of our OEM customers are
made to centralized purchasing and manufacturing locations which in turn sell through to other locations, we believe that non-U.S. sales of our products into each region may differ from what is reported, though accurate data is difficult to
obtain. We expect that non-U.S. sales will continue to represent a significant portion of our total revenue.

Percentage of total
revenue attributed to sales of product through our OEM channels has decreased due to the acquisition of VUTEk in 2005 and Printcafe in 2004. In 2005, more than 65% of revenue is generated from the sales of products through our OEM channels with such
customers as Canon, Fuji Xerox, Konica Minolta, Océ, Oki, Ricoh, Sharp, Toshiba, Xerox and others. The customers that individually accounted for more than 10% of our revenues were Canon, Konica Minolta, and Xerox. Together these
customers accounted for 48% of our revenues in 2005, 61% in 2004 and 72% in 2003. The decrease to 48% from 61% is the result of our increased software sales, which are sold to more customers than our traditional server business, and sales to
customers of VUTEk. Although we have decreased our reliance on our OEM partners, in the event that any of the OEM relationships are scaled back or discontinued, we could still experience an adverse impact on our financial condition and results of
operations.

We continue to work on the development of products utilizing our proprietary architecture and other products and intend to
continue to introduce new generations of controller products and other new product lines with current and new OEMs in 2006 and beyond as well as new inkjet and software products to be sold to our direct customers. No assurance can be given that
the introduction or market acceptance of new, current or future products will be successful.

Gross Margins

Our gross margins were 62%, 65% and 61% for 2005, 2004 and 2003, respectively. The 300 basis point decrease in
gross margin from 2004 to 2005 was due primarily to the acquisition of VUTEk in 2005 which carries lower gross margins than our other products. The 400 basis point increase in gross margin from 2003 to 2004 resulted primarily from
(1) an increase in software sales compared to the prior year principally due to our 2003 acquisitions and (2) the migration of embedded board controller sales to design-license sales for certain of our products. Product mix is a
significant driver in our gross margins and we cannot predict the impact of it will have on future gross margin results.

Our print
controllers are manufactured by third-party manufacturers who purchase most of the necessary components. If our third-party manufacturers cannot obtain the necessary components at favorable prices we



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could experience an increase in our product costs. We do purchase certain parts directly, including processors, memory, certain ASICs and software licensed
from various sources, including PostScript®
interpreter software, which we license from Adobe Systems, Inc.

Our inkjet printers have a lower gross margin than our traditional
controller business. Since we have acquired VUTEk, the gross margins for the inkjet printers have averaged 38%. The inks have an average 70% gross margin. We expect that as the installed base of printers grow that revenues from the inks will
increase, which will have a positive effect on our gross margins.

If our product mix changes significantly, our gross margins will
fluctuate. In addition, gross margins can be impacted by a variety of other 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, printheads and PostScript® interpreter
software), third party manufacturing costs, product, channel and geographic mix, the success of our product transitions and new products, competition and general economic conditions in the United States and abroad. Consequently, gross margins may
fluctuate from period to period. In addition to the factors affecting revenue described above, if we are pressured to reduce prices, gross margins for our products could be lower.

Operating Expenses

Operating expenses increased by 25% in 2005 over 2004 and increased by 21% in 2004 over 2003.
Operating expenses as a percentage of revenue amounted to 64%, 61% and 52% for 2005, 2004 and 2003, respectively. An increase in amortization expense related to VUTEk of $13,694 and in-process research and development expense from the VUTEk
acquisition of $45,300 account for most of the $59,541 increase in 2005 compared to 2004. Increases in the other operating expense categories due to the VUTEk acquisition were offset by a reduction in workforce initiated in the first quarter of
2005. Of the $42,539 increase in 2004 compared to 2003, the largest increase came from the acquisitions made in 2003 and 2004 with the next largest amount coming from the $14,394 of real estate-related charges. Less significant additional increases
in 2004 were from increased payroll expenses, additional trade show expenses, accounting and consulting fees related to compliance with the Sarbanes-Oxley Act of 2002, additional legal costs and $7,240 in increased amortization expense for
identified intangibles offset with a decrease of $12,220 from in-process research and development costs.

The components of operating
expenses are detailed below.

Research and Development

Expenses for research and development consist primarily of personnel-related and facility expenses and, to a lesser extent, consulting,
depreciation and costs of prototype materials. Research and development expenses were $109,525 or 23% of revenue in 2005 compared to $111,134 or 28% of revenue in 2004. The increased costs associated with the addition of the VUTEk employees were
partially offset by reduced personnel expenses from the early 2005 reduction in workforce and reduced prototype-related expenses also contributed to the decrease in research and development expenses in 2005 from 2004.

Our 2003 acquisitions on an annualized basis account for the majority of the $14,437 increase in research and development expenses in 2004
when compared to 2003, while our 2004 acquisitions accounted for a small additional amount. As the acquired companies were not maintained as stand-alone businesses, the amounts in 2004 attributed to acquisitions cannot be accurately determined.

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 product development efforts. We expect that our research and development expenses may increase in absolute dollars and also as a percentage of revenue. As part of our
cost containment practices, we review all projects on a periodic basis for estimated return on investment. Those projects that do not meet certain criteria are changed or halted.



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Sales and Marketing

Sales and marketing expenses include personnel-related 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 2005 were $81,854 or 18% of revenue
compared to $74,711 or 19% of revenue in 2004 and $61,597 or 16% of revenue in 2003. The acquisition of VUTEk increased our costs by $14,058 in 2005, which was offset by $4,411 of employee related reductions from the reduction in workforce in the
first quarter of 2005 and $1,929 in reduced tradeshow expenses. Drupa, a leading print industry exposition in Europe which occurs every four years in Europe, pushed tradeshow expenses higher in 2004.

We estimate that over half of the increase in 2004 from 2003 was attributable to our 2003 acquisitions when calculated on an annualized
basis. The remaining increase in 2004 over 2003 primarily came from drupa, our first sponsorship of Connect, the annual conference for users of our Print MIS software and our participation in other trade shows. Included in the increases are
the effects of a weaker US dollar, which led to higher US dollar costs for our international sales offices. While costs in the local currency have generally remained constant, during 2004 the translated US dollar costs have increased.

We expect that our sales and marketing expenses may increase in absolute dollars and possibly also as a percentage of revenue as we
continue to actively promote our products, launch 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 remains volatile against the euro or other currencies, sales and marketing expenses reported in US dollars could fluctuate. Approximately 34% of our sales and
marketing expenses are from our foreign offices.

General and Administrative

General and administrative expenses consist primarily of personnel-related expenses and, to a lesser extent, depreciation and facility
costs, professional fees and other costs associated with public companies. General and administrative expenses were $34,007 or 7% of revenue in 2005, compared to $27,264 or 7% of revenue in 2004 and $21,690 or 6% of revenue in 2003. The $6,743
increase in general and administrative expenses between 2004 and 2005 principally consists of from the impact of our 2005 acquisition of VUTEk of $4,994, rent increases of $1,124 and increased litigation-related legal fees.

The increase in general and administrative expenses between 2003 and 2004 principally consists of from the impact of our 2003 acquisitions
on an annualized basis, increased costs associated with complying with new regulations related to SOX, and increased legal costs related to various litigation matters. We expect that our general and administrative expenses will increase in absolute
dollars and as a percentage of revenue due to additional costs that will be incurred for compliance with SOX, and in order to support our efforts to grow our business in future periods. We also expect that if the US dollar remains volatile against
the euro or other currencies, general and administrative expenses reported in US dollars could fluctuate. Approximately 10% of our general and administrative expenses are from our foreign offices.

Amortization of Identifiable Intangibles

Amortization of identifiable intangibles was $26,434 or approximately 6% of revenue in 2005. Amortization of identifiable intangibles, was $13,690 or 4% of revenue in 2004. The acquisition of two companies in the
fourth quarter of 2003 and one company in the first quarter of 2004 account for the increase in amortization expense.



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In-process Research and Development

We expensed $45,300 for in-process research and development in 2005 upon acquisition of VUTEk. In 2004, our our acquisition of ADS
produced a charge of $1,000 for in-process research and development The in-process research and development costs related to Printcafe, T/R Systems and Best, all acquired in 2003, were $8,600, $3,400 and $1,220, respectively.

Real Estate Related Charges

We expensed $14,394 related to our real estate in 2004. A valuation of the building located at 301 Velocity Way was completed in 2004 as part of our amended financing arrangement signed in September 2004 for that
building. Under the original lease of $43,080, we guaranteed the lessor an 82% residual value in the building upon the termination of the original lease. The valuation provided a value of approximately $31,730 for the building, and we paid the
lessor $11,350 and recorded a one-time loss associated with the original lease in September 2004. In addition, during the quarter ended September 30, 2004, we wrote off $852 of capitalized lease costs associated with the original lease. We also
wrote off $2,192 of capitalized costs associated with other development activity determined to have no remaining validity related to land purchased in 1997 within our Foster City campus.

Stock-based Compensation

During 2005 we awarded 357 shares of restricted stock to employees and our board of directors. As we have not adopted FAS 123R, we applied APB 25 to recognize $1,929 of expense related to our 2003 and 2005 restricted
stock awards. In 2003 and 2004 the compensation expense associated with restricted stock was not reported as a separate line item on our income statement. We will be required to adopt FAS 123R during the first quarter of 2006, and at that time will
begin recognizing expense related to options granted to employees and members of our board of directors, in addition to the expense related to restricted stock awards. We are still in the process of implementing FAS 123R and although we expect the
charge to be material to our financial statements, we are unable to forecast the actual charges at this time.

Restructuring Charges

In December 2004 we announced that we would reduce our worldwide headcount by approximately 5% in an effort to
reduce operating expenses in future periods. During the first quarter of 2005 we incurred severance costs of approximately $2,685.

Interest and Other
Income

Interest and other income

Interest income was $15,515 in 2005 and increased by approximately 28% from $12,160 in 2004, reflecting rising intererst rates. The
increase in 2004 of $1,649 in interest income from 2003 also reflects rising market interest rates throughout 2003 as well as a higher invested balance. We had realized losses on our marketable securities of $800 in 2005, mainly due to the
liquidation of various securities before maturity to fund the acquisition of VUTEk. In 2004, the realized gains on short-term investments were $140. We recognized $905 in gains from our short-term investments in 2003.

Interest expense

Interest expense and debt issuance costs related to the convertible debentures were $4,998, $4,998 and $2,873 for the years ended December 31, 2005, 2004 and 2003, respectively. The remaining interest expense was generated from the
payment of taxes.



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Litigation settlement income (charges), net

In 2004 and 2003 we received litigation settlement income of $58 and $2,408, respectively, net of related legal expenses, from the
settlement of litigation protecting our intellectual property.

Loss on equity investment

In June 2003 we exercised an option granted by Printcafe to purchase shares of Printcafe stock, representing approximately a 17% ownership
in Printcafe, which we accounted for as an available-for-sale equity security. In October 2003, we acquired the remaining 83% interest in Printcafe. We were required under generally accepted accounting principles (GAAP) to report the
investment in Printcafe on an equity basis from the time of the option exercise through the date that we acquired 100% of the outstanding shares of Printcafe. A $1,562 non-cash charge was recorded as a result of the change to equity method of
accounting.

Gain on Sale of Product Line

In 2004, we recognized approximately $2,994 from the sale of our Unimobile product line, consisting of a customer base, research and
development and sales employees, and intangible assets.

(Provision for) Benefit from Income Taxes

In 2005, we recorded a tax provision of $823 on a pre-tax operating loss of $3,244, compared to a $13,791 tax benefit recorded in 2004 on pre-tax
operating income of $24,228. In 2003, our effective tax rate was 35.9%. In each of these years, we benefited from tax-exempt interest income, research and development credits, and lower taxes on foreign income. In 2005 and 2004, our taxes decreased
due to benefits derived from the extra-territorial income exclusion. Our taxes for 2005 were also reduced by $6,239 in the second and third quarters due to a reassessment of tax contingency reserves related to the filing of US and foreign income tax
returns and $1,057 in the fourth quarter as a result of the expiration of the statute of limitations for state research and development credits. Our taxes increased in all years due to in-process research and development write-offs related to the
VUTEk acquisition in 2005, the ADS acquisition in 2004, and the Printcafe and T/R Systems acquisitions in 2003.

In the second quarter of
2005, pursuant to the American Jobs Creation Act of 2004, we made the decision to repatriate $60,000 of earnings, which had previously been permanently invested outside the United States, and we recorded a tax charge associated with repatriating
these earnings of $3,208 in the second quarter. Of this $3,208 tax charge, $2,254 related to earnings accumulated prior to 2005 and was recorded in the second quarter of 2005. The remaining tax charge of $954 relates to 2005 foreign earnings and was
reflected in the 2005 effective tax rate beginning in the second quarter. In the fourth quarter, we repatriated $70,000 (the $60,000 decided upon in the second quarter plus an additional $10,000) of earnings to the US, which resulted in an
additional tax charge of $307 in the fourth quarter.

During the third quarter of 2004, we reached a settlement with the Internal Revenue
Service for the federal income tax returns filed for the years 1999 through 2001. As a result of the settlement, the third quarters tax benefit in 2004 was increased by the reassessment of taxes resulting in a favorable adjustment of $18,934.
This favorable adjustment was related to the profitability of foreign operations in 1999 through 2003 and foreign sales corporation and research and development credit benefits.



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Recent Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 154 (FAS 154), Accounting Changes and Error Corrections.This new
standard replaces Accounting Principles Board (APB) Opinion No. 20, Accounting Changesand SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. FAS 154 requires that a voluntary change in
accounting principle be applied retrospectively with all prior period financial statements presented on the basis of the new accounting principle, unless it is impracticable to do so. FAS 154 also provides that (1) a change in method of
depreciating or amortizing a long-lived non-financial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements
should be termed a restatement. FAS 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. We do not expect the adoption of this pronouncement to have a significant
impact on our financial statements.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004) (FAS 123R),
Share-Based Payment, revising SFAS 123, Accounting for Stock-Based Compensation (FAS 123) and superseding APB Opinion No. 25, Accounting for Stock Issued to Employees(APB 25). This statement
requires a public entity to measure the cost of services provided by employees and directors received in exchange for an award of equity instruments, including stock options, at a grant-date fair value. The fair value cost is then recognized over
the period that services are provided.

In April 2005, the staff of the Securities and Exchange Commission, or the SEC, issued Staff
Accounting Bulletin No. 107 (SAB 107) to provide additional guidance regarding the application of FAS 123R. SAB 107 permits registrants to choose an appropriate valuation technique or model to estimate the fair value of stock
options, assuming consistent application, and provides guidance for the development of assumptions used in the valuation process. Additionally, SAB 107 discusses disclosures to be made under Managements Discussion and Analysis of
Financial Condition and Results of Operations in registrants periodic reports.

Based upon SEC rules issued in April 2005, FAS
123R is effective for the first quarter of fiscal years that begin after June 15, 2005. See Note 1 of these financial statements for a disclosure of the effect on net income and earnings per share for the years ended December 31, 2005,
2004 and 2003 as if we had applied the fair value recognition provisions of FAS 123 to stock-based employee compensation. While we will utilize the Black-Scholes-Merton method to calculate the stock-based employee compensation under FAS 123R, we do
not have an estimate of the full impact adoption will have on our financial statements, because we are unable to predict the number of stock options that will be granted in 2006 and we have not determined the actual variables that will be used in
the calculations. We do anticipate that there will be a significant impact upon our financial statements.

Liquidity and Capital Resources

All amounts in the following discussion are in thousands.



|                                                        |  |      |         |   |      |   |         |      |  |   |          |  
|------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                        |  | 2005 |         |   | 2004 |   |         | 2003 | 
|Cash and cash equivalents                               |  | $    | 182,039 |   |      | $ | 156,322 |      |  | $ | 113,163  |  
|Short term investments                                  |  |      | 287,577 |   |      |   | 503,237 |      |  |   | 510,949  |  
|                                                        |  |      |         |   |      |   |         |      |  |   |          |  
|Total cash, cash equivalents and short term investments |  | $    | 469,616 |   |      | $ | 659,559 |      |  | $ | 624,112  |  
|                                                        |  |      |         |   |      |   |         |      |  |   |          |  
|                                                        |  |      |        
|Net cash provided by operating activities               |  | $    | 62,883  |   |      | $ | 59,677  |      |  | $ | 46,112   |  
|Net cash (used in) provided by investing activities     |  | $    | (71,726 | ) |      | $ | 12,194  |      |  | $ | (301,664 | )
|Net cash provided by (used in) financing activities     |  | $    | 34,720  |   |      | $ | (28,766 | )    |  | $ | 214,719  |  

Overview

We ended 2005 with cash, cash equivalents and short-term investments totaling $469,616, as compared to $659,559 at the end of 2004. The decrease of $189,943 was from the use of approximately $289,150 for the



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purchase of VUTEk, offset with cash generated by our operations of approximately $62,883 and cash received from employees for purchases of common stock under
our ESPP and the exercise of common stock options of approximately $34,720. A more detailed discussion of changes in our liquidity follows.

Operating
Activities

Net cash provided by operating activities in 2005, 2004 and 2003 of $62,883, $59,677 and $46,112, respectively, was
primarily the result of net income adjusted for non-cash items such as depreciation and amortization, acquired in-process research and development, deferred income taxes, stock compensation and changes in various assets and liabilities such as
accounts payable, accounts receivable and other current assets.

Our historical and primary source of operating cash flow is the collection
of accounts receivable from our customers and the timing of payments to our vendors and service providers. One measure of the effectiveness of our collection efforts is average days sales outstanding (DSO) for accounts receivable. DSOs
were 42 days, 46 days, and 45 days at December 31, 2005, 2004 and 2003. We calculate accounts receivable DSO by dividing the net accounts receivable balance at the end of the quarter by the amount of revenue recognized for the quarter
multiplied by the total days in the quarter. We expect DSOs to vary from period to period because of changes in quarterly revenue and the effectiveness of our collection efforts. Our accounts receivable DSO trended upward in 2003 and 2004,
reflecting the longer invoice terms offered with our software products, which represented a higher portion of our sales in those years. The decrease in 2005 is a reflection of adjustments made to our accounts receivable related to the VUTEk
acquisition. We expect that our DSOs will trend upwards again in future quarters as a greater portion of our revenues will come from direct sales of printers and software which traditionally carry longer terms.

Our operating cash flows are impacted by the timing of payments to our vendors for accounts payable and by our accrual of liabilities. In 2005, the
change in accounts payable and accrued liabilities reduced our cash flows by approximately $6,230. Payments for taxes reduced our operating cash flows by $13,466.

Our working capital, defined as current assets minus current liabilities, was $460,384 and $618,056 at December 31, 2005 and 2004, respectively. The cause of the decrease in working capital of approximately
$157,672 is principally related to lower cash balances resulting from our acquisition of VUTEk.

We expect to meet our obligations as they
become due through available cash and internally generated funds. We expect to generate positive working capital through our operations. However, we cannot predict whether current trends and conditions will continue or what the effect on our
business might be from the competitive environment in which we operate. We believe the working capital available to us will be sufficient to meet our cash requirements for at least the next 12 months.

Investing Activities

A summary of our investing
activities at December 31, 2005, 2004 and 2003 follows. The detail of these line items can be seen in our consolidated statement of cash flows.

Activity



|                                                                              |  |      |          |   |      |   |          |      |  |   |            |  
|----------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | ---------- | -
|                                                                              |  | 2005 |          |   | 2004 |   |          | 2003 | 
|Purchases of short-term investments                                           |  | $    | (525,809 | ) |      | $ | (225,576 | )    |  | $ | (1,143,532 | )
|Proceeds from sales / maturities of short-term investments                    |  |      | 741,709  |   |      |   | 264,951  |      |  |   | 974,653    |  
|Net purchases of restricted cash, cash equivalents and short-term investments |  |      |         |   |      |   | (472     | )    |  |   |           |  
|Transfers of investments between restricted and available                     |  |      |         |   |      |   | 34,119   |      |  |   | (69,669    | )
|Net purchases of restricted investments                                       |  |      |         |   |      |   | (45,500  | )    |  |   |           |  
|Purchase of property and equipment                                            |  |      | (6,299   | ) |      |   | (6,563   | )    |  |   | (5,052     | )
|Proceeds from sales of property and equipment                                 |  |      | 672      |   |      |   | 4,266    |      |  |   | 176        |  
|Businesses acquired, net of cash received                                     |  |      | (281,755 | ) |      |   | (11,550  | )    |  |   | (58,240    | )
|Purchase of technology                                                        |  |      | (460     | ) |      |   |         |      |  |   |           |  
|Changes in other assets                                                       |  |      | 216      |   |      |   | (1,481   | )    |  |   |           |  
|                                                                              |  |      |          |   |      |   |          |      |  |   |            |  
|Net cash (used for) provided by investing activities                          |  | $    | (71,726  | ) |      | $ | 12,194   |      |  | $ | (301,664   | )
|                                                                              |  |      |          |   |      |   |          |      |  |   |            |  



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Acquisitions

In 2005, we purchased VUTEk for $281,755, net of cash received of $7,395. VUTEk expands our product offerings from servers and software to include
super-wide digital inkjet printers. We are now able to offer printshops a diversified product portfolio. In 2004, we paid cash for our acquisition of ADS Technology in the amount of $11,550, net of cash received of $261. We purchased ADS Technology
to enhance our software offerings to the copier dealer channels. We acquired Best GmbH for $9,585 in cash in January 2003 and Printcafe Software for a combination of shares of our common stock and $29,386 in cash in October 2003 to add products to
our offerings for the professional print industry. We also purchased T/R Systems for $20,021 in cash in November 2003 for their server technology and web-based storefront software.

We may buy or make investments in complementary companies, products and technologies. Our available cash and equity may be used to acquire or invest in
companies or products, possibly resulting in significant acquisition-related charges to earnings and dilution to our stockholders.

Property and Equipment

Our equipment purchases totaled $6,299 in 2005. We purchased $6,563 of equipment during 2004, including
costs related to the consolidation of our three Arizona offices. Purchases of property and equipment were $5,052 in 2003. Our property and equipment additions have been funded from operations.

We anticipate that we will continue to purchase property and equipment necessary in the normal course of our business. The amount and timing of these
purchases and the related cash outflows in future periods is difficult to predict and is dependent on a number of factors including our hiring of employees, the rate of change in computer hardware/software used in our business and our business
outlook.

Investments

We received net proceeds from our marketable securities in 2005 of $215,900, reflecting the liquidation of marketable securities for the purchase of VUTEk. In 2004 we received net proceeds of $39,375 resulting from the liquidation of
marketable securities to fund the collateral accounts for our synthetic leases. In 2003 we made purchases net of sales and maturities of our marketable securities of $168,879. We have classified our investment portfolio as available for
sale, and our investments are made with a policy of capital preservation and liquidity as the primary objectives. We generally hold investments in corporate bonds and U. S. government agency securities to maturity; however, we may sell an
investment at any time if the quality rating of the investment declines, the yield on the investment is no longer attractive or we are in need of cash. Because we invest only in investment securities that are highly liquid with a ready market, we
believe that the purchase, maturity or sale of our investments has no material impact on our overall liquidity.

Restricted Cash, Cash Equivalents and Short term Investments

During 2004 the restrictions on certain cash, cash equivalents and
short term investments were lifted when the synthetic lease requiring the pledged accounts expired. Approximately $35,724 in cash equivalents and short-term investments were transferred to investment accounts that carried no restrictions.

Collateral Accounts

In connection with the synthetic leases for our Foster City offices, we are required to maintain cash in LIBOR-based interest-bearing accounts. At December 31, 2003 there was one account which carried a balance of $43,080 for the 301
Velocity Way building. In September 2004 we withdrew $11,350 to reimburse the lessor for the loss in value of that building. In July 2004 we negotiated a new lease for the building located at 303 Velocity Way, and per provisions in that lease,
placed $56,850 in cash in a second LIBOR-based interest-bearing account. We now have $88,580 in collateral accounts. For further information on these transactions please see the discussion at Off Balance Sheet Financing.



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Financing Activities

Historically, our recurring cash flows provided by financing activities have been from the receipt of cash from the issuance of common stock under stock option and employee stock purchase plans. We received cash
proceeds from these plans in the amount of $34,720, $26,879 and $40,635 in 2005, 2004 and 2003, respectively. The lower proceeds in 2004 is reflective of our lower stock price during that period. If our stock price rises, more employees
options are in the money in their options, and the employees are more likely to exercise their options, which results in cash to us. If our stock price decreases, more of our employees options are out of the money or
under water, and therefore, the employees will be unlikely to exercise options, which results in no cash received by us. While we expect to continue to receive these proceeds in future periods, the timing and amount of such proceeds are
difficult to predict and is contingent on a number of factors including the price of our common stock, the number of employees participating in the plans and general market conditions. Under FAS 123R we will be required to expense the fair market
value of stock options granted and we may decide to decrease the number of stock options granted in future periods.

The primary use of
funds for financing activities in 2004 and 2003 was the use of $55,645 and $59,118, respectively, of cash to repurchase outstanding shares of our common stock. See Item 5Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities for further discussion of our programs to repurchase our common stock.

In 2003, we
received net proceeds from the issuance of our 1.50% senior convertible debentures in the amount of $233,244, net of issuance costs.

The
synthetic lease agreements for our corporate headquarters provide for residual value guarantees. Under FIN 45, the fair value of a residual value guarantee in lease agreements entered into after December 31, 2002, must be recognized as a
liability on our consolidated balance sheet. We have determined that the guarantees have no material value as of December 31, 2005 and therefore have not recorded any liability.

Other Commitments

Our inventory consists primarily of memory subsystems, processors and ASICs for
our controller products, which are sold to third-party contract manufacturers responsible for manufacturing our products and inkjet printheads, frames and other components related to our manufacturer of inkjet printers. Should we decide to purchase
components and do our own manufacturing of controllers, 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 financial condition and results of operations. We are also reliant on
several sole-source suppliers for certain key components and could experience a further significant negative impact on our financial condition and results of operations if such supply were reduced or not available. Should our volumes increase
materially on our inkjet printers, our purchases of inkjet printheads, frames and other components will also increase correspondingly.

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 allowance. Our financial condition and
results of operations could be negatively impacted if we were required to compensate the sub-contract manufacturers in amounts in excess of the accrued liability.

Legal Proceedings

In addition to the matters discussed under Item 3, Legal Proceedings, we are involved from time to
time in litigation relating to claims arising in the normal course of our business.



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Contractual Obligations

The following table summarizes our significant contractual obligations at December 31, 2005 and the effect such obligations are expected to have on our liquidity and cash flows in future periods. This table
excludes amounts already recorded on our balance sheet as current liabilities at December 31, 2005.



|                                                             |  |                        |         |                 |   |           |  |           |        |                  |   |        |  |   |        
|------------------------------------------------------------ |  | ---------------------- | ------- | --------------- | - | --------- |  | --------- | ------ | ---------------- | - | ------ |  | - | -------
|                                                             |  | Payments due by period
|                                                             |  | Total                  |         | Less than1 year |   | 1-3 years |  | 3-5 years |        | More than5 years
|Operating lease obligations (1)                              |  | $                      | 51,123  |                 | $ | 9,454     |  | $         | 16,086 |                  | $ | 11,992 |  | $ | 13,591 
|Capital purchase obligations (2)                             |  |                        |        |                 |   |          |  |           |       |                  |   |       |  |   |       
|Interest payments on 1.50% senior convertible debentures (3) |  |                        | 62,700  |                 |   | 3,600     |  |           | 7,200  |                  |   | 7,200  |  |   | 44,700 
|Long-term debt obligations                                   |  |                        | 240,000 |                 |   |          |  |           |       |                  |   |       |  |   | 240,000
|                                                             |  |                        |         |                 |   |           |  |           |        |                  |   |        |  |   |        
|Total (4)                                                    |  | $                      | 353,823 |                 | $ | 13,054    |  | $         | 23,286 |                  | $ | 19,192 |  | $ | 298,291
|                                                             |  |                        |         |                 |   |           |  |           |        |                  |   |        |  |   |        

---

|(1) | Lease obligations related to the principal corporate facilities are estimated and are based on current market interest rates (LIBOR). See Off-Balance Sheet Financing below
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | See Off-Balance Sheet Financing below.
|--- | --------------------------------------

|(3) | See Note 7 of the Notes to the Consolidated Financial Statements for additional information regarding our 1.50% Senior Convertible Debentures
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Total does not include contractual obligations recorded on the balance sheet as current liabilities, or certain purchase obligations as discussed below.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------

Purchase orders or contracts for the purchase of raw materials and other goods and services are not included in the table above. We are not able to
determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. For the purposes of this table, contractual obligations for
purchase of goods or services are defined as agreements that are enforceable and legally binding on EFI and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and
the approximate timing of the transaction. Our purchase orders are based on our current manufacturing needs and are fulfilled by our vendors within short time horizons. We do not have significant agreements for the purchase of raw materials or other
goods specifying minimum quantities or set prices that exceed our expected requirements for three months. We also enter into contracts for outsourced services; however the obligations under these contracts were not significant and the contracts
generally contain clauses allowing for cancellation without significant penalty.

The expected timing of payment of the obligations
discussed above is estimated based on current information. Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations.

Off-Balance Sheet Financing

All amounts in this
section are presented in thousands, except for per share amounts.

Synthetic Lease Arrangements

We are a party to two synthetic leases (the 301 Lease and the 303 Lease, together Leases) covering our Foster City
facilities located at 301 and 303 Velocity Way, Foster City, California. These leases provide a cost effective means of providing adequate office space for our corporate offices. Both Leases expire in July 2014. 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 lessor to purchase the facilities ($56,850 for the 303 Lease and $31,730 for the 301 Lease). We have guaranteed to the lessor a residual value associated with
the buildings equal to 82% of their funding of the respective Leases. Under the financial covenants, we must maintain a minimum net worth and a minimum



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tangible net worth as of the end of each quarter. There is an additional covenant regarding mergers. We were in compliance with all of the covenants as of
December 31, 2005. We are liable to the lessor for the financed amount of the buildings if we default on our covenants.

We have
assessed our exposure in relation to the first loss guarantees under the Leases and believe that there is no deficiency to the guaranteed value at December 31, 2005. If there is a decline in value, we will record a loss associated with the
residual value guarantee. The funds pledged under the Leases ($56,850 for the 303 Lease and $31,730 for the 301 Lease at December 31, 2005 for a total of $88,580) are in LIBOR-based interest bearing accounts and are restricted as to withdrawal
at all times. In conjunction with the Leases, we have entered into separate ground leases with the lessor for approximately 30 years.

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

Effective July 1, 2003, we applied the accounting and
disclosure rules set forth in Interpretation No. 46 Consolidation of Variable Interest Entities, as revised (FIN 46R) for variable interest entities (VIEs). We have evaluated our synthetic lease agreements to
determine if the arrangements qualify as variable interest entities under FIN 46R. We have determined that the synthetic lease agreements do qualify as VIEs; however, because we are not the primary beneficiary under FIN 46R we are not required to
consolidate the VIEs in our financial statements.

Factors That Could Adversely Affect Performance and Financial Results

Item 7A:Quantitative and Qualitative Disclosures About Market Risk

All amounts in this section are presented in thousands, except for per share amounts.

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.

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 held by us at December 31, 2005 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:



|                        |  |                                                                          |         |                            |   |                                                                          |  |   |        
|----------------------- |  | ------------------------------------------------------------------------ | ------- | -------------------------- | - | ------------------------------------------------------------------------ |  | - | -------
|                        |  | Valuation of securitiesgiven an interest ratedecrease of 100 basispoints |         | No change ininterest rates |   | Valuation of securitiesgiven an interest rateincrease of 100 basispoints
|Total Fair Market Value |  | $                                                                        | 330,408 |                            | $ | 329,734                                                                  |  | $ | 329,067



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The fair value of our long-term debt, including current maturities, was estimated to be $265,200 as of
December 31, 2005 and the carrying value was $240,000. The fair market value of our convertible senior debentures was estimated based upon quoted market prices.

Derivatives

We do not use any derivatives for trading or speculative purposes.

Financial Risk Management

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

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

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

Item 8: Financial Statements and Supplementary Data



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Electronics for Imaging Inc.:

We have completed integrated audits of Electronics for Imaging Inc.s 2005 and 2004
consolidated financial statements and of its internal control over financial reporting as of December 31, 2005 and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement
schedule

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly,
in all material respects, the financial position of Electronics for Imaging Inc. and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly,
in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, managements assessment, included in Managements Report on Internal Control Over Financial Reporting appearing under
Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2005, based on criteria established in Internal ControlIntegrated Framework issued by the COSO. The Companys management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on managements assessment and on the effectiveness of the Companys internal control over financial
reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinions.

A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys
internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable



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assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As
described in Managements Report on Internal Control over Financial Reporting, management has excluded VUTEk Inc. (VUTEk) from its assessment of internal control over financial reporting as of December 31, 2005 because it was acquired
by the Company in a purchase business combination during fiscal year 2005. We have also excluded VUTEk from our audit of internal control over financial reporting. VUTEk is a wholly-owned subsidiary whose total assets and total revenues represent
24.6% and 18.6%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2005.

/s/    PricewaterhouseCoopers LLP

San Jose, California

March 16, 2006



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Electronics for Imaging, Inc.

Consolidated Balance Sheets



|                                                                                                             |  |              |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------------------ |  | ------------ | --------- | - | ---- | - | --------- | -
|                                                                                                             |  | December 31, |          
|(in thousands, except per share amounts)                                                                     |  | 2005         |           |   | 2004 |  
|Assets                                                                                                       |  |              |           |   |      |   |           |  
|                                                                                                             |  |             
|Current assets:                                                                                              |  |              |           |   |      |   |           |  
|Cash and cash equivalents                                                                                    |  | $            | 182,039   |   |      | $ | 156,322   |  
|Short-term investments                                                                                       |  |              | 287,577   |   |      |   | 503,237   |  
|Accounts receivable, net                                                                                     |  |              | 67,926    |   |      |   | 41,128    |  
|Inventories                                                                                                  |  |              | 25,874    |   |      |   | 5,529     |  
|Other current assets                                                                                         |  |              | 32,267    |   |      |   | 22,157    |  
|                                                                                                             |  |              |           |   |      |   |           |  
|Total current assets                                                                                         |  |              | 595,683   |   |      |   | 728,373   |  
|                                                                                                             |  |             
|Property and equipment, net                                                                                  |  |              | 49,600    |   |      |   | 44,324    |  
|Restricted investments                                                                                       |  |              | 88,580    |   |      |   | 88,580    |  
|Goodwill                                                                                                     |  |              | 189,667   |   |      |   | 73,768    |  
|Intangible assets, net                                                                                       |  |              | 153,722   |   |      |   | 40,842    |  
|Other assets                                                                                                 |  |              | 5,276     |   |      |   | 41,990    |  
|                                                                                                             |  |              |           |   |      |   |           |  
|Total assets                                                                                                 |  | $            | 1,082,528 |   |      | $ | 1,017,877 |  
|                                                                                                             |  |              |           |   |      |   |           |  
|Liabilities and Stockholders Equity                                                                         |  |              |           |   |      |   |           |  
|                                                                                                             |  |             
|Current liabilities:                                                                                         |  |              |           |   |      |   |           |  
|                                                                                                             |  |             
|Accounts payable                                                                                             |  | $            | 30,937    |   |      | $ | 24,286    |  
|Accrued and other liabilities                                                                                |  |              | 88,035    |   |      |   | 62,219    |  
|Income taxes payable                                                                                         |  |              | 16,327    |   |      |   | 23,812    |  
|                                                                                                             |  |              |           |   |      |   |           |  
|Total current liabilities                                                                                    |  |              | 135,299   |   |      |   | 110,317   |  
|                                                                                                             |  |             
|Deferred tax liability                                                                                       |  |              | 530       |   |      |   |          |  
|                                                                                                             |  |             
|Long-term obligations                                                                                        |  |              | 240,000   |   |      |   | 240,000   |  
|                                                                                                             |  |              |           |   |      |   |           |  
|Total liabilities                                                                                            |  |              | 375,829   |   |      |   | 350,317   |  
|Commitments and contingencies (Note 9)                                                                       |  |              |           |   |      |   |           |  
|Stockholders equity:                                                                                        |  |              |           |   |      |   |           |  
|Preferred stock, $0.01 par value, 5,000 shares authorized; none issued and outstanding                       |  |              |          |   |      |   |          |  
|Common stock, $0.01 par value; 150,000 shares authorized; 56,249 and 53,828 shares outstanding, respectively |  |              | 662       |   |      |   | 638       |  
|Additional paid-in capital                                                                                   |  |              | 408,532   |   |      |   | 360,489   |  
|Deferred compensation                                                                                        |  |              | (5,153    | ) |      |   | (1,149    | )
|Treasury stock, at cost, 9,964 shares                                                                        |  |              | (214,722  | ) |      |   | (214,722  | )
|Retained earnings                                                                                            |  |              | 519,449   |   |      |   | 523,516   |  
|Accumulated other comprehensive income                                                                       |  |              | (2,069    | ) |      |   | (1,212    | )
|                                                                                                             |  |              |           |   |      |   |           |  
|Total stockholders equity                                                                                   |  |              | 706,699   |   |      |   | 667,560   |  
|                                                                                                             |  |              |           |   |      |   |           |  
|Total liabilities and stockholders equity                                                                   |  | $            | 1,082,528 |   |      | $ | 1,017,877 |  
|                                                                                                             |  |              |           |   |      |   |           |  

See accompanying notes to consolidated financial statements.



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Electronics for Imaging, Inc.

Consolidated Statements of Income



|                                                                          |  |                                  |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                          |  | For the Years Ended December 31, |        
|(in thousands, except per share amounts)                                  |  | 2005                             |         |   | 2004 |   |         | 2003 | 
|Revenue                                                                   |  | $                                | 468,501 |   |      | $ | 394,604 |      |  | $ | 379,587 |  
|Cost of revenue (1)                                                       |  |                                  | 179,490 |   |      |   | 138,382 |      |  |   | 148,054 |  
|                                                                          |  |                                  |         |   |      |   |         |      |  |   |         |  
|Gross profit                                                              |  |                                  | 289,011 |   |      |   | 256,222 |      |  |   | 231,533 |  
|                                                                          |  |                                  |         |   |      |   |         |      |  |   |         |  
|Operating expenses:                                                       |  |                                  |         |   |      |   |         |      |  |   |         |  
|Research and development (1)                                              |  |                                  | 109,525 |   |      |   | 111,134 |      |  |   | 96,697  |  
|Sales and marketing (1)                                                   |  |                                  | 81,854  |   |      |   | 74,711  |      |  |   | 61,597  |  
|General and administrative (1)                                            |  |                                  | 34,007  |   |      |   | 27,264  |      |  |   | 21,690  |  
|Stock-based compensation expense                                          |  |                                  | 1,929   |   |      |   |        |      |  |   |        |  
|Restructuring charges                                                     |  |                                  | 2,685   |   |      |   |        |      |  |   |        |  
|Real estate related charges                                               |  |                                  |        |   |      |   | 14,394  |      |  |   |        |  
|Amortization of identified intangibles                                    |  |                                  | 26,434  |   |      |   | 13,690  |      |  |   | 6,450   |  
|In-process research & development charge                                  |  |                                  | 45,300  |   |      |   | 1,000   |      |  |   | 13,220  |  
|                                                                          |  |                                  |         |   |      |   |         |      |  |   |         |  
|Total operating expenses                                                  |  |                                  | 301,734 |   |      |   | 242,193 |      |  |   | 199,654 |  
|                                                                          |  |                                  |         |   |      |   |         |      |  |   |         |  
|(Loss) income from operations                                             |  |                                  | (12,723 | ) |      |   | 14,029  |      |  |   | 31,879  |  
|                                                                          |  |                                  |         |   |      |   |         |      |  |   |         |  
|Interest and other income, net:                                           |  |                                  |         |   |      |   |         |      |  |   |         |  
|Interest and other income                                                 |  |                                  | 14,489  |   |      |   | 12,779  |      |  |   | 11,489  |  
|Interest expense                                                          |  |                                  | (5,010  | ) |      |   | (5,632  | )    |  |   | (2,886  | )
|Gain on sale of product line                                              |  |                                  |        |   |      |   | 2,994   |      |  |   |        |  
|Litigation settlement income, net                                         |  |                                  |        |   |      |   | 58      |      |  |   | 2,408   |  
|Loss on equity investment                                                 |  |                                  |        |   |      |   |        |      |  |   | (1,562  | )
|                                                                          |  |                                  |         |   |      |   |         |      |  |   |         |  
|Total interest and other income, net                                      |  |                                  | 9,479   |   |      |   | 10,199  |      |  |   | 9,449   |  
|                                                                          |  |                                  |         |   |      |   |         |      |  |   |         |  
|(Loss) income before income taxes                                         |  |                                  | (3,244  | ) |      |   | 24,228  |      |  |   | 41,328  |  
|(Provision for) benefit from income taxes                                 |  |                                  | (823    | ) |      |   | 13,791  |      |  |   | (14,820 | )
|                                                                          |  |                                  |         |   |      |   |         |      |  |   |         |  
|Net (loss) income                                                         |  | $                                | (4,067  | ) |      | $ | 38,019  |      |  | $ | 26,508  |  
|                                                                          |  |                                  |         |   |      |   |         |      |  |   |         |  
|Net (loss) income per basic common share                                  |  | $                                | (0.07   | ) |      | $ | 0.71    |      |  | $ | 0.49    |  
|                                                                          |  |                                  |         |   |      |   |         |      |  |   |         |  
|Shares used in basic per-share calculation                                |  |                                  | 54,425  |   |      |   | 53,898  |      |  |   | 53,789  |  
|Net (loss) income per diluted common share                                |  | $                                | (0.07   | ) |      | $ | 0.64    |      |  | $ | 0.47    |  
|                                                                          |  |                                  |         |   |      |   |         |      |  |   |         |  
|Shares used in diluted per-share calculation                              |  |                                  | 54,425  |   |      |   | 63,996  |      |  |   | 60,138  |  
|                                                                          |  |                                  |         |   |      |   |         |      |  |   |         |  
|(1)    Non-cash stock-based compensation expense as follows:              |  |                                  |         |   |      |   |         |      |  |   |         |  
|                                                                          |  |                                  |        
|Cost of revenue (included in cost of revenue)                             |  | $                                | 54      |   |      | $ |        |      |  | $ |        |  
|                                                                          |  |                                  |         |   |      |   |         |      |  |   |         |  
|Research and development (included in stock-based compensation expense)   |  |                                  | 467     |   |      |   |        |      |  |   |        |  
|Sales and marketing (included in stock-based compensation expense)        |  |                                  | 88      |   |      |   |        |      |  |   |        |  
|General and administrative (included in stock-based compensation expense) |  |                                  | 1,374   |   |      |   |        |      |  |   |        |  
|                                                                          |  |                                  |         |   |      |   |         |      |  |   |         |  
|                                                                          |  |                                  | 1,929   |   |      |   |        |      |  |   |        |  
|                                                                          |  |                                  |         |   |      |   |         |      |  |   |         |  
|                                                                          |  | $                                | 1,983   |   |      | $ |        |      |  | $ |        |  
|                                                                          |  |                                  |         |   |      |   |         |      |  |   |         |  

See accompanying notes to consolidated financial statements.



50



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##### Table of Contents

Electronics for Imaging, Inc.

Consolidated Statements of Stockholders Equity



|                                               |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|---------------------------------------------- |  | ------------ | - | -------------------------- | ------ | --- | --------------------- | - | ------- | -------------- |  | ------ | --------------------------------- | - |  | ----------------- | - |  | -------------------------- | -------- | - |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                               |  | Common Stock |   | Additional Paid-in Capital |        |     | Deferred Compensation |   |         | Treasury Stock |  |        | Other Comprehensive Income
(Loss) |   |  | Retained Earnings |   |  | Total Stockholders Equity |         
|(in thousands)                                 |  | Shares       |   |                            | Amount |     |                       |   | Shares  |                |  | Amount |                                   |   |  |                  
|Balances as of December 31, 2002               |  | 59,046       |   |                            | $      | 590 |                       | $ | 272,456 |                |  |        |                                  |   |  | (4,478            | ) |  | $                          | (99,959  | ) |  | $ | 1,991  |   |  | $ | 458,989 |   |  | $ | 634,067 |  
|Net income                                     |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   | 26,508  |   |  |   |         |  
|Other comprehensive income (loss), net of tax: |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Currency translation adjustment                |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   | 1,417  |   |  |   |         |   |  |   |         |  
|Market valuation on short-term investments     |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   | (2,396 | ) |  |   |        |   |  |   |         |  
|                                               |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Comprehensive income                           |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   | (979   | ) |  |   | 26,508  |   |  |   | 25,529  |  
|Repurchase of common stock                     |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  | (3,170            | ) |  |                            | (59,118  | ) |  |   |        |   |  |   |         |   |  |   | (59,118 | )
|Stock issued for acquisitions                  |  | 202          |   |                            |        | 2   |                       |   | 5,575   |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   | 5,577   |  
|Exercise of common stock options               |  | 2,425        |   |                            |        | 24  |                       |   | 36,581  |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   | 36,605  |  
|Restricted stock grants                        |  | 66           |   |                            |        | 1   |                       |   | 1,643   |                |  |        | (1,597                            | ) |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   | 47      |  
|Stock issued pursuant to ESPP                  |  | 305          |   |                            |        | 3   |                       |   | 3,980   |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   | 3,983   |  
|Tax benefit related to stock plans             |  |             |   |                            |        |    |                       |   | 8,123   |                |  |        |                                  |   |  |                  |   |  |                            |         |   |  |   |       |   |  |   |        |   |  |   | 8,123   |  
|                                               |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Balances as of December 31, 2003               |  | 62,044       |   |                            |        | 620 |                       |   | 328,358 |                |  |        | (1,597                            | ) |  | (7,648            | ) |  |                            | (159,077 | ) |  |   | 1,012  |   |  |   | 485,497 |   |  |   | 654,813 |  
|Net income                                     |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   | 38,019  |   |  |   |         |  
|Other comprehensive income (loss), net of tax: |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Currency translation adjustment                |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   | 392    |   |  |   |         |   |  |   |         |  
|Market valuation on short-term investments     |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   | (2,616 | ) |  |   |        |   |  |   |         |  
|                                               |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Comprehensive income                           |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   | (2,224 | ) |  |   | 38,019  |   |  |   | 35,795  |  
|Repurchase of common stock                     |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  | (2,316            | ) |  |                            | (55,645  | ) |  |   |        |   |  |   |         |   |  |   | (55,645 | )
|Exercise of common stock options               |  | 1,385        |   |                            |        | 14  |                       |   | 21,951  |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   | 21,965  |  
|Restricted stock grants cancelled              |  | (5           | ) |                            |        |    |                       |   | (126    | )              |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   | (126    | )
|Amortization of deferred compensation          |  |              |   |                            |        |     |                       |   |         |                |  |        | 448                               |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   | 448     |  
|Stock issued pursuant to ESPP                  |  | 368          |   |                            |        | 4   |                       |   | 5,036   |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   | 5,040   |  
|Tax benefit related to stock plans             |  |             |   |                            |        |    |                       |   | 5,270   |                |  |        |                                  |   |  |                  |   |  |                            |         |   |  |   |       |   |  |   |        |   |  |   | 5,270   |  
|                                               |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Balances as of December 31, 2004               |  | 63,792       |   |                            |        | 638 |                       |   | 360,489 |                |  |        | (1,149                            | ) |  | (9,964            | ) |  |                            | (214,722 | ) |  |   | (1,212 | ) |  |   | 523,516 |   |  |   | 667,560 |  
|Net loss                                       |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   | (4,067  | ) |  |   |         |  
|Other comprehensive income (loss), net of tax: |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Currency translation adjustment                |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   | (1,000 | ) |  |   |         |   |  |   |         |  
|Market valuation on short-term investments     |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   | 143    |   |  |   |        |   |  |   |         |  
|                                               |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Comprehensive loss                             |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   | (857   | ) |  |   | (4,067  | ) |  |   | (4,924  | )
|Exercise of common stock options               |  | 1,698        |   |                            |        | 17  |                       |   | 29,434  |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   | 29,451  |  
|Restricted stock grants                        |  | 357          |   |                            |        | 4   |                       |   | 6,194   |                |  |        | (6,198                            | ) |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   |        |  
|Amortization of deferred compensation          |  |              |   |                            |        |     |                       |   |         |                |  |        | 2,194                             |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   | 2,194   |  
|Stock issued pursuant to ESPP                  |  | 366          |   |                            |        | 3   |                       |   | 5,266   |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   | 5,269   |  
|Tax benefit related to stock plans             |  |             |   |                            |        |    |                       |   | 7,149   |                |  |        |                                  |   |  |                  |   |  |                            |         |   |  |   |       |   |  |   |        |   |  |   | 7,149   |  
|                                               |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Balances as of December 31, 2005               |  | 66,213       |   |                            | $      | 662 |                       | $ | 408,532 |                |  | $      | (5,153                            | ) |  | (9,964            | ) |  | $                          | (214,722 | ) |  | $ | (2,069 | ) |  | $ | 519,449 |   |  | $ | 706,699 |  
|                                               |  |              |   |                            |        |     |                       |   |         |                |  |        |                                   |   |  |                   |   |  |                            |          |   |  |   |        |   |  |   |         |   |  |   |         |  

See accompanying notes to consolidated financial statements.



51



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##### Table of Contents

Electronics for Imaging, Inc.

Consolidated Statements of Cash Flows



|                                                                                         |  |                          |          |   |      |   |          |      |  |   |            |  
|---------------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | ---------- | -
|                                                                                         |  | Years Ended December 31, |         
|(in thousands)                                                                           |  | 2005                     |          |   | 2004 |   |          | 2003 | 
|Cash flows from operating activities:                                                    |  |                          |          |   |      |   |          |      |  |   |            |  
|Net (loss) income                                                                        |  | $                        | (4,067   | ) |      | $ | 38,019   |      |  | $ | 26,508     |  
|Adjustments to reconcile net (loss) income to net cash provided by operating activities: |  |                          |          |   |      |   |          |      |  |   |            |  
|Depreciation and amortization                                                            |  |                          | 35,610   |   |      |   | 23,524   |      |  |   | 17,162     |  
|Purchased in-process research & development                                              |  |                          | 45,300   |   |      |   | 1,000    |      |  |   | 13,220     |  
|Deferred taxes                                                                           |  |                          | 1,770    |   |      |   | (13,442  | )    |  |   | 2,226      |  
|Provision for allowance for bad debts and sales-related allowances                       |  |                          | 6,890    |   |      |   | 1,288    |      |  |   | 96         |  
|Tax benefit from exercise of non-qualified stock options                                 |  |                          | 7,149    |   |      |   | 5,270    |      |  |   | 8,123      |  
|Amortization of deferred compensation                                                    |  |                          | 2,194    |   |      |   | 448      |      |  |   |           |  
|Impairment of long-lived assets                                                          |  |                          |         |   |      |   |         |      |  |   | 306        |  
|Loss on equity investment                                                                |  |                          |         |   |      |   |         |      |  |   | 1,562      |  
|Provision for inventory obsolesence                                                      |  |                          | 1,954    |   |      |   | 308      |      |  |   | 2,040      |  
|Other                                                                                    |  |                          |         |   |      |   | 50       |      |  |   | 9          |  
|Changes in operating assets and liabilities, net of effect of acquired companies:        |  |                          |          |   |      |   |          |      |  |   |            |  
|Accounts receivable                                                                      |  |                          | (11,853  | ) |      |   | 12,197   |      |  |   | (3,049     | )
|Inventories                                                                              |  |                          | (3,610   | ) |      |   | 2,167    |      |  |   | (5,132     | )
|Receivables from sub-contract manufacturers                                              |  |                          | (72      | ) |      |   | (439     | )    |  |   | 621        |  
|Other current assets                                                                     |  |                          | 1,314    |   |      |   | 524      |      |  |   | 217        |  
|Accounts payable and accrued liabilities                                                 |  |                          | (6,230   | ) |      |   | (1,421   | )    |  |   | (19,184    | )
|Income taxes payable                                                                     |  |                          | (13,466  | ) |      |   | (9,816   | )    |  |   | 1,387      |  
|                                                                                         |  |                          |          |   |      |   |          |      |  |   |            |  
|Net cash provided by operating activities                                                |  |                          | 62,883   |   |      |   | 59,677   |      |  |   | 46,112     |  
|Cash flows from investing activities:                                                    |  |                          |          |   |      |   |          |      |  |   |            |  
|Purchases of short-term investments                                                      |  |                          | (525,809 | ) |      |   | (225,576 | )    |  |   | (1,143,532 | )
|Proceeds from sales and maturities of short-term investments                             |  |                          | 741,709  |   |      |   | 264,951  |      |  |   | 974,653    |  
|Net purchases of restricted cash, cash equivalents and short-term investments            |  |                          |         |   |      |   | (472     | )    |  |   |           |  
|Transfers of investments between restricted and available-for-sale                       |  |                          |         |   |      |   | 34,119   |      |  |   | (69,669    | )
|Net purchases of restricted investments                                                  |  |                          |         |   |      |   | (45,500  | )    |  |   |           |  
|Purchase of property and equipment                                                       |  |                          | (6,299   | ) |      |   | (6,563   | )    |  |   | (5,052     | )
|Proceeds from sales of property and equipment                                            |  |                          | 672      |   |      |   | 4,266    |      |  |   | 176        |  
|Businesses acquired, net of cash received                                                |  |                          | (281,755 | ) |      |   | (11,550  | )    |  |   | (58,240    | )
|Purchase of technology                                                                   |  |                          | (460     | ) |      |   |         |      |  |   |           |  
|Purchases of other assets                                                                |  |                          | 216      |   |      |   | (1,481   | )    |  |   |           |  
|                                                                                         |  |                          |          |   |      |   |          |      |  |   |            |  
|Net cash provided by (used for) investing activities                                     |  |                          | (71,726  | ) |      |   | 12,194   |      |  |   | (301,664   | )
|Cash flows from financing activities:                                                    |  |                          |          |   |      |   |          |      |  |   |            |  
|Repayment of long-term obligations                                                       |  |                          |         |   |      |   |         |      |  |   | (42        | )
|Proceeds from issuance of long-term debt, net                                            |  |                          |         |   |      |   |         |      |  |   | 233,244    |  
|Proceeds from issuance of common stock                                                   |  |                          | 34,720   |   |      |   | 26,879   |      |  |   | 40,635     |  
|Purchases of treasury stock                                                              |  |                          |         |   |      |   | (55,645  | )    |  |   | (59,118    | )
|                                                                                         |  |                          |          |   |      |   |          |      |  |   |            |  
|Net cash provided by (used for) financing activities                                     |  |                          | 34,720   |   |      |   | (28,766  | )    |  |   | 214,719    |  
|Effect of foreign exchange changes on cash and cash equivalents                          |  |                          | (160     | ) |      |   | 54       |      |  |   | 91         |  
|                                                                                         |  |                          |          |   |      |   |          |      |  |   |            |  
|Increase (decrease) in cash and cash equivalents                                         |  |                          | 25,717   |   |      |   | 43,159   |      |  |   | (40,742    | )
|Cash and cash equivalents at beginning of year                                           |  | $                        | 156,322  |   |      | $ | 113,163  |      |  | $ | 153,905    |  
|                                                                                         |  |                          |          |   |      |   |          |      |  |   |            |  
|Cash and cash equivalents at end of year                                                 |  | $                        | 182,039  |   |      | $ | 156,322  |      |  | $ | 113,163    |  
|                                                                                         |  |                          |          |   |      |   |          |      |  |   |            |  

See accompanying notes to consolidated financial statements.



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements

(In thousands, except for per share amounts)

Note
1: The Company and Its Significant Accounting Policies

The Company and Its Business

We are a world leader in digital controllers, superwide format printers and inks, and print management solutions. Our award-winning technologies offer
integrated document management tools from creation to print, including high fidelity color Fiery print controllers that can output up to 2000 pages per minute; VUTEk superwide digital inkjet printers and UV and solvent inks capable of printing on
flexible and rigid substrates; powerful print production workflow and management information software solutions for increased performance and cost efficiency; and an array of corporate printing solutions. Our integrated solutions and award-winning
technologies are designed to automate print and business processes, streamline workflow, provide profitable value-added services and produce accurate digital output across the range of digital printing from office to high-end production to
super-wide digital inkjet printing. We operate primarily in one industry and sell our products primarily to original equipment manufacturers, major distribution partners and directly to print shops in North America, Europe, Asia Pacific and Japan.

Significant Accounting Policies

Basis of
Presentation

The accompanying consolidated financial statements include the accounts of EFI and our subsidiaries. All significant
inter-company accounts and transactions have been eliminated in consolidation.

All amounts, except for per share amounts, are presented in
thousands.

Reclassifications

Certain
prior year balances have been reclassified for conformity with the current year presentation.

Use of Estimates

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

Cash, Cash Equivalents and Short-term Investments

We invest our excess cash in deposits with major banks; money market securities; and municipal, U.S. government and corporate debt securities. By policy, EFI invests primarily in high-grade marketable securities. We
are exposed to credit risk in the event of default by the financial institutions or issuers of these investments to the extent of amounts recorded on the consolidated balance sheet.

EFI considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Typically, the cost
of these investments has approximated fair value. Marketable investments with



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



a maturity greater than 3 months are classified as available-for-sale short-term investments. Available-for-sale securities are stated at fair market value
with unrealized gains and losses reported as a separate component of stockholders equity, adjusted for deferred income taxes. Realized gains and losses on sales of investments are recognized upon sale of the investments using the specific
identification method.

Allowance for Doubtful Accounts and Sales-related Allowances

We analyze accounts receivable and historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our
customer payment terms when evaluating the adequacy of our allowance for doubtful accounts. In addition, we specifically reserve for any accounts receivable for which there are identified collection issues. Balances are charged off when we deem it
probable the receivable will not be recovered. We also make provision for sales rebates and revenue adjustments based upon analysis of current sales programs and revenues.

Concentration of Risk

EFI is exposed to credit risk in the event of default by any of our customers
to the extent of amounts recorded in the consolidated balance sheet. We perform ongoing evaluations of the collectibility of the accounts receivable balances for our customers and maintain allowances for estimated credit losses; actual losses have
not historically been significant, but has risen over the past several years as our customer base has grown through acquisitions.

Our
controller products, which constitute approximately 59% of our revenues, are sold to a limited number of OEMs. We expect that we will continue to depend on a relatively small number of OEM customers for a significant portion of our revenues,
although the significance of that revenue is expected to decline in future periods, as we broaden our customer base through acquisitions.

We are reliant on certain sole source suppliers for key components of our products. We conduct our business with our component suppliers solely on a purchase order basis. Any disruption in the supply of the key components would result in us
being unable to manufacture our products.

Most of our current controller products include software that we must license from Adobe Systems
Incorporated (Adobe). In order to obtain licenses from Adobe, Adobe requires that we obtain from it 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 produce products that incorporate Adobe PostScript® software.

EFI subcontracts with other companies to manufacture our controller products. We rely on
the ability of our sub-contractors to produce the products sold to our customers. A high concentration of EFIs products is manufactured at one sub-contractor location. If the sub-contractor was to lose production capabilities at this facility,
we would experience delays in delivering product to our customers. We do not maintain long-term agreements with our sub-contractors which could lead to an inability of such sub-contractor to fill our orders.

Inventories

Inventories are stated at standard cost,
which approximates the lower of actual cost using a first-in, first-out method, or market. We periodically review our inventories for potential slow-moving or obsolete items and write



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



down specific items to net realizable value as appropriate. Work-in-process inventories consist of EFIs product at various levels of assembly and
include materials, labor and manufacturing overhead. Finished goods inventory represents completed products awaiting shipment.

Property and Equipment

Property and equipment is recorded at cost. Depreciation on assets is computed using the straight-line method over the estimated useful
lives of the assets. The estimated life for desktop and laptop computers is 18 to 24 months, furniture has an estimated life of 5 to 7 years, software is amortized over 3 to 8 years and buildings have an estimated life of 40 years. All other assets
are typically considered to have a 3- to 5-year life. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements or the lease term, if shorter. Land improvements, such as parking lots and
sidewalks, are amortized using the straight-line method over the estimated useful lives of the improvements.

When assets are disposed, we
remove the asset and accumulated depreciation from our records and recognize the related gain or loss in results of operations. The cost and related accumulated depreciation applicable to property and equipment sold or no longer in service are
eliminated from the accounts and any gain or loss is included in operations.

Depreciation expense was $7,778, $8,192 and $9,908 for the
years ended December 31, 2005, 2004 and 2003, respectively.

Repairs and maintenance expenditures which are not considered
improvements and do not extend the useful life of property and equipment, are expensed as incurred.

Internal Use Software

We follow the guidance in Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.
Software development costs, including costs incurred to purchase third party software, are capitalized beginning when We have determined that certain factors are present, including among others, that technology exists to achieve the performance
requirements. Capitalization of software costs ceases when the software is substantially complete and is ready for its intended use and is amortized over its estimated useful life of three years using the straight-line method.

Long-lived Assets, including Goodwill

Long-lived
assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. We measure the assets for impairment based upon the estimated future undiscounted cash flows
from the asset.

Under SFAS No. 142,Goodwill and Other Intangible Assets (SFAS 142) we have ceased amortizing
goodwill. The provisions of SFAS 142 also require periodic testing of goodwill for impairment. The annual impairment test performed on the July 1, 2005 balances did not require us to recognize any impairment charge against goodwill.

Amortization of Purchased Intangible Assets

Intangible assets acquired to date are being amortized on a straight-line basis over periods ranging from 3 to 30 years. No changes have been made to the useful lives of amortizable identifiable intangible assets in 2005.



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



Aggregate amortization expense was $26,434, $13,690 and $6,450 for the years ended December 31,
2005, 2004 and 2003, respectively.

Fair Value of Financial Instruments

The carrying amounts of our financial instruments, including cash, cash equivalents, accounts receivable, accounts payable, and accrued liabilities
approximate their respective fair market values due to the short maturities of these financial instruments. The fair market value of our convertible senior debentures issued in June 2003 was $265,200 and $229,500 at December 31, 2005 and 2004,
respectively, based upon the quoted market price. The fair value of our available-for-sale securities is disclosed in Note 6 of the Notes to the Consolidated Financial Statements.

Warranty

Our products are generally accompanied by a 12-month warranty, which covers both parts and
labor. In accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies(SFAS 5), an accrual is made when it is estimable and probable based upon historical experience. A provision for
estimated future warranty work is recorded in cost of goods sold upon recognition of revenue and the resulting accrual is reviewed regularly and periodically adjusted to reflect changes in warranty work estimates.

Research and Development

We expense costs associated
with the research and development of new software products as incurred until technological feasibility is established. Research and development costs include salaries and benefits of researchers, supplies and other expenses incurred with research
and development efforts. To date we have not capitalized research and development costs associated with software development as products and enhancements have generally reached technological feasibility and have been released for sale at
substantially the same time.

Revenue Recognition

We apply the provisions of Statement of Position 97-2, Software Revenue Recognition(SOP 97-2), as amended by Statement of Position 98-9, Modification of SOP 97-2, Software Recognition, With
Respect to Certain Transactions, to all transactions involving the sale of software products and hardware transactions where the software is not incidental.

We recognize revenue from the sale of controllers, printers, and ink when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable and collection of the resulting
receivable is reasonably assured. Delivery generally occurs when product is delivered to the customers common carrier. We assess whether the fee is fixed or determinable based on the terms of the contract or purchase order. We assess
collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. We do not request collateral from our customers. If we determine that collection of a fee is not reasonably
assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash.

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



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



We license our software under perpetual licenses. Revenue from software consists of software
licensing, post-contract customer support and professional consulting. Revenue is allocated to the support elements of an agreement using vendor specific objective evidence of fair value (VSOE) and to the software license portion of the
agreements using the residual method. VSOE is determined based on the price charged when the element is sold separately or for post-contract customer support based on substantative renewal rates. Revenue allocated to software licenses is recognized
when the following four basic criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectibility is probable. Revenue allocated to post-contract support is recognized ratably
over the term of the support contract (typically one to two years), assuming the four basic criteria are met. We also have subscription arrangements where the customer pays a fixed fee and receives services over a period of time. We recognize
revenue from the subscriptions ratably over the service period. Any upfront setup fees associated with our subscription arrangements are recognized ratably, generally over one year.

Advertising

Advertising costs are expensed as incurred. Total advertising and promotional expenses
were $4,526 for 2005, $2,554 for 2004 and $3,308 for 2003.

Shipping and Handling Costs

Shipping and handling costs are included in cost of revenue. Total shipping and handling costs were $1,710 for 2005, $1,375 for 2004 and $1,169 for 2003.

Income Taxes

We account for income
taxes under the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes(SFAS 109). Under SFAS 109, deferred tax liabilities and assets are determined based on the differences between the financial
statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse.

Business Combinations

We apply the provisions of SFAS 141, Business Combinations, when accounting for our
acquisitions. EFI allocates the purchase price of acquired companies to the tangible and intangible assets acquired, liabilities assumed, as well as in-process research and development based on their estimated fair values. We engage independent
third-party appraisal firms to assist in determining the fair values of intangible assets acquired on all material acquisitions. All acquisitions are included in our financial statements from the date of acquisition.

Employee Stock-Based Compensation

In 1997, we
adopted Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation(SFAS 123). As permitted under this standard, we have elected to use the intrinsic value method as set forth in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) in accounting for our stock options and other stock-based employee awards. Accordingly, no compensation cost related to stock options has
been recorded in the income statement for stock-based compensation granted to employees.

In December 2004, the FASB issued SFAS
No. 123 (Revised 2004) (FAS 123R), Share-Based Payment, revising SFAS 123, Accounting for Stock-Based Compensation (FAS 123) and superseding APB Opinion



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



No. 25, Accounting for Stock Issued to Employees(APB 25). This statement requires a public entity to measure the cost of
services provided by employees and directors received in exchange for an award of equity instruments, including stock options, at a grant-date fair value. The fair value cost is then recognized over the period that services are provided.

In April 2005, the staff of the Securities and Exchange Commission, or the SEC, issued Staff Accounting Bulletin No. 107 (SAB 107) to provide
additional guidance regarding the application of FAS 123R. Based upon SEC rules issued in April 2005, FAS 123R is effective for the first quarter of fiscal years that begin after June 15, 2005. While we will utilize the Black-Scholes-Merton
method to calculate the stock-based employee compensation under FAS 123R, we do not have an estimate of the full impact adoption will have on our consolidated financial statements, because we are unable to predict the number of stock options that
will be granted in 2006 and we have not determined the actual variables that will be used in the calculations. We do anticipate that there will be a significant impact upon our consolidated financial statements.

Had compensation cost for options and restricted stock granted in 2005, 2004 and 2003 under our stock-compensation plans been determined based on the
fair value at the grant dates as prescribed by SFAS 123, our net (loss) income and pro forma net (loss) income per share would have been as follows:



|                                                                                                                                          |  |             |  |                          |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                                          |  |             |  | Years ended December 31, |        
|                                                                                                                                          |  |             |  | 2005                     |         |   | 2004 |   |         | 2003 | 
|Net (loss) income, as reported                                                                                                            |  | As reported |  | $                        | (4,067  | ) |      | $ | 38,019  |      |  | $ | 26,508  |  
|Add: Stock-based employee compensation expenses included in reported net income, net of related tax effect                                |  |             |  |                          | 1,691   |   |      |   | 322     |      |  |   | 30      |  
|Deduct: Stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax
effects |  |             |  |                          | (14,437 | ) |      |   | (17,235 | )    |  |   | (17,859 | )
|                                                                                                                                          |  |             |  |                          |         |   |      |   |         |      |  |   |         |  
|Net (loss) income, pro forma                                                                                                              |  | Pro forma   |  | $                        | (16,813 | ) |      | $ | 21,106  |      |  | $ | 8,679   |  
|                                                                                                                                          |  |             |  |                          |         |   |      |   |         |      |  |   |         |  
|After-tax equivalent of expense related to 1.50% senior convertible debentures                                                            |  |             |  |                          |        |   |      |   | 2,999   |      |  |   |        |  
|                                                                                                                                          |  |             |  |                         
|(Loss) Income for dilution calculation                                                                                                    |  | Pro forma   |  | $                        | (16,813 | ) |      | $ | 24,105  |      |  | $ | 8,679   |  
|                                                                                                                                          |  |             |  |                          |         |   |      |   |         |      |  |   |         |  
|Net (loss) income per basic common share                                                                                                  |  | As reported |  | $                        | (0.07   | ) |      | $ | 0.71    |      |  | $ | 0.49    |  
|                                                                                                                                          |  |             |  |                          |         |   |      |   |         |      |  |   |         |  
|                                                                                                                                          |  | Pro forma   |  | $                        | (0.31   | ) |      | $ | 0.39    |      |  | $ | 0.16    |  
|                                                                                                                                          |  |             |  |                          |         |   |      |   |         |      |  |   |         |  
|Net (loss) income per diluted common share                                                                                                |  | As reported |  | $                        | (0.07   | ) |      | $ | 0.64    |      |  | $ | 0.47    |  
|                                                                                                                                          |  |             |  |                          |         |   |      |   |         |      |  |   |         |  
|                                                                                                                                          |  | Pro forma   |  | $                        | (0.31   | ) |      | $ | 0.38    |      |  | $ | 0.16    |  
|                                                                                                                                          |  |             |  |                          |         |   |      |   |         |      |  |   |         |  

See Note 13, Employee Benefit Plans for additional disclosures related to SFAS 123.

Foreign Currency Translation

The U.S.
dollar is the functional currency for all of our foreign operations, except for our Germany subsidiary, which is considered to be euro functional and our Japanese subsidiary which is considered to be Japanese yen functional. Where the U.S. dollar is
the functional currency, translation adjustments are recorded in income. Where a currency other than the U.S. dollar is the functional currency, translation adjustments are recorded as a separate component of stockholders equity. Foreign
currency translation and transaction gains and losses have not been significant in any period presented.



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



Computation of Net (Loss) Income per Common Share

Net (loss) income per basic common share is computed using the weighted average number of common shares outstanding during the period. Net income per
diluted common share is computed using the weighted average number of common shares and potential common shares outstanding during the period. Potential common shares result from the assumed exercise of outstanding common stock options having a
dilutive effect using the treasury stock method, from unvested shares of restricted stock using the treasury stock method and from the potential conversion of our senior convertible 1.50% debentures. In addition, in computing the dilutive effect of
the convertible securities, the numerator is adjusted to add back the after-tax amount of interest and amortized debt-issuance costs recognized in the period associated with our convertible debt. Any potential shares that are anti-dilutive as
defined in SFAS 128 are excluded from the effect of dilutive securities.

The following table presents a reconciliation of basic and
diluted earnings per share for the three years ended December 31, 2005:



|                                                                                                  |  |                          |        |   |      |   |        |  |   |       
|------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ |  | - | ------
|                                                                                                  |  | Years ended December 31,
|                                                                                                  |  | 2005                     |        |   | 2004 |   | 2003  
|Basic net (loss) income per share:                                                                |  |                          |        |   |      |   |        |  |   |       
|Net (loss) income available to common shareholders                                                |  | $                        | (4,067 | ) |      | $ | 38,019 |  | $ | 26,508
|                                                                                                  |  |                          |        |   |      |   |        |  |   |       
|Weighted average common shares outstanding                                                        |  |                          | 54,425 |   |      |   | 53,898 |  |   | 53,789
|Basic net (loss) income per share                                                                 |  | $                        | (0.07  | ) |      | $ | 0.71   |  | $ | 0.49  
|                                                                                                  |  |                          |        |   |      |   |        |  |   |       
|Dilutive net (loss) income per share                                                              |  |                          |        |   |      |   |        |  |   |       
|Net (loss) income                                                                                 |  | $                        | (4,067 | ) |      | $ | 38,019 |  | $ | 26,508
|After-tax equivalent of expense related to 1.50% senior convertible debentures                    |  |                          |       |   |      |   | 2,999  |  |   | 1,724 
|                                                                                                  |  |                          |        |   |      |   |        |  |   |       
|(Loss) Income for purposes of computing diluted net income per share                              |  | $                        | (4,067 | ) |      | $ | 41,018 |  | $ | 28,232
|                                                                                                  |  |                          |        |   |      |   |        |  |   |       
|Weighted average common share outstanding                                                         |  |                          | 54,425 |   |      |   | 53,898 |  |   | 53,789
|                                                                                                  |  |                          |       
|Dilutive stock options (1), (2)                                                                   |  |                          |       |   |      |   | 1,014  |  |   | 1,050 
|Weighted average assumed conversion of 1.50% senior convertible debentures (1)                    |  |                          |       |   |      |   | 9,084  |  |   | 5,299 
|                                                                                                  |  |                          |        |   |      |   |        |  |   |       
|Weighted average common shares outstanding for purposes of computing diluted net income per share |  |                          | 54,425 |   |      |   | 63,996 |  |   | 60,138
|                                                                                                  |  |                          |        |   |      |   |        |  |   |       
|Dilutive net (loss) income per share                                                              |  | $                        | (0.07  | ) |      | $ | 0.64   |  | $ | 0.47  
|                                                                                                  |  |                          |        |   |      |   |        |  |   |       

---

|(1) | All stock options, unvested restricted shares outstanding and potential debt conversion shares are considered anti-dilutive for the year ended December 31, 2005 due to the net
loss. The potential dilutive shares from stock options and unvested restricted shares outstanding were 915. The potential dilutive shares from assumed debt conversion would have been 9,084 and the related after-tax equivalent of expense would have
been $2,999.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Anti-dilutive weighted shares of common stock of 3,323 and 4,313 as of December 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 shares for the years then ended.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



Accounting for Derivative Instruments and Risk Management

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, requires companies to reflect the fair value of all
derivative instruments, including those embedded in other contracts, as assets or liabilities in an entitys balance sheet. We have two embedded derivatives related to the 1.50% Senior Convertible Debentures as of December 31, 2005, the
fair value of which were insignificant. We had no other derivatives as of December 31, 2005.

Variable Interest Entities

FASB Interpretation No. 46, Consolidation of Variable Interest Entities, as amended(FIN 46R) requires that we consolidate any
variable interest entities, or VIE, in which we are the primary beneficiary. The primary beneficiary is generally defined as having the majority of the risks and rewards arising from the VIE. We have evaluated and will continue to assess its
synthetic lease arrangements and other entities that we have a relationship with that may be deemed a VIE.

Recent Accounting Pronouncements

SFAS 154

In May 2005, the
Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 154 (FAS 154), Accounting Changes and Error Corrections.This new standard replaces Accounting Principles Board
(APB) Opinion No. 20, Accounting Changesand SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. FAS 154 requires that a voluntary change in accounting principle be applied retrospectively
with all prior period financial statements presented on the basis of the new accounting principle, unless it is impracticable to do so. FAS 154 also provides that (1) a change in method of depreciating or amortizing a long-lived non-financial
asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a restatement. FAS 154 is
effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. We do not expect the adoption of this pronouncement to have a significant impact on our financial statements.

SFAS 123 (Revised 2004)

In December 2004, the FASB
issued SFAS No. 123 (Revised 2004) (FAS 123R), Share-Based Payment, revising SFAS 123, Accounting for Stock-Based Compensation (FAS 123) and superseding APB Opinion No. 25, Accounting for Stock
Issued to Employees(APB 25). This statement requires a public entity to measure the cost of services provided by employees and directors received in exchange for an award of equity instruments, including stock options, at a
grant-date fair value. The fair value cost is then recognized over the period that services are provided.

In April 2005, the staff of the
Securities and Exchange Commission, or the SEC, issued Staff Accounting Bulletin No. 107 (SAB 107) to provide additional guidance regarding the application of FAS 123R. SAB 107 permits registrants to choose an appropriate valuation technique or
model to estimate the fair value of stock options, assuming consistent application, and provides guidance for the development of assumptions used in the valuation process. Additionally, SAB 107 discusses disclosures to be made under
Managements Discussion and Analysis of Financial Condition and Results of Operations in registrants periodic reports.

Based upon SEC rules issued in April 2005, FAS 123R is effective for the first quarter of fiscal years that begin after June 15, 2005. See Note 3 of these financial statements for a disclosure of the effect on net income



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



and earnings per share for the three and nine month periods ended September 30, 2005 and 2004 as if we had applied the fair value recognition provisions
of FAS 123 to stock-based employee compensation. While we will utilize the Black-Scholes-Merton method to calculate the stock-based employee compensation under FAS 123R, we do not have an estimate of the impact adoption will have on our consolidated
financial statements, although we believe the impact will be significant.

Note 2: Supplemental Cash Flow Information



|                                                    |  |                          |          |   |      |   |         |      |  |   |         |  
|--------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                    |  | Years Ended December 31, |         
|                                                    |  | 2005                     |          |   | 2004 |   |         | 2003 | 
|Supplemental disclosures of cash flow information:  |  |                          |          |   |      |   |         |      |  |   |         |  
|Cash paid for interest expense                      |  | $                        | (3,612   | ) |      | $ | (3,698  | )    |  | $ | (1,777  | )
|                                                    |  |                          |          |   |      |   |         |      |  |   |         |  
|Cash (paid for) refunded from income taxes          |  | $                        | (4,876   | ) |      | $ | (4,048  | )    |  | $ | 166     |  
|                                                    |  |                          |          |   |      |   |         |      |  |   |         |  
|Acquisition related activities:                     |  |                          |          |   |      |   |         |      |  |   |         |  
|                                                    |  |                          |         
|Cash paid for acquisitions                          |  | $                        | (289,150 | ) |      | $ | (11,811 | )    |  | $ | (58,832 | )
|                                                    |  |                          |         
|Cash acquired in acquisitions                       |  |                          | 7,395    |   |      |   | 261     |      |  |   | 592     |  
|                                                    |  |                          |          |   |      |   |         |      |  |   |         |  
|Net cash paid for acquisitions                      |  | $                        | (281,755 | ) |      | $ | (11,550 | )    |  | $ | (58,240 | )
|                                                    |  |                          |          |   |      |   |         |      |  |   |         |  
|Common stock issued in connection with acquisitions |  |                          |         |   |      |   |        |      |  | $ | (5,011  | )
|                                                    |  |                          |          |   |      |   |         |      |  |   |         |  

Note 3: Acquisitions

2005 Acquisition

VUTEk, Inc.

In June 2005 we acquired VUTEk, Inc. (VUTEk), for approximately $289,150, less cash received of $7,395 for a net purchase price of $281,755. We acquired VUTEk to further our presence in the commercial
print market, as well as to increase our recurring revenue streams. The sales of solvent and ultraviolet cured, or UV, inks are expected to provide the recurring revenue stream for VUTEk. 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:



|                                    |  |   |         |  
|----------------------------------- |  | - | ------- | -
|Cash                                |  | $ | 7,395   |  
|Other tangible assets               |  |   | 44,142  |  
|In-process research and development |  |   | 45,300  |  
|Acquired technology                 |  |   | 64,500  |  
|Customer relationships              |  |   | 36,400  |  
|Trademarks and trade names          |  |   | 38,500  |  
|Goodwill                            |  |   | 116,839 |  
|                                    |  |   |         |  
|                                    |  |   | 353,076 |  
|Liabilities assumed                 |  |   | (33,398 | )
|Deferred tax liability, net         |  |   | (30,528 | )
|                                    |  |   |         |  
|                                    |  | $ | 289,150 |  
|                                    |  |   |         |  



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



The preliminary purchase price allocation as reported in the interim periods ending June 30 and
September 30, 2005 has been updated to reflect the final valuation reports and the final analysis of the acquired assets and assumed liabilities. The fair market values of accounts receivable and inventory were reduced $4,997 and $2,284,
respectively, as compared to the September 30, 2005 reported amounts. Additional accruals of $2,359 and $10,093 were made for warranty and legal expenses, respectively. Finalization of the estimated future revenue streams allocated to various
technologies resulted in increases in the in-process research and development charge of $7,100 and the basis for trademarks and trade names of $11,500 and customer relationships of $1,100 and a decrease to the basis of the acquired technology
$1,000. The deferred tax liability increased $9,276 after accounting for the additional adjustments.

The amounts allocated to intangible
assets are being amortized using the straight-line method over their respective estimated useful lives of four years for acquired technology, six years for customer relationships and 30 years for trademarks and trade names. Goodwill of $116,839
represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired of which $26,097 will be deductible for tax purposes. Factors that contributed to a purchase price that results in goodwill include,
but are not limited to, the retention of research and development personnel with the skills to develop future VUTEk technology, support personnel to provide the maintenance services related to VUTEk products and a trained sales force capable of
selling current and future VUTEk products, the opportunity to cross-sell VUTEk and EFI products to existing customers and the positive reputation that VUTEk has in the market.

VUTEks operating results have been included in our operating results since June 2005.

2004 Acquisitions

Automated Dispatch Systems Inc.

In February 2004 we acquired Automated Dispatch Systems, Inc. (ADS), for approximately $11,811 in cash. We acquired ADS to
further develop relationships with copier and office equipment distributors. 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:



|                                    |  |   |        |  
|----------------------------------- |  | - | ------ | -
|Cash                                |  | $ | 261    |  
|Other tangible assets               |  |   | 336    |  
|In-process research and development |  |   | 1,000  |  
|Acquired technology                 |  |   | 3,800  |  
|Other intangible assets             |  |   | 1,200  |  
|Goodwill                            |  |   | 8,613  |  
|                                    |  |   |        |  
|                                    |  |   | 15,210 |  
|Liabilities assumed                 |  |   | (1,791 | )
|Deferred tax liability, net         |  |   | (1,608 | )
|                                    |  |   |        |  
|                                    |  | $ | 11,811 |  
|                                    |  |   |        |  

The amounts allocated to intangible assets are being amortized using the straight-line method over
their respective estimated useful lives of five years except for developed technology which has a three-year life, and customer relationships which have a four-year life.

ADSs operating results have been included in our operating results since February 2004.



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



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. Project completion 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. During the fourth quarter of 2005, our original estimate of IPR&D of $38,200 from the VUTEk acquisition as reported in the previous interim periods was adjusted to reflect $45,300
per the final valuation report. No other adjustments have been made to our original estimates of IPR&D.



|                                                          |  |         |   |  |          |  
|--------------------------------------------------------- |  | ------- | - |  | -------- | -
|                                                          |  | VUTEk   |   |  | ADS      |  
|Discount rate for IPR&D                                   |  | 35      | % |  | 27       | %
|Percentage of completion for in-process projects acquired |  | 10  40 | % |  | 37   54 | %

Unaudited Pro forma Information

The pro forma information set forth below represents revenues, net income and earnings per share as if our 2005 and 2004 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, reduced interest income to reflect net cash used for the purchase and the
related income tax effects of these adjustments. This pro forma information also excludes non-recurring charges including IPR&D that are directly attributable to the acquisition. All acquisitions are included in our financial statements from the
date of acquisition.

The 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.



|                                    |  |                         |         |      |   |        
|----------------------------------- |  | ----------------------- | ------- | ---- | - | -------
|                                    |  | Year Ended December 31,
|                                    |  | 2005                    |         | 2004
|Revenue                             |  | $                       | 526,492 |      | $ | 528,442
|                                    |  |                         |         |      |   |        
|Net income                          |  | $                       | 42,110  |      | $ | 41,214 
|                                    |  |                         |         |      |   |        
|Net income per basic common share   |  | $                       | 0.77    |      | $ | 0.76   
|                                    |  |                         |         |      |   |        
|Net income per diluted common share |  | $                       | 0.70    |      | $ | 0.69   
|                                    |  |                         |         |      |   |        



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



Note 4: Balance Sheet Components



|                                               |  |              |         |   |      |   |         |  
|---------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                               |  | December 31, |        
|                                               |  | 2005         |         |   | 2004 |  
|Accounts receivable, net:                      |  |              |         |   |      |   |         |  
|Accounts receivable                            |  | $            | 72,232  |   |      | $ | 44,214  |  
|Less allowances                                |  |              | (4,306  | ) |      |   | (3,086  | )
|                                               |  |              |         |   |      |   |         |  
|                                               |  | $            | 67,926  |   |      | $ | 41,128  |  
|                                               |  |              |         |   |      |   |         |  
|Inventories, net of allowances:                |  |              |         |   |      |   |         |  
|Raw materials                                  |  | $            | 12,508  |   |      | $ | 3,475   |  
|Work in process                                |  |              | 2,344   |   |      |   |        |  
|Finished goods                                 |  |              | 11,022  |   |      |   | 2,054   |  
|                                               |  |              |         |   |      |   |         |  
|                                               |  | $            | 25,874  |   |      | $ | 5,529   |  
|                                               |  |              |         |   |      |   |         |  
|Other current assets:                          |  |              |         |   |      |   |         |  
|Deferred income taxes, current portion         |  | $            | 26,581  |   |      | $ | 16,666  |  
|Receivable from subcontract manufacturers      |  |              | 1,449   |   |      |   | 1,377   |  
|Other                                          |  |              | 4,237   |   |      |   | 4,114   |  
|                                               |  |              |         |   |      |   |         |  
|                                               |  | $            | 32,267  |   |      | $ | 22,157  |  
|                                               |  |              |         |   |      |   |         |  
|Property and equipment, net:                   |  |              |         |   |      |   |         |  
|Land, building and improvements                |  | $            | 42,515  |   |      | $ | 37,018  |  
|Equipment and purchased software               |  |              | 44,155  |   |      |   | 42,767  |  
|Furniture and leasehold improvements           |  |              | 14,570  |   |      |   | 14,231  |  
|                                               |  |              |         |   |      |   |         |  
|                                               |  |              | 101,240 |   |      |   | 94,016  |  
|Less accumulated depreciation and amortization |  |              | (51,640 | ) |      |   | (49,692 | )
|                                               |  |              |         |   |      |   |         |  
|                                               |  | $            | 49,600  |   |      | $ | 44,324  |  
|                                               |  |              |         |   |      |   |         |  
|Other assets:                                  |  |              |         |   |      |   |         |  
|Deferred income taxes, non-current portion     |  | $            |        |   |      | $ | 35,184  |  
|Debt issuance costs, net of amortization       |  |              | 3,344   |   |      |   | 4,726   |  
|Other                                          |  |              | 1,932   |   |      |   | 2,080   |  
|                                               |  |              |         |   |      |   |         |  
|                                               |  | $            | 5,276   |   |      | $ | 41,990  |  
|                                               |  |              |         |   |      |   |         |  
|Accrued and other liabilities:                 |  |              |         |   |      |   |         |  
|Accrued compensation and benefits              |  | $            | 25,570  |   |      | $ | 18,089  |  
|Deferred revenue                               |  |              | 23,620  |   |      |   | 16,113  |  
|Warranty provision                             |  |              | 5,644   |   |      |   | 1,838   |  
|Accrued royalty payments                       |  |              | 5,245   |   |      |   | 6,347   |  
|Other accrued liabilities                      |  |              | 27,956  |   |      |   | 19,832  |  
|                                               |  |              |         |   |      |   |         |  
|                                               |  | $            | 88,035  |   |      | $ | 62,219  |  
|                                               |  |              |         |   |      |   |         |  



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



Note 5: Goodwill and Other Intangible Assets



|                                    |  |                                   |                       |                   |                          |                   |   |                     |   |                       |   |                          |  |   |                     |  |   |         |   |  |   |       
|----------------------------------- |  | --------------------------------- | --------------------- | ----------------- | ------------------------ | ----------------- | - | ------------------- | - | --------------------- | - | ------------------------ |  | - | ------------------- |  | - | ------- | - |  | - | ------
|                                    |  | Weighted Average Life at 12/31/05 |                       | December 31, 2005 |                          | December 31, 2004
|                                    |  |                                   | Gross Carrying Amount |                   | Accumulated Amortization |                   |   | Net Carrying Amount |   | Gross Carrying Amount |   | Accumulated Amortization |  |   | Net Carrying Amount
|Goodwill                            |  |                                   |                       | $                 | 189,667                  |                   |   |                    |   |                       | $ | 189,667                  |  | $ | 73,768              |  |   |        |   |  | $ | 73,768
|                                    |  |                                   |                       |                   |                          |                   |   |                     |   |                       |   |                          |  |   |                     |  |   |         |   |  |   |       
|Acquired technology                 |  | 4.5 yrs                           |                       | $                 | 102,647                  |                   | $ | (34,583             | ) |                       | $ | 68,064                   |  | $ | 37,971              |  | $ | (17,465 | ) |  | $ | 20,506
|Patents, trademarks and trade names |  | 24.5 yrs                          |                       |                   | 49,176                   |                   |   | (8,385              | ) |                       |   | 40,791                   |  |   | 10,708              |  |   | (6,647  | ) |  |   | 4,061 
|Other intangible assets             |  | 5.9 yrs                           |                       |                   | 57,007                   |                   |   | (12,140             | ) |                       |   | 44,867                   |  |   | 20,965              |  |   | (4,690  | ) |  |   | 16,275
|                                    |  |                                   |                       |                   |                          |                   |   |                     |   |                       |   |                          |  |   |                     |  |   |         |   |  |   |       
|Amortizable intangible assets       |  | 9.6 yrs                           |                       | $                 | 208,830                  |                   | $ | (55,108             | ) |                       | $ | 153,722                  |  | $ | 69,644              |  | $ | (28,802 | ) |  | $ | 40,842
|                                    |  |                                   |                       |                   |                          |                   |   |                     |   |                       |   |                          |  |   |                     |  |   |         |   |  |   |       

Acquired technology, patents, trademarks and trade names and other intangible assets are amortized
over their estimated useful lives of 3 to 30 years using the straight-line method. Aggregate amortization expense was $26,434, $13,690 and $6,450 for the years ended December 31, 2005, 2004 and 2003, respectively. As of December 31, 2005
future estimated amortization expense related to amortizable intangible assets is estimated to be:



|                    |  |   |       
|------------------- |  | - | ------
|2006                |  | $ | 36,132
|2007                |  |   | 33,257
|2008                |  |   | 27,678
|2009                |  |   | 14,433
|2010 and thereafter |  |   | 42,221

As of December 31, 2005, we had goodwill of $189,667. No impairments have been recorded
against the goodwill account since the adoption of SFAS 142 on January 1, 2002.A reconciliation of the activity in goodwill for 2004 and 2005 is presented below.



|                                   |  |   |         |     
|---------------------------------- |  | - | ------- | ----
|Beginning balance, January 1, 2004 |  | $ | 67,166  |     
|Additions                          |  |   | 8,613   | (1) 
|Impairments                        |  |   |        |     
|Other                              |  |   | (2,011  | )(2)
|                                   |  |   |         |     
|Ending balance, December 31, 2004  |  |   | 73,768  |     
|Additions                          |  |   | 116,839 | (3) 
|Impairments                        |  |   |        |     
|Other                              |  |   | (940    | )(4)
|                                   |  |   |         |     
|Ending balance, December 31, 2005  |  | $ | 189,667 |     
|                                   |  |   |         |     

---

|(1) | The additions to goodwill consist of $8,613 for ADS Technology.
|--- | ---------------------------------------------------------------

|(2) | Included in Other are translation adjustments on the Best GmbH balance of $434, an adjustment to taxes payable related to the 2000 Splash acquisition of ($2,322), and
adjustments to our 2003 acquisitions of ($123).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The additions to goodwill consist of $116,839 for VUTEk, Inc.
|--- | -------------------------------------------------------------

|(4) | Included in Other are translation adjustments on the Best GmbH balance of ($647) and an adjustment to taxes payable related to prior acquisitions of ($293).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



Note 6: Short-term Investments

Debt and marketable equity securities are classified as available-for-sale and are carried at fair value, which is determined based on quoted market prices, with net unrealized gains and losses included in
Accumulated other comprehensive income, net of tax. We review investments in debt and equity securities for other-than-temporary impairment whenever the fair value of an investment is less than the amortized cost and evidence indicates
that investments carring amount is not recoverable within a reasonable period of time. To determine whether an impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until a market price
recovery and consider whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. We have determined that the gross unrealized losses on short-term investments at December 31, 2005 are temporary in
nature because each investment meets our investment policy credit quality requirements and we have the ability and the intent to hold these investments until they recover their unrealized losses, which may be until maturity.

The following tables summarize our available-for-sale securities:



|                             |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|---------------------------- |  | -------------- | ------- | ---------------------- | - | ----------------------- |  | - | ---------- | - |  | - | -------
|December 31, 2005            |  | Amortized Cost |         | Gross Unrealized Gains |   | Gross Unrealized Losses |  |   | Fair Value
|Municipal Securities         |  | $              | 8,842   |                        | $ |                        |  | $ | (59        | ) |  | $ | 8,783  
|U.S. Government Securities   |  |                | 65,999  |                        |   | 1                       |  |   | (1,189     | ) |  |   | 64,811 
|Corporate Debt Securities    |  |                | 217,132 |                        |   | 13                      |  |   | (3,162     | ) |  |   | 213,983
|                             |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|Total short-term investments |  | $              | 291,973 |                        | $ | 14                      |  | $ | (4,410     | ) |  | $ | 287,577
|                             |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|                             |  |                |         |                       
|December 31, 2004            |  |                |         |                        |   |                         |  |   |           
|Municipal Securities         |  | $              | 28,509  |                        | $ | 13                      |  | $ | (151       | ) |  | $ | 28,371 
|U.S. Government Securities   |  |                | 168,789 |                        |   |                        |  |   | (1,121     | ) |  |   | 167,668
|Corporate Debt Securities    |  |                | 310,574 |                        |   | 27                      |  |   | (3,403     | ) |  |   | 307,198
|                             |  |                |         |                        |   |                         |  |   |            |   |  |   |        
|Total short-term investments |  | $              | 507,872 |                        | $ | 40                      |  | $ | (4,675     | ) |  | $ | 503,237
|                             |  |                |         |                        |   |                         |  |   |            |   |  |   |        

The following table summarizes the contractual maturities of the available-for-sale investment
securities as of December 31, 2005:



|                             |  |                |         |            |   |        
|---------------------------- |  | -------------- | ------- | ---------- | - | -------
|                             |  | Amortized Cost |         | Fair Value
|Less than one year           |  | $              | 149,504 |            | $ | 147,962
|Due in 1-2 years             |  |                | 113,588 |            |   | 111,077
|Due in 2-3 years             |  |                | 28,881  |            |   | 28,538 
|                             |  |                |         |            |   |        
|Total short-term investments |  | $              | 291,973 |            | $ | 287,577
|                             |  |                |         |            |   |        

The following table shows the gross unrealized losses and fair values of our investments in
individual securities that have been in a continuous unrealized loss position, aggregated by investment category, at December 31, 2005 and 2004:



|                             |  |                            |        |                  |                     |      |            |  |                  |         |  |   |        |  
|---------------------------- |  | -------------------------- | ------ | ---------------- | ------------------- | ---- | ---------- |  | ---------------- | ------- |  | - | ------ | -
|                             |  | Deemed to be Temporary For |       
|                             |  | Less than 12 months        |        |                  | More than 12 months |     
|December 31, 2005            |  | Fair Value                 |        | UnrealizedLosses |                     |      | Fair Value |  | UnrealizedLosses |        
|Municipal Securities         |  | $                          | 2,434  |                  | $                   | (15  | )          |  | $                | 14,138  |  | $ | (147   | )
|U.S. Governmental Securities |  |                            | 6,332  |                  |                     | (254 | )          |  |                  | 54,879  |  |   | (935   | )
|Corporate Securities         |  |                            | 10,071 |                  |                     | (138 | )          |  |                  | 183,648 |  |   | (2,921 | )
|                             |  |                            |        |                  |                     |      |            |  |                  |         |  |   |        |  
|Total                        |  | $                          | 18,837 |                  | $                   | (407 | )          |  | $                | 252,665 |  | $ | (4,003 | )
|                             |  |                            |        |                  |                     |      |            |  |                  |         |  |   |        |  



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



|                             |  |                            |         |                  |                     |        |            |  |                  |         |  |   |        |  
|---------------------------- |  | -------------------------- | ------- | ---------------- | ------------------- | ------ | ---------- |  | ---------------- | ------- |  | - | ------ | -
|                             |  | Deemed to be Temporary For |        
|                             |  | Less than 12 months        |         |                  | More than 12 months |       
|December 31, 2004            |  | Fair Value                 |         | UnrealizedLosses |                     |        | Fair Value |  | UnrealizedLosses |        
|Municipal Securities         |  | $                          | 12,778  |                  | $                   | (119   | )          |  | $                | 10,767  |  | $ | (66    | )
|U.S. Governmental Securities |  |                            | 94,119  |                  |                     | (776   | )          |  |                  | 87,623  |  |   | (545   | )
|Corporate Securities         |  |                            | 221,191 |                  |                     | (2,352 | )          |  |                  | 71,307  |  |   | (817   | )
|                             |  |                            |         |                  |                     |        |            |  |                  |         |  |   |        |  
|Total                        |  | $                          | 328,088 |                  | $                   | (3,247 | )          |  | $                | 169,697 |  | $ | (1,428 | )
|                             |  |                            |         |                  |                     |        |            |  |                  |         |  |   |        |  

The following table shows the proceeds, gross realized gains and gross realized losses on
available-for-sale securities:



|                                 |  |          |         |                    |   |                     |  |   |    
|-------------------------------- |  | -------- | ------- | ------------------ | - | ------------------- |  | - | ---
|                                 |  | Proceeds |         | GrossRealizedGains |   | GrossRealizedLosses
|For the year ended December 31,: |  |          |         |                    |   |                     |  |   |    
|2005                             |  | $        | 741,709 |                    | $ | 33                  |  | $ | 794
|2004                             |  |          | 264,951 |                    |   | 596                 |  |   | 525
|2003                             |  |          | 974,653 |                    |   | 1,143               |  |   | 288

Note 7: Long-Term Debt

On June 4, 2003 we sold $240,000 of our 1.50% convertible senior debentures due in 2023 (the Debentures) in a private placement. The resale of the Debentures and the underlying shares of common stock
have been registered with the Securities and Exchange Commission under the Securities Act of 1933 pursuant to a registration statement that was declared effective in January 2004. The Debentures are unsecured senior obligations, 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 equal 120% or more of the principal amount of the debentures, beginning in the sixth year after issuance. The Debentures are convertible before maturity into 9,084,192 shares of our 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. We may redeem the Debentures at our 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 us 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. We 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, our common stock, or any combination thereof in 2013 and 2018. Additionally, 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, our common stock, or any combination thereof.



|                                                                                                            |  |                  |         |                  |   |        
|----------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | ---------------- | - | -------
|                                                                                                            |  | December 31,2005 |         | December 31,2004
|1.50% convertible debentures due June 1, 2023, with interest payable semi-annually on June 1 and December 1 |  | $                | 240,000 |                  | $ | 240,000
|                                                                                                            |  |                  |         |                  |   |        
|                                                                                                            |  | $                | 240,000 |                  | $ | 240,000
|                                                                                                            |  |                  |         |                  |   |        



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



Note 8: Other Comprehensive Income

The activity in other comprehensive income and related tax effects are as follows:



|                                                                                                                                                |  |                          |        |   |      |   |        |      |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                                                |  | Years Ended December 31, |       
|                                                                                                                                                |  | 2005                     |        |   | 2004 |   |        | 2003 | 
|Net unrealized investment (losses)/gains:                                                                                                       |  |                          |        |   |      |   |        |      |  |   |        |  
|Unrealized holding gains/(losses), net of tax (provision)/benefit of $(500) in 2005, $1,796 in 2004 and $2,062 in 2003                          |  | $                        | 737    |   |      | $ | (2,694 | )    |  | $ | (3,092 | )
|Reclassification adjustment for losses included in net income, net of tax benefit/(provision) of $403 in 2005, $(53) in 2004 and $(481) in
2003 |  |                          | (594   | ) |      |   | 78     |      |  |   | 696    |  
|                                                                                                                                                |  |                          |        |   |      |   |        |      |  |   |        |  
|Net unrealized investment (losses)/gains                                                                                                        |  |                          | 143    |   |      |   | (2,616 | )    |  |   | (2,396 | )
|Translation adjustments                                                                                                                         |  |                          | (1,000 | ) |      |   | 392    |      |  |   | 1,417  |  
|Other comprehensive (loss)/income                                                                                                               |  | $                        | (857   | ) |      | $ | (2,224 | )    |  | $ | (979   | )

The components of accumulated other comprehensive income were:



|                                             |  |                  |        |   |                  |   |        |  
|-------------------------------------------- |  | ---------------- | ------ | - | ---------------- | - | ------ | -
|                                             |  | December 31,2005 |        |   | December 31,2004 |  
|Net unrealized investment (losses) /gains    |  | $                | (2,563 | ) |                  | $ | (2,706 | )
|                                             |  |                  |        |   |                  |   |        |  
|Translation gains/(losses)                   |  |                  | 494    |   |                  |   | 1,494  |  
|                                             |  |                  |        |   |                  |   |        |  
|Accumulated other comprehensive (loss)income |  | $                | (2,069 | ) |                  | $ | (1,212 | )
|                                             |  |                  |        |   |                  |   |        |  

Note 9: Commitments and Contingencies

Leases

Off-Balance Sheet FinancingSynthetic Lease Arrangement

We are a party to two synthetic leases (the 301 Lease and the 303 Lease, together Leases) covering our Foster City
facilities located at 301 and 303 Velocity Way, Foster City, California. These leases provide a cost effective means of providing adequate office space for our corporate offices. Both Leases expire in July 2014. 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 lessor to purchase the facilities ($56,850 for the 303 Lease and $31,730 for the 301 Lease). We have guaranteed to the lessor a residual value associated with
the buildings equal to 82% of their funding of the respective Leases. Under the financial covenants, we must maintain a minimum net worth and a minimum tangible net worth as of the end of each quarter. There is an additional covenant regarding
mergers. We were in compliance with all of the covenants as of December 31, 2005. We are liable to the lessor for the financed amount of the buildings if we default on our covenants.

We have assessed our exposure in relation to the first loss guarantees under the Leases and believe that there is no deficiency to the guaranteed value
at December 31, 2005. If there is a decline in value, we will record a loss associated with the residual value guarantee. The funds pledged under the Leases ($56,850 for the 303 Lease and $31,730 for the 301 Lease at December 31, 2005 for
a total of $88,580) are in LIBOR-based interest bearing accounts and are restricted as to withdrawal at all times. In conjunction with the Leases, we have entered into separate ground leases with the lessor for approximately 30 years.

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



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



As part of the September 2004 amended financing arrangement for the 301 Lease, we completed a
valuation of the building located at 301 Velocity Way. Under the original financing agreement, we guaranteed the lessor upon termination of the original lease an 82% residual value in the building which cost $43,080 to construct. The valuation
provided a value of approximately $31,730, and we recorded a one-time loss of $11,350 associated with the original lease. In addition, we took a non-cash charge of $852 for capitalized costs associated with the financial arrangement.

Effective July 1, 2003, we have applied the accounting and disclosure rules set forth in Interpretation No. 46 Consolidation of Variable
Interest Entities, as revised (FIN 46R) for variable interest entities (VIEs). We have evaluated our synthetic lease agreements to determine if the arrangements qualify as variable interest entities under FIN 46R. We
determined that the synthetic lease agreements do qualify as VIEs; however, because we are not the primary beneficiary under FIN 46R we are not required to consolidate the VIEs in our financial statements.

We also leases office facilities in various locations in the United States and overseas for periods ranging from two to five years, expiring between
March 2003 and November 2009.

The following summarizes the future minimum lease payments under the non-cancelable operating leases:



|                  |  |                |       
|----------------- |  | -------------- | ------
|Fiscal Year       |  | (in thousands)
|2006              |  | $              | 9,454 
|2007              |  |                | 8,735 
|2008              |  |                | 7,351 
|2009              |  |                | 6,574 
|2010              |  |                | 5,418 
|2011 through 2014 |  |                | 13,591
|                  |  |                |       
|Total             |  | $              | 51,123
|                  |  |                |       

Lease obligation related to the principal corporate facility is estimated and is based on current
market interest rates (LIBOR) and based on collateralized assumptions.

Rental expense amounted to approximately $6,206, $4,750 and $3,573
for the years ended December 31, 2005, 2004 and 2003, respectively.

Purchase Commitments

We sub-contract with other companies to manufacture our products. During the normal course of business the sub-contractors procure components based upon
orders placed by us. If we cancel all or part of the order, we may still be liable to the sub-contractors for the cost of the components purchased by the sub-contractors for placement in our products. We periodically review the potential liability
and the adequacy of the related allowance. Our consolidated financial position and results of operations could be negatively impacted if we were required to compensate the sub-contract manufacturers for amounts in excess of the related allowance.

Guarantees and Product Warranties

Under Financial Accounting Standards Board Interpretation No 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), we are required
upon issuance of a guarantee to disclose and recognize a liability for the fair value of the obligation we assume under that guarantee.



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



Our products are generally accompanied by a 12-month warranty, which covers both parts and labor. We
accrue for warranty costs as part of 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.

Changes in the warranty reserves for the years ended December 31, 2004 and 2005 were as follows:



|                                                      |  |   |        |  
|----------------------------------------------------- |  | - | ------ | -
|Balance at December 31, 2003                          |  | $ | 2,103  |  
|Provision for warranty during the year                |  |   | 1,742  |  
|Settlements                                           |  |   | (2,007 | )
|                                                      |  |   |        |  
|Balance at December 31, 2004                          |  |   | 1,838  |  
|Warranty obligation assumed upon acquisition of VUTEk |  |   | 3,867  |  
|Provision for warranty during the year                |  |   | 3,605  |  
|Settlements                                           |  |   | (3,666 | )
|                                                      |  |   |        |  
|Balance at December 31, 2005                          |  | $ | 5,644  |  
|                                                      |  |   |        |  

The lease agreements for our company headquarters provide for residual value guarantees. Under FIN
45, the fair value of a residual value guarantee in lease agreements entered into after December 31, 2002, must be recognized as a liability on our consolidated balance sheet. We have determined that the residual value guarantees have no
material value as of December 31, 2005.

In the normal course of business and in an effort to facilitate the sales of our products, we
sometimes indemnify other parties, including customers, lessors and parties to other transactions with us. Typically our indemnity provisions provide that we agree to hold the other party harmless against losses arising from a breach of
representations and warranties or covenants and intellectual property infringement. Our indemnity provisions often limit the time within which an indemnification claim can be made as well as the amount of the claim which can be made. In addition, we
have entered into indemnification agreements with our officers and directors; our bylaws also contain similar indemnification obligations for our agents.

Legal Proceedings

As more fully discussed below, from time to time we may be involved in a variety of claims,
lawsuits, investigations and proceedings relating to contractual disputes, securities law, intellectual property law, and employment law. We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is
deemed probable and can be reasonably estimated. We assess our potential liability by analyzing our litigation and regulatory matters using available information. We develop our views on estimated losses in consultation with inside and outside
counsel, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. Because of the uncertainties related to both the amount and range of loss on the pending litigation matters, we are unable
to predict the liability that could finally result from a range of possible unfavorable outcomes. However, we have reserved the estimated amount that we reasonably expect to pay for the cases discussed. However, our estimate could be
wrong, and we could pay more or less than our current accrual. Litigation can be costly, diverting managements attention and could, upon resolution, have a material adverse effect on our business, results of operations, financial
condition and cash flow. In addition, we are normally involved in other litigation matters relating to various claims that arise in the normal course of our business.

Leggett & Platt, Inc. and L&P Property Management Company v. VUTEk, Inc.: On May 17, 2005, Leggett & Platt,
Inc., or L&P, and its patent holding subsidiary brought a patent infringement action against



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



VUTEk, a company acquired by us in June 2005, in the United States District Court in the Eastern District of Missouri. We believe that the L&P
infringement claims are demonstrably false, and we will vigorously seek summary adjudication of non-infringement against L&Ps claims. On June 29, 2005, we answered L&Ps complaint and counter-claimed, asking the court to
find that L&P had no objective or subjective basis for bringing the action and that the asserted patent is invalid and not infringed. A Markman hearing has been scheduled in April 2006, with the case set for trial in March 2007.

Citiline Holdings, Inc. v. Printcafe Software, Inc., Marc Olin, Joseph Whang, Amos Michelson, et al.: On June 25, 2003,
a securities class action complaint was filed against Printcafe Software, Inc., a our wholly owned subsidiary acquired in October 2003 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. In June 2004, an amended complaint was filed in the action adding additional Printcafe directors as defendants. The parties have reached an agreement in principle to fully and finally resolve this litigation,
subject to the Courts approval of the proposed class action settlement. The parties executed a written Stipulation and Agreement of Compromise and Settlement in September 2005 and jointly moved for the Courts preliminary approval of
the settlement. On December 20, 2005, the Court preliminarily approved the proposed settlement, certified the settlement class and directed the issuance of notice. In accordance with class action procedures, the court also
scheduled a final hearing in April 2006 to consider final approval of the settlement.

US Bureau of Industry and Security (BIS) Export
Investigation

EFI recently learned that there is an open investigation by the US Bureau of Industry and Security (BIS) under the US
Departments of Commerce relating to VUTEks compliance with the export regulations in connection with several export sales to Syria in 2004. The investigation was initiated in Jan 2005, prior to EFIs acquisition of VUTEk in
June 2005. At present, we believe that these matters will be resolved solely with administrative penalties and without a significant adverse effect to on our on-going business. However, there is no assurance that these matters will not
have an unforeseen outcome that could impair the conduct of our business with our sales outside the United States and Canada.

Indemnifications

In the normal course of business, we provide indemnifications of varying scope to customers against claims of intellectual property
infringement or other possible claims made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential
impact of these indemnification provisions on our future results of operations.

As permitted under Delaware law, we have agreements
whereby we indemnify our executive officers and directors for certain events or occurrences while the executive officer or director is, or was serving, at our request in such capacity. The indemnification period covers all pertinent events and
occurrences during the executive officers or directors lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer
insurance coverage that limits our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is immaterial.



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Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



Note 10: Common Stock Repurchase Programs

In August 2004, our Board of Directors authorized $100,000 to be used to repurchase shares of its common stock. A total of 53 shares were repurchased
under this program in 2004; no shares were repurchased in 2005. The $100,000 repurchase program was intended to partially offset the exercise of common stock options by employees and the distribution of common stock through the 2000 Employee Stock
Purchase Plan.

None of the shares of common stock we have repurchased have been cancelled.

Note 11: Restructuring charges

We incurred
restructuring costs of $2,685 during the first quarter of 2005. These costs related to employee severance related to a reduction in workforce in all of our operating categories and at all of our principal locations. As of December 31, 2005, we
had charged approximately $2,671 against the restructuring accrual for employee severance costs for approximately 65 employees. We anticipate the remaining accrual balance for employee severance costs will be paid within the next six months.

Note 12: Income Taxes

The components
of income from operations before income taxes are as follows:



|        |  |                          |         |   |      |   |        |  |   |       
|------- |  | ------------------------ | ------- | - | ---- | - | ------ |  | - | ------
|        |  | Years ended December 31,
|        |  | 2005                     |         |   | 2004 |   | 2003  
|U.S.    |  | $                        | (31,045 | ) |      | $ | 8,080  |  | $ | 21,648
|Foreign |  |                          | 27,801  |   |      |   | 16,148 |  |   | 19,680
|        |  |                          |         |   |      |   |        |  |   |       
|Total   |  |                          | (3,244  | ) |      |   | 24,228 |  |   | 41,328
|        |  |                          |         |   |      |   |        |  |   |       

The provision (benefit) for income taxes is summarized as follows:



|                                           |  |                          |        |   |      |   |         |      |  |   |        |  
|------------------------------------------ |  | ------------------------ | ------ | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                           |  | Years ended December 31, |       
|                                           |  | 2005                     |        |   | 2004 |   |         | 2003 | 
|Current:                                   |  |                          |        |   |      |   |         |      |  |   |        |  
|U.S. Federal                               |  | $                        | (1,624 | ) |      | $ | (8,233  | )    |  | $ | 10,120 |  
|State                                      |  |                          | (723   | ) |      |   | (1,454  | )    |  |   | 1,447  |  
|Foreign                                    |  |                          | 1,400  |   |      |   | 1,224   |      |  |   | 1,490  |  
|                                           |  |                          |        |   |      |   |         |      |  |   |        |  
|Total current                              |  |                          | (947   | ) |      |   | (8,463  | )    |  |   | 13,057 |  
|                                           |  |                          |       
|Deferred:                                  |  |                          |        |   |      |   |         |      |  |   |        |  
|U.S. Federal                               |  |                          | 3,059  |   |      |   | (4,946  | )    |  |   | 3,536  |  
|State                                      |  |                          | (1,247 | ) |      |   | 241     |      |  |   | (1,734 | )
|Foreign                                    |  |                          | (42    | ) |      |   | (623    | )    |  |   | (39    | )
|                                           |  |                          |        |   |      |   |         |      |  |   |        |  
|Total deferred                             |  |                          | 1,770  |   |      |   | (5,328  | )    |  |   | 1,763  |  
|                                           |  |                          |        |   |      |   |         |      |  |   |        |  
|Total provision (benefit) for income taxes |  | $                        | 823    |   |      | $ | (13,791 | )    |  | $ | 14,820 |  
|                                           |  |                          |        |   |      |   |         |      |  |   |        |  



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Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



The tax effects of temporary differences that give rise to deferred tax assets (liabilities) are as
follows:



|                                  |  |              |         |   |      |   |         |  
|--------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                  |  | December 31, |        
|                                  |  | 2005         |         |   | 2004 |  
|Inventory reserves                |  | $            | 5,140   |   |      | $ | 2,394   |  
|Other reserves and accruals       |  |              | 13,698  |   |      |   | 8,516   |  
|Accrued compensation and benefits |  |              | 3,877   |   |      |   | 3,155   |  
|Net operating loss carryforwards  |  |              | 39,271  |   |      |   | 32,227  |  
|Tax credit carryforwards          |  |              | 31,310  |   |      |   | 26,615  |  
|Deferred revenue                  |  |              | 2,090   |   |      |   | 1,010   |  
|Other                             |  |              | 4,287   |   |      |   | 2,855   |  
|                                  |  |              |         |   |      |   |         |  
|Gross deferred tax assets         |  |              | 99,673  |   |      |   | 76,772  |  
|                                  |  |             
|Depreciation                      |  |              | (1,591  | ) |      |   | (2,300  | )
|Amortization of Intangibles       |  |              | (48,190 | ) |      |   | (5,060  | )
|Convertible Debt                  |  |              | (17,421 | ) |      |   | (9,678  | )
|State Taxes                       |  |              | (4,468  | ) |      |   | (5,932  | )
|                                  |  |              |         |   |      |   |         |  
|Gross deferred tax liabilities    |  |              | (71,670 | ) |      |   | (22,970 | )
|                                  |  |              |         |   |      |   |         |  
|Deferred Tax Valuation Allowance  |  |              | (1,952  | ) |      |   | (1,952  | )
|                                  |  |              |         |   |      |   |         |  
|Total deferred tax assets, net    |  | $            | 26,051  |   |      | $ | 51,850  |  
|                                  |  |              |         |   |      |   |         |  

A reconciliation between the income tax provision computed at the federal statutory rate and the
actual tax provision is as follows:



|                                                             |  |                          |   |  |        |   |  |         |   |  |       |   |  |        |   |  |      |  
|------------------------------------------------------------ |  | ------------------------ | - |  | ------ | - |  | ------- | - |  | ----- | - |  | ------ | - |  | ---- | -
|                                                             |  | Years ended December 31, |  
|                                                             |  | 2005                     |   |  | 2004   |   |  | 2003    |  
|                                                             |  | $                        |   |  | %      |   |  | $       |   |  | %     |   |  | $      |   |  | %    |  
|Tax expense at federal statutory rate                        |  | (1,135                   | ) |  | 35.0   |   |  | 8,480   |   |  | 35.0  |   |  | 14,465 |   |  | 35.0 |  
|State income taxes, net of federal benefit                   |  | (1,281                   | ) |  | 39.5   |   |  | (1,041  | ) |  | (4.3  | ) |  | (198   | ) |  | (0.5 | )
|Tax-exempt interest income                                   |  | (40                      | ) |  | 1.2    |   |  | (348    | ) |  | (1.4  | ) |  | (1,772 | ) |  | (4.3 | )
|Research and development credits                             |  | (2,554                   | ) |  | 78.7   |   |  | (2,427  | ) |  | (10.0 | ) |  | (1,136 | ) |  | (2.6 | )
|Foreign tax rate differential                                |  | (6,803                   | ) |  | 209.7  |   |  | (495    | ) |  | (2.0  | ) |  | (1,022 | ) |  | (2.5 | )
|In-process technology and amortization of goodwill           |  | 15,855                   |   |  | (488.8 | ) |  | 350     |   |  | 1.4   |   |  | 4,200  |   |  | 10.2 |  
|Change in accounting for foreign earnings                    |  | 2,998                    |   |  | (92.4  | ) |  | (11,077 | ) |  | (45.7 | ) |  |       |   |  | 0.0  |  
|Reduction in accrual for estimated potential tax assessments |  | (6,239                   | ) |  | 192.3  |   |  | (7,857  | ) |  | (32.4 | ) |  |       |   |  | 0.0  |  
|Extra-territorial income exclusion                           |  | (311                     | ) |  | 9.6    |   |  | (134    | ) |  | (0.6  | ) |  |       |   |  | 0.0  |  
|Non-deductible travel & entertainment                        |  | 286                      |   |  | (8.8   | ) |  | 226     |   |  | 0.9   |   |  | 142    |   |  | 0.3  |  
|Non-deductible stock compensation charge                     |  | 47                       |   |  | (1.4   | ) |  |        |   |  | 0.0   |   |  |       |   |  | 0.0  |  
|Other                                                        |  |                         |   |  | 0.0    |   |  | 532     |   |  | 2.2   |   |  | 141    |   |  | 0.3  |  
|                                                             |  |                          |   |  |        |   |  |         |   |  |       |   |  |        |   |  |      |  
|                                                             |  | 823                      |   |  | (25.4  | ) |  | (13,791 | ) |  | (56.9 | ) |  | 14,820 |   |  | 35.9 |  
|                                                             |  |                          |   |  |        |   |  |         |   |  |       |   |  |        |   |  |      |  

We have $101,512 and $32,340 of loss and credit carry-forwards at December 31, 2005. These
losses and credits will expire between 2006 and 2025. A significant portion of these net operating loss and credit carry-forwards relate to recent acquisitions and utilization of these loss and credit carry-forwards will be subject to an annual
limitation under the U.S. Internal Revenue Code. We also have a valuation allowance related to foreign tax credits resulting from the 2003 acquisition of Best. If these foreign tax credits are ultimately utilized, the resulting benefit would reduce
goodwill rather than tax expense.



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



In 2005, the Internal Revenue Service (IRS) started an examination of our income tax returns for the
years 2002, 2003, and 2004. We are also subject to ongoing audits by state and foreign tax authorities. We believe that adequate accruals for potential assessments have been made for all years.

In the second quarter of 2005, pursuant to the American Jobs Creation Act of 2004, we made the decision to repatriate earnings which had previously been
permanently invested outside the United States. In the fourth quarter of 2005, we repatriated $70,000 of earnings to the US. The total tax charge associated with this repatriation was $3,515, of which $517 represents state income taxes, net of
federal benefit. In addition, we reduced our tax contingency reserve in 2005 by $6,239 as a result of the filing of our prior years federal, state, and foreign tax returns and the closing of the statute of limitations in certain tax jurisdictions.

During the third quarter of 2004, we reached a settlement with the IRS for the federal income tax returns filed for the years 1999 through
2001. As a result of the settlement, the third quarters tax benefit in 2004 was increased by the reassessment of taxes resulting in a favorable adjustment of $18,934. This favorable adjustment was related to the profitability of foreign
operations in 1999 through 2003 and foreign sales corporation and research and development credit benefits.

Note 13: Employee Benefit Plans

As of December 31, 2004, we have eleven stock-based compensation plans, ten stock incentive plans and one employee stock purchase
plan. We apply APB 25 and related interpretations in accounting for our plans. Accordingly, no compensation cost has been recognized for stock-based compensation for options granted to employees under our plans. Stock-based compensation costs
related to restricted stock granted under our plans have been recognized.

Stock Compensation Plans

We have ten stock incentive plans. The 2004 Equity Incentive Plan, the 1999 Equity Incentive Plan, and the Printcafe 2002 Stock Incentive Plan allow for
awards of restricted stock as well as grants of options. Restricted stock awards are not transferable by the receipient until vesting has occurred, but carry full voting and dividend rights. The vesting of restricted stock is normally in four to six
years, which can be accelerated to one to four years if certain performance criteria are met. Restricted stock has been granted to our employees who are vice-presidents and above and members of our board of directors.

All plans allow us to grant stock options. The exercise price of each option granted under any open plan equals the market price of our stock on the date
of grant and with a term of 7 to 10 years. Options are granted throughout the year and generally vest ratably over two to four years. We have periodically made company-wide grants.

At December 31, 2005, approximately 1,773 shares were available for future grants to employees, directors or consultants. We do not grant any
options under the closed plans, however all outstanding options under the closed plans continue to be governed by the terms and conditions of the existing option agreements for those grants.



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Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



|                                                  |  |        |  |          |  |                                  
|------------------------------------------------- |  | ------ |  | -------- |  | ---------------------------------
|Plan Name                                         |  | Status |  | Origin   |  | Shares Available for Distribution
|2004 Equity Incentive Plan                        |  | Open   |  | Original |  | 1,352                            
|1999 Equity Incentive Plan                        |  | Open   |  | Original |  | 284                              
|Splash 1996 Stock Option Plan                     |  | Open   |  | Assumed  |  | 67                               
|Printcafe 2002 Stock Incentive Plan               |  | Open   |  | Assumed  |  | 14                               
|Printcafe 2002 Key Executive Stock Incentive Plan |  | Open   |  | Assumed  |  | 55                               
|T/R Systems                                       |  | Open   |  | Assumed  |  | 1                                
|1990 Stock Plan                                   |  | Closed |  | Original |  | n/a                              
|MGI 1985 Nonqualified Stock Option Plan           |  | Closed |  | Assumed  |  | n/a                              
|Prograph 1999 Stock Incentive Plan                |  | Closed |  | Assumed  |  | n/a                              
|Printcafe Inc. 2000 Stock Incentive Plan          |  | Closed |  | Assumed  |  | n/a                              
|                                                  |  |        |  |          |  |                                  
|Total shares available, December 31, 2004         |  |        |  |          |  | 1,773                            
|                                                  |  |        |  |          |  |                                  

For purposes of pro forma reporting, we estimate the fair value of our options using the
Black-Scholes option value model, which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Our options have characteristics significantly different from those of traded options and changes in the subjective input assumptions can materially affect the fair value estimates. The fair value of
options granted and the option component of the employee purchase plan shares were estimated at the date of grant using the Black-Scholes pricing model with the following weighted average assumptions:



|                                                         |  |                          |  |                  |  |                
|-------------------------------------------------------- |  | ------------------------ |  | ---------------- |  | ---------------
|                                                         |  | Years Ended December 31,
|Black Scholes Assumptions & Fair Value                   |  | 2005                     |  | 2004             |  | 2003           
|Expected Volatility                                      |  | 40.1% - 44.7%            |  | 46.1% - 56.9%    |  | 62.4% - 68.1%  
|Dividend Yield                                           |  | 0.0%                     |  | 0.0%             |  | 0.0%           
|Risk Free Interest Rate                                  |  | 3.64 to 4.36%            |  | 2.25 to 3.40%    |  | 2.0 to 2.75%   
|Weighted Average Expected Option Term                    |  | 2.8 - 3.34 years         |  | 3.6 - 3.75 years |  | 3.4 - 4.0 years
|Weighted Average Per Share Fair Value of Options Granted |  | $5.83                    |  | $12.08           |  | $11.99         

Stock issued under the ESPP are valued using the same assumptions as the stock grants, except that
the term is reduced to 6 months.



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



A summary of the status of our stock option activity as of and for the years ended December 31,
2005, 2003 and 2002 is presented below:



|                                       |  |                          |   |      |                        |       |        |        |   |                        |   |        |  |        |                        |  |   |       
|-------------------------------------- |  | ------------------------ | - | ---- | ---------------------- | ----- | ------ | ------ | - | ---------------------- | - | ------ |  | ------ | ---------------------- |  | - | ------
|                                       |  | Years ended December 31,
|                                       |  | 2005                     |   | 2004 |                        | 2003 
|                                       |  | Shares                   |   |      | Average Exercise Price |       | Shares |        |   | Average Exercise Price |   | Shares |  |        | Average Exercise Price
|Options outstanding, beginning of year |  | 9,747                    |   |      | $                      | 24.81 |        | 11,487 |   |                        | $ | 24.21  |  | 11,128 |                        |  | $ | 21.25 
|Granted                                |  | 3,140                    |   |      |                        | 17.32 |        | 344    |   |                        |   | 24.09  |  | 3,269  |                        |  |   | 20.48 
|Assumed thru acquisitions              |  |                         |   |      |                        |      |        |       |   |                        |   |       |  | 140    |                        |  |   | 189.96
|Exercised                              |  | (1,709                   | ) |      |                        | 17.36 |        | (1,384 | ) |                        |   | 15.85  |  | (2,425 | )                      |  |   | 15.11 
|Forfeited                              |  | (1,061                   | ) |      |                        | 26.20 |        | (700   | ) |                        |   | 32.33  |  | (625   | )                      |  |   | 23.61 
|                                       |  |                          |   |      |                        |       |        |        |   |                        |   |        |  |        |                        |  |   |       
|Options outstanding, end of year       |  | 10,117                   |   |      | $                      | 23.60 |        | 9,747  |   |                        | $ | 24.81  |  | 11,487 |                        |  | $ | 24.21 
|                                       |  |                          |   |      |                        |       |        |        |   |                        |   |        |  |        |                        |  |   |       
|Options exercisable, end of year       |  | 6,154                    |   |      | $                      | 27.05 |        | 7,212  |   |                        | $ | 26.20  |  | 6,693  |                        |  | $ | 27.06 
|                                       |  |                          |   |      |                        |       |        |        |   |                        |   |        |  |        |                        |  |   |       
|Options expired during year            |  | 268                      |   |      |                        |       |        | 123    |   |                        |   |        |  | 199    |                        |  |   |       
|                                       |  |                          |   |      |                        |       |        |        |   |                        |   |        |  |        |                        |  |   |       

The following table summarizes information about stock options outstanding at December 31,
2005:



|                         |  |                     |  |                              |  |                              |         |                    |       |                              |   |        
|------------------------ |  | ------------------- |  | ---------------------------- |  | ---------------------------- | ------- | ------------------ | ----- | ---------------------------- | - | -------
|                         |  | Options Outstanding |  | Options Exercisable         
|Range of Exercise Prices |  | Number Outstanding  |  | Weighted Avg. Remaining Life |  | Weighted Avg. Exercise Price |         | Number Exercisable |       | Weighted Avg. Exercise Price
|$10.61 to $     16.17    |  | 2,195               |  | 5.48                         |  | $                            | 15.1668 |                    | 791   |                              | $ | 13.4182
|$16.20 to $     17.15    |  | 1,707               |  | 6.32                         |  |                              | 16.9357 |                    | 829   |                              |   | 17.1057
|$17.70 to $     19.45    |  | 2,264               |  | 5.16                         |  |                              | 19.0933 |                    | 1,170 |                              |   | 19.0754
|$19.50 to $   25.625     |  | 1,818               |  | 4.82                         |  |                              | 22.9361 |                    | 1,343 |                              |   | 22.9168
|$25.63 to $     47.25    |  | 1,832               |  | 3.28                         |  |                              | 35.2307 |                    | 1,720 |                              |   | 35.7756
|$47.56 to $7,467.09      |  | 301                 |  | 3.01                         |  |                              | 89.8717 |                    | 301   |                              |   | 89.8717
|                         |  |                     |  |                              |  |                              |         |                    |       |                              |   |        
|$10.61 to $7,467.09      |  | 10,117              |  | 4.96                         |  | $                            | 23.5951 |                    | 6,154 |                              | $ | 27.0489
|                         |  |                     |  |                              |  |                              |         |                    |       |                              |   |        

Restricted Stock Grants

We have granted restricted stock to certain employees and to the members of the Board of Directors. The grant price of the restricted shares equals the estimated grant date fair value. The vesting periods range up to
48 months. The estimated fair value of the restricted stock was recorded in additional paid-in capital, with an off-setting amount recorded as deferred compensation in the stockholdersequity section of the balance sheet. As the stock vests,
compensation expense is recorded in the income statement and the deferred compensation account is relieved. We awarded 363 shares in 2005 with a weighted average fair value of $17.42 per share, of which 6 shares were forfeited before year-end.

Approximately $2,069, $448 and $47 was recorded as compensation expense for the years ended December 31, 2005, 2004 and 2003,
respectively.

Employee Stock Purchase Plan

In 2001, We established an employee stock purchase plan which allows qualified employees (as defined) to purchase designated shares of our common stock at a price equal to 85% of the lower of the closing price on the first day of the two
year offering period or the last day of the purchase period.



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



The Plan is qualified under Section 423 of the Internal Revenue Code. We initially authorized 400 shares for purchase under this plan, with an
additional 0.5% of the common shares outstanding on the first day of each year being automatically added to the shares available for issue under this plan. As of December 31, 2005, there were 212 shares available for purchase under this plan.
We issued 366 shares during 2005 at an average purchase price of $14.39, 368 shares during 2004 at an average purchase price of $13.68 and 305 shares during 2003 at an average purchase price of $13.04.

Employee 401(k) Plan

We sponsor a 401(k) Savings
Plan (the 401(k) Plan) to provide retirement and incidental benefits for our employees. Employees may contribute from 1% to 20% of their annual compensation to the Plan, limited to a maximum annual amount as set periodically by the
Internal Revenue Service. We currently match 50% of the employee contributions, up to a maximum of the first 4% of the employees compensation contributed to the plan, subject to IRS limitations. Our match is annually determined by the Board of
Directors. All matching contributions vest over four years starting with the hire date of the individual employee. Our matching contributions to the Plan totaled $1,576 in 2005, $1,653 in 2004 and $952 in 2003. The employee and our contributions are
cash contributions invested in mutual funds managed by an independent fund manager, or in self-directed retirement plans. The fund manager or the employee may invest in our common stock at their discretion.

Note 14: Information Concerning Business Segments and Major Customers

Information about Products and Services

We operate in a single industry segment, technology for high-quality printing in
short production runs. In accordance with SFAS 131, Disclosures About Segments of an Enterprise and Related Information, our operating decision-makers have been identified as our executive officers, who review the operating results to make
decisions about allocating resources and assessing performance for the entire Company. We do not have separate operating segments for which discrete financial statements are prepared. Our management makes operating decisions and assesses performance
primarily based on the marketplace acceptace of our products, which is typically measured by revenues.

The following is a breakdown of
revenues by product category for the years ended December 31, 2005, 2004 and 2003:



|                                   |  |                          |         |      |   |         |  |   |        
|---------------------------------- |  | ------------------------ | ------- | ---- | - | ------- |  | - | -------
|                                   |  | Years ended December 31,
|                                   |  | 2005                     |         | 2004 |   | 2003   
|Controllers                        |  | $                        | 274,015 |      | $ | 292,833 |  | $ | 318,884
|Inkjet Products                    |  |                          | 86,913  |      |   |        |  |   |       
|Professional Printing Applications |  |                          | 71,375  |      |   | 68,484  |  |   | 21,782 
|Miscellaneous                      |  |                          | 36,198  |      |   | 33,287  |  |   | 38,921 
|                                   |  |                          |         |      |   |         |  |   |        
|Total Revenue                      |  | $                        | 468,501 |      | $ | 394,604 |  | $ | 379,587
|                                   |  |                          |         |      |   |         |  |   |        

Information about Geographic Areas

Our sales originate in the United States, The Netherlands, Germany and Japan. Shipments to some of our OEM customers are made to centralized purchasing
and manufacturing locations, which in turn sell through to other locations. As a result of these factors, we believe that sales to certain geographic locations might be higher or lower, as accurate data is difficult to obtain.



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



The following is a breakdown of revenues by sales origin for the years ended December 31, 2005,
2004 and 2003, respectively:



|                |  |                          |         |      |   |         |  |   |        
|--------------- |  | ------------------------ | ------- | ---- | - | ------- |  | - | -------
|                |  | Years ended December 31,
|                |  | 2005                     |         | 2004 |   | 2003   
|United States   |  | $                        | 332,895 |      | $ | 258,873 |  | $ | 231,389
|The Netherlands |  |                          | 127,595 |      |   | 126,861 |  |   | 140,372
|Germany         |  |                          | 7,506   |      |   | 8,781   |  |   | 7,368  
|Japan           |  |                          | 505     |      |   | 89      |  |   | 458    
|                |  |                          |         |      |   |         |  |   |        
|Total Revenue   |  | $                        | 468,501 |      | $ | 394,604 |  | $ | 379,587
|                |  |                          |         |      |   |         |  |   |        

The following table presents our long-lived assets in Europe as of December 31, 2005 and
2004.



|                       |  |              |       |      |   |       
|---------------------- |  | ------------ | ----- | ---- | - | ------
|                       |  | December 31,
|                       |  | 2005         |       | 2004
|Goodwill               |  | $            | 6,235 |      | $ | 6,882 
|Intangible Assets, net |  |              | 3,253 |      |   | 4,541 
|                       |  | $            | 9,488 |      | $ | 11,423

Information about Major Customers

For the past three years we have had three major customers, Canon, Konica Minolta and Xerox, each with total revenues greater than 10%. These customers,
in order of magnitude, accounted for approximately 22%, 15% and 11% of revenue in 2005, approximately 22%, 21% and 17% of revenue in 2004 and approximately 28%, 25% and 19% of revenue in 2003. These same three customers, each with accounts
receivable balances greater than 10% of our total accounts receivable balance, in aggregate accounted for approximately 39% and 49% of the accounts receivable balance as of December 31, 2005 and 2004, respectively.

Note 15: Related Party Transactions

In February 2005
we signed an engagement letter with the investment banking firm CE Unterberg, Towbin (CEUT), under which they would provide acquisition-related services to the Company. The Chairman of CEUT is a member of our Board of Directors. We have
paid CEUT $1,984 for their services related to the acquisition of VUTEk, which closed in June 2005.



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Electronics for Imaging, Inc.

Notes to Consolidated Financial Statements(Continued)

(In thousands,
except for per share amounts)



Note 16: Unaudited Quarterly Consolidated Financial Information

The following table presents our operating results for each of the eight quarters in the two-year period ended December 31, 2005. The information for
each of these quarters is unaudited but has been prepared on the same basis as the audited consolidated financial statements appearing elsewhere in this Annual Report. In the opinion of management, all necessary adjustments (consisting only of
normal recurring adjustments) have been included to present fairly the unaudited quarterly results when read in conjunction with our audited consolidated financial statements and the notes thereto appearing in this Annual Report. These operating
results are not necessarily indicative of the results for any future period.



|                                               |  |    |         |   |    |   |         |    |  |   |         |   |  |   |         |  
|---------------------------------------------- |  | -- | ------- | - | -- | - | ------- | -- |  | - | ------- | - |  | - | ------- | -
|2005:                                          |  | Q1 |         |   | Q2 |   |         | Q3 |  |   | Q4      |  
|Revenue                                        |  | $  | 82,003  |   |    | $ | 99,036  |    |  | $ | 142,102 |   |  | $ | 145,360 |  
|Gross profit                                   |  |    | 53,209  |   |    |   | 61,745  |    |  |   | 86,688  |   |  |   | 87,369  |  
|(Loss) income from operations                  |  |    | (3,362  | ) |    |   | (35,883 | )  |  |   | 15,579  |   |  |   | 10,943  |  
|Net (loss) income                              |  |    | (658    | ) |    |   | (33,277 | )  |  |   | 18,498  |   |  |   | 11,370  |  
|Net (loss) income for dilution calculation (1) |  |    | (658    | ) |    |   | (33,277 | )  |  |   | 19,248  |   |  |   | 12,120  |  
|Net (loss) income per basic common share       |  | $  | (0.01   | ) |    | $ | (0.61   | )  |  | $ | 0.34    |   |  | $ | 0.21    |  
|Net (loss) income per diluted common share (1) |  | $  | (0.01   | ) |    | $ | (0.61   | )  |  | $ | 0.30    |   |  | $ | 0.18    |  
|In-process research and development charges    |  |    |        |   |    |   | (38,200 | )  |  |   |        |   |  |   | (7,100  | )
|Reduction in workforce                         |  |    | (2,685  | ) |    |   |        |    |  |   |        |   |  |   |        |  
|                                               |  |    |         |  
|2004:                                          |  | Q1 |         |   | Q2 |   |         | Q3 |  |   | Q4      |  
|Revenue                                        |  | $  | 106,682 |   |    | $ | 109,107 |    |  | $ | 97,586  |   |  | $ | 81,229  |  
|Gross profit                                   |  |    | 68,562  |   |    |   | 71,050  |    |  |   | 63,597  |   |  |   | 53,013  |  
|Income (loss) from operations                  |  |    | 11,341  |   |    |   | 13,026  |    |  |   | (7,972  | ) |  |   | (2,366  | )
|Net income                                     |  |    | 11,009  |   |    |   | 10,138  |    |  |   | 16,059  |   |  |   | 813     |  
|Net income for dilution calculation (1)        |  |    | 11,759  |   |    |   | 10,888  |    |  |   | 16,809  |   |  |   | 813     |  
|Net income per basic common share              |  | $  | 0.20    |   |    | $ | 0.19    |    |  | $ | 0.30    |   |  | $ | 0.02    |  
|Net income per diluted common share (1)        |  | $  | 0.18    |   |    | $ | 0.17    |    |  | $ | 0.27    |   |  | $ | 0.02    |  
|In-process research and development charges    |  |    | (1,000  | ) |    |   |        |    |  |   |        |   |  |   |        |  
|Gain on sale of assets                         |  |    | 2,994   |   |    |   |        |    |  |   |        |   |  |   |        |  
|Real estate related charges                    |  |    |        |   |    |   |        |    |  |   | (14,394 | ) |  |   |        |  
|Benefit from settlement of IRS audit           |  |    |        |   |    |   |        |    |  |   | 18,935  |   |  |   |        |  

---

|(1) | The quarterly information for 2005 and 2004 reflect the dilutive effect of the 9,084 shares of common stock related to the 1.50% senior convertible debentures. Net income for
dilution was calculated by adding back the after-tax effect of interest and other debt-related expense for each period. In the first and second quarter of 2005 and the fourth quarter of 2004 the shares were anti-dilutive, and were excluded from the
calculation.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act), that are designed to ensure that
information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that
such information 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. Our management, including the Chief
Executive Officer and Chief Financial Officer, is engaged in a comprehensive effort to review, evaluate and improve our controls; however, management does not expect that our disclosure controls will prevent all errors and all fraud. A control
system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives are met. Additionally, in designing disclosure controls and procedures, our management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective.

Managements Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the
Securities Exchange Act of 1934. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We assessed the effectiveness of the companys internal control over financial reporting as of December 31, 2005. In making this assessment, we used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal ControlIntegrated Framework.

Based on our assessment using
those criteria, we concluded that our internal control over financial reporting was effective as of December 31, 2005.

We have
excluded VUTEk from our assessment of internal control over financial reporting as December 31, 2005 because it was acquired by the Company in a purchase business combination during fiscal year 2005. VUTEK is a wholly-owned subsidiary whose
total assets and total revenue represent 24.6% and 18.6%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2005.

Our managements assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on pages 41 and 42 of this Annual Report on Form 10-K.



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##### Table of Contents

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the period covered by this Annual Report on Form 10-K that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9A. Other Information

On September 19, 2005, we entered into an OEM Distribution and License Agreement with Adobe Systems Incorporated and Adobe Systems
Software Ireland Limited, as amended by Amendment No. 1 to OEM Distribution and License Agreement with such parties dated September 19, 2005. The agreement is effective for a five-year term beginning October 1, 2005, with one-year
renewal terms thereafter, and may be earlier terminated by either party upon material breach by the other party and in other limited circumstances. Pursuant to such agreement, Adobe has granted us non-exclusive, non-transferable licenses to use
Adobe PostScript(R) interpreter software, certain font programs and other software and related Adobe trademarks in our products. We are obligated to pay royalties and other fees to Adobe in exchange for such licenses. Each party to the agreement has
agreed to indemnify the other for losses arising out of intellectual property infringement by the other partys products, subject to various conditions and limitations.

We have used Adobe software in most of our products pursuant to a prior license agreement with Adobe and expect to continue to use Adobe software in many
of our products in the foreseeable future. Please see Item 1A Risk Factors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.

A copy of the agreement is filed with this annual report on Form 10-K. We have requested confidential treatment of
portions of the agreement.



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##### Table of Contents

PART III

Item 10: Directors and Executive Officers of the Registrant

Information regarding our directors is incorporated by
reference from the information contained under the caption Election of Directors in our Proxy Statement for our 2006 Annual Meeting of Stockholders (the 2006 Proxy Statement). Information regarding our current
executive officers is incorporated by reference from information contained under the caption Executive Officers in our 2006 Proxy Statement. Information regarding Section 16 reporting compliance is incorporated by reference
from information contained under the captionSection 16 (a) Beneficial Ownership Reporting Compliance in our 2006 Proxy Statement. Information regarding the audit committee of our board of directors and information regarding
an audit committee financial expert is incorporated by reference from information contained under the captionCommittees of the Board of Directors in our 2006 Proxy Statement. Information regarding our code of ethics is
incorporated by reference from information contained under the captionCommittees of the Board of Directors in our 2006 Proxy Statement. Information regarding our implementation of procedures for stockholder nominations to our
board of is incorporated by reference from information contained under the captionCommittees of the Board of Directors in our 2006 Proxy Statement.

Item 11: Executive Compensation

The information required by this item is incorporated by
reference from the information contained under the caption Executive Compensation in our 2006 Proxy Statement.

Item 12:  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Other than information regarding securities authorized for issuance under equity compensation plans, which is set forth below, the information required by this item is incorporated by reference from the information contained under the
caption Security Ownership in our 2006 Proxy Statement.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information as of December 31, 2005 concerning securities that are authorized under equity
compensation plans.



|                                                       |  |                                                                                             |  |                                                                             |       |                                                                                                                                           |          
|------------------------------------------------------ |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ----- | ----------------------------------------------------------------------------------------------------------------------------------------- | ---------
|Plan category                                          |  | Number of securities to be issued upon exercise
of outstanding options, warrants and rights |  | Weighted-average exercise price of outstanding options, warrants and rights |       | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column 1)
|Equity compensation plans approved by stockholders     |  | 10,109,709                                                                                  |  | $                                                                           | 22.71 |                                                                                                                                           | 1,772,966
|Equity compensation plans not approved by stockholders |  |                                                                                            |  |                                                                             |      |                                                                                                                                           |         
|                                                       |  |                                                                                             |  |                                                                             |       |                                                                                                                                           |          
|TOTAL                                                  |  | 10,109,709                                                                                  |  | $                                                                           | 22.71 |                                                                                                                                           | 1,772,966
|                                                       |  |                                                                                             |  |                                                                             |       |                                                                                                                                           |          

This table does not include options outstanding as of December 31, 2005, representing 6,959
shares with an average exercise price of $1,316.46 per share, that were assumed in connection with business combinations where additional grants cannot be made.

Item 13: Certain Relationships and Related Transactions

The information required by this item is incorporated by
reference from the information contained under the captionRelated Transactions in our 2006 Proxy Statement.

Item 14: Principal
Accountant Fees and Services

The information required by this item is incorporated by reference from the information contained under
the captionPrincipal Accountant Fees and Services in our 2006 Proxy Statement.



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PART IV

Item 15: Exhibits, Financial Statement Schedules and Reports on Form 10-K.

(a) Documents Filed as Part of this Report

(1) Index to Financial Statements

The Financial Statements required by this item are submitted in Item 8 of this report as follows:

Index to Financial Statements



|                                                                                            |  |     
|------------------------------------------------------------------------------------------- |  | ----
|                                                                                            |  | Page
|Report of Independent Registered Public Accounting Firm                                     |  | 47  
|Consolidated Balance Sheets at December 31, 2005 and 2004                                   |  | 49  
|Consolidated Statements of Income for the three years ended December 31, 2005               |  | 50  
|Consolidated Statements of Stockholders Equity for the three years ended December 31, 2005 |  | 51  
|Consolidated Statements of Cash Flows for the three years ended December 31, 2005           |  | 52  
|Notes to Consolidated Financial Statements                                                  |  | 53  

(2) Financial Statement Schedule

Schedule IIValuation and Qualifying Accounts

(All other schedules are omitted because of the absence of conditions under which they are required or because the necessary information is provided in the consolidated financial statements or notes thereto in Item 8 of this report.)

(3) Exhibits



|            |  |                                                                                                                                                                                                                
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                    
|2.1         |  | Agreement and Plan of Merger, dated as of August 30, 2000, by and among the Company, Vancouver Acquisition Corp. and Splash Technology Holdings, Inc. (6)                                                      
|            | 
|2.2         |  | Amendment No. 1, dated as of October 19, 2000, to the Agreement and Plan of Merger, dated as of August 30, 2000, by and among the Company, Vancouver Acquisition Corp. and Splash Technology
Holdings, Inc. (7)
|            | 
|2.3         |  | Agreement and Plan of Merger and Reorganization, dated as of July 14, 1999, among the Company, Redwood Acquisition Corp. and Management Graphics, Inc. (4)                                                     
|            | 
|2.4         |  | Agreement and Plan of Merger, dated as of February 26, 2003 by and among the Company, Strategic Value Engineering, Inc. and Printcafe Software, Inc. (15)                                                      
|            | 
|2.5         |  | Merger Agreement, dated as of April 14, 2005 by and among the Company, VUTEk, Inc. and EFI Merger Sub, Inc. (18)                                                                                               
|            | 
|3.1         |  | Amended and Restated Certificate of Incorporation (2)                                                                                                                                                          
|            | 
|3.2         |  | Bylaws as amended (1)                                                                                                                                                                                          
|            | 
|4.2         |  | Specimen Common Stock certificate of the Company (1)                                                                                                                                                           
|            | 
|4.3         |  | Indenture dated as of June 4, 2003 between the Company and U.S. Bank National Association, as Trustee, relating to convertible senior debentures due 2023 (8)                                                  
|            | 
|4.4         |  | Form of Convertible Senior Debenture due 2023 (Exhibit A to Indenture filed as Exhibit 4.3 above) (8)                                                                                                          
|            | 
|4.5         |  | Registration Rights Agreement, dated as of June 4, 2003, among the Company, UBS Warburg LLC, C.E. Unterberg Towbin and Morgan Stanley Incorporated (8)                                                         



83



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##### Table of Contents

|            |  |                                                                                                                                                                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                    
|10.1+       |  | Agreement dated December 6, 2000, by and between Adobe Systems Incorporated and the Company (5)                                                                                                                                                                                                
|            | 
|10.2        |  | 1990 Stock Plan of the Company (1)                                                                                                                                                                                                                                                             
|            | 
|10.3        |  | Management Graphics, Inc. 1985 Nonqualified Stock Option Plan (17)                                                                                                                                                                                                                             
|            | 
|10.4        |  | The 1999 Equity Incentive Plan as amended (3)                                                                                                                                                                                                                                                  
|            | 
|10.5        |  | 2000 Employee Stock Purchase Plan as amended (3)                                                                                                                                                                                                                                               
|            | 
|10.7        |  | Splash Technology Holdings, Inc. 1996 Stock Option Plan as amended to date (13)                                                                                                                                                                                                                
|            | 
|10.8        |  | Prographics, Inc. 1999 Stock Option Plan (10)                                                                                                                                                                                                                                                  
|            | 
|10.9        |  | Printcafe Software, Inc. 2000 Stock Incentive Plan (10)                                                                                                                                                                                                                                        
|            | 
|10.10       |  | Printcafe Software, Inc. 2002 Key Executive Stock Incentive Plan (10)                                                                                                                                                                                                                          
|            | 
|10.11       |  | Printcafe Software, Inc. 2002 Employee Stock Incentive Plan (10)                                                                                                                                                                                                                               
|            | 
|10.12       |  | T/R Systems, Inc. 1999 Stock Option Plan (11)                                                                                                                                                                                                                                                  
|            | 
|10.13       |  | Electronics for Imaging, Inc. 2004 Equity Incentive Plan (12)                                                                                                                                                                                                                                  
|            | 
|10.14       |  | Form of option grant agreement                                                                                                                                                                                                                                                                 
|            | 
|10.15       |  | Form of restricted stock award agreement                                                                                                                                                                                                                                                       
|            | 
|10.16       |  | Form of Indemnification Agreement (1)                                                                                                                                                                                                                                                          
|            | 
|10.17       |  | Employment Agreement dated August 1, 2003, by and between Fred Rosenzweig and the Company (9)                                                                                                                                                                                                  
|            | 
|10.18       |  | Employment Agreement dated August 1, 2003, by and between Joseph Cutts and the Company (9)                                                                                                                                                                                                     
|            | 
|10.19       |  | Employment Agreement dated August 1, 2003, by and between Guy Gecht and the Company (9)                                                                                                                                                                                                        
|            | 
|10.20       |  | Lease Financing of Properties Located in Foster City, California, dated as of July 16, 2004, among the Company, Société Générale Financial Corporation and
Société Générale (14)                                                                                                               
|            | 
|10.21       |  | Lease Financing of Properties Located in Foster City, California, dated as of September 30, 2004, among the Company, Société Générale Financial Corporation and
Société Générale (16)                                                                                                          
|            | 
|10.22+      |  | OEM Distribution and License Agreement dated September 19, 2005 by and among Adobe Systems Incorporated, Adobe Systems Software Ireland Limited and the Company, as amended by Amendment No. 1
dated as of October 1, 2005                                                                     
|            | 
|12.1        |  | Computation of Ratios of Earnings to Fixed Charges                                                                                                                                                                                                                                             
|            | 
|21          |  | List of Subsidiaries                                                                                                                                                                                                                                                                           
|            | 
|23.1        |  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                       
|            | 
|24.1        |  | Power of Attorney (see signature page)                                                                                                                                                                                                                                                         
|            | 
|31.1        |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                             
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                             
|            | 
|32.1        |  | Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Chief Financial Officer Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

---

|+ | 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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------



84



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##### Table of Contents

|(3) | Filed as an exhibit to the Companys Registration Statement on Form S-8 on June 24, 2003 and incorporated herein by reference.
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(4) | Filed as an exhibit to the Companys Report of Unscheduled Events on Form 8-K on September 8, 1999 (File No. 000-18805) and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | 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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Filed as exhibit (d) (1) to the Companys Schedule TO-T on September 14, 2000 and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------

|(7) | Filed as exhibit (d) (5) to the Companys TO/A Number 3 on October 20, 2000 and incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------

|(8) | Filed as an exhibit to the Companys Quarterly Report on Form 10Q for the quarter ended June 30, 2003 (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 September 30, 2003 (File No. 000-18805) and incorporated herein by reference.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Filed as an exhibit to Printcafe Software, Inc.s Registration Statement on Form S-1 (File No. 333-82646) and incorporated herein by reference.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Filed as an exhibit to T/R Systems, Inc.s Registration Statement on Form S-1 (File No. 333-82646) and incorporated herein by reference.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------

|(12) | Filed as an exhibit to the Companys Registration Statement on Form S-8 on June 16, 2004 and incorporated herein by reference.
|---- | ------------------------------------------------------------------------------------------------------------------------------

|(13) | Filed as an exhibit to the Companys Quarterly Report on Form 10Q for the quarter ended March 31, 2004 (File No. 000-18805) and incorporated herein by reference.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) | Filed as an exhibit to the Companys Quarterly Report on Form 10Q for the quarter ended June 30, 2004 (File No. 000-18805) and incorporated herein by reference.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(15) | Filed as exhibit 10 to Amendment No. 2 to the Schedule 13D filed on February 26, 2003 and incorporated herein by reference.
|---- | ---------------------------------------------------------------------------------------------------------------------------

|(16) | Filed as an exhibit to the Companys Form 8-K filed on October 6, 2004 (File No. 000-18805 and incorporated herein by reference.
|---- | --------------------------------------------------------------------------------------------------------------------------------

|(17) | Filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 000-18805) and incorporated herein by reference.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(18) | Filed as an exhibit to the Companys Form 8-K filed on April 18, 2005 (File No. 000-18805) and incorporated herein by reference.
|---- | --------------------------------------------------------------------------------------------------------------------------------

(b) List of Exhibits

See Item 15 (a).

(c) Consolidated Financial Statement Schedule II for the years ended December 31, 2005, 2004 and 2003,
respectively.



85



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##### Table of Contents

ELECTRONICS FOR IMAGING, INC.

Schedule II

Valuation and Qualifying Accounts



|                                                             |  |                                |       |                                 |   |                                 |  |   |            |      |  |                          |        |   |  |   |      
|------------------------------------------------------------ |  | ------------------------------ | ----- | ------------------------------- | - | ------------------------------- |  | - | ---------- | ---- |  | ------------------------ | ------ | - |  | - | -----
|Description                                                  |  | Balance at beginning of
period |       | Charged to revenue and expenses |   | Charged to/ from other accounts |  |   | Deductions |      |  | Balance at end of period
|                                                             |  | (in thousands)                
|Year Ended December 31, 2005                                 |  |                                |       |                                 |   |                                 |  |   |            |      |  |                          |        |   |  |   |      
|Allowance for doubtful accounts and sales-related allowances |  | $                              | 3,086 |                                 | $ | 6,890                           |  | $ | 43         | (1)  |  | $                        | (5,713 | ) |  | $ | 4,306
|                                                             |  |                                |       |                                 |  
|Year Ended December 31, 2004                                 |  |                                |       |                                 |   |                                 |  |   |            |      |  |                          |        |   |  |   |      
|Allowance for doubtful accounts and sales-related allowances |  | $                              | 3,794 |                                 | $ | 1,319                           |  | $ | (1,145     | )(2) |  | $                        | (882   | ) |  | $ | 3,086
|                                                             |  |                                |       |                                 |  
|Year Ended December 31, 2003                                 |  |                                |       |                                 |   |                                 |  |   |            |      |  |                          |        |   |  |   |      
|Allowance for doubtful accounts and sales-related allowances |  | $                              | 1,238 |                                 | $ | 580                             |  | $ | 2,237      | (3)  |  | $                        | (261   | ) |  | $ | 3,794

---

|(1) | Sales-related allowance$43
|--- | ---------------------------

|(2) | Adjustment to acquired bad debt allowances: T/R Systems$(175), Printcafe Software, Inc.$(1,070); sales-related allowance$100
|--- | -------------------------------------------------------------------------------------------------------------------------------

|(3) | Bad debt allowance received through acquisition of Best GmbH$30, Printcafe Software, Inc.$1,713 and T/R Systems, Inc$394, and sales-related allowance$100.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------



86



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SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) 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.
|               |  |                              
|March 16, 2006 |  | By:                           |  | /s/    GUY GECHT                 
|               |  |                               |  | Guy Gecht Chief Executive Officer



POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Guy Gecht and Joseph Cutts
jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to the Form 10-K Annual Report and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.



|                         |  |                                                                          |  |               
|------------------------ |  | ------------------------------------------------------------------------ |  | --------------
|Signature                |  | Title                                                                    |  | Date          
|                         |  |                                                                         
|/s/    GUY GECHT         |  | Chief Executive Officer, Director                                        |  | March 16, 2006
|Guy Gecht                |  |                                                                         
|                         |  |                                                                         
|/s/    FRED ROSENZWEIG   |  | President, Director                                                      |  | March 16, 2006
|Fred Rosenzweig          |  |                                                                         
|                         |  |                                                                         
|/s/    JOSEPH CUTTS      |  | Chief Financial Officer, Chief Operating Officer and Corporate Secretary |  | March 16, 2006
|Joseph Cutts             |  |                                                                         
|                         |  |                                                                         
|/s/    GILL COGAN        |  | Director                                                                 |  | March 16, 2006
|Gill Cogan               |  |                                                                         
|                         |  |                                                                         
|/s/    JEAN-LOUIS
GASSÉE |  | Director                                                                 |  | March 16, 2006
|Jean-Louis Gassée        |  |                                                                         
|                         |  |                                                                         
|/s/    DAN MAYDAN        |  | Director                                                                 |  | March 16, 2006
|Dan Maydan               |  |                                                                         
|                         |  |                                                                         
|/s/    THOMAS UNTERBERG  |  | Director                                                                 |  | March 16, 2006
|Thomas Unterberg         |  |                                                                         
|                         |  |                                                                         
|/s/    JAMES S. GREENE   |  | Director                                                                 |  | March 16, 2006
|James S. Greene          |  |                                                                         
|                         |  |                                                                         
|/s/    CHRIS PAISLEY     |  | Director                                                                 |  | March 16, 2006
|Chris Paisley            |  |                                                                         



87



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##### Table of Contents

Exhibit Index



|            |  |                                                                                                                                                                                                                
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                    
|            | 
|2.1         |  | Agreement and Plan of Merger, dated as of August 30, 2000, by and among the Company, Vancouver Acquisition Corp. and Splash Technology Holdings, Inc. (6)                                                      
|            | 
|2.2         |  | Amendment No. 1, dated as of October 19, 2000, to the Agreement and Plan of Merger, dated as of August 30, 2000, by and among the Company, Vancouver Acquisition Corp. and Splash Technology
Holdings, Inc. (7)
|            | 
|2.3         |  | Agreement and Plan of Merger and Reorganization, dated as of July 14, 1999, among the Company, Redwood Acquisition Corp. and Management Graphics, Inc. (4)                                                     
|            | 
|2.4         |  | Agreement and Plan of Merger, dated as of February 26, 2003 by and among the Company, Strategic Value Engineering, Inc. and Printcafe Software, Inc. (15)                                                      
|            | 
|2.5         |  | Merger Agreement, dated as of April 14, 2005 by and among the Company, VUTEk, Inc. and EFI Merger Sub, Inc. (18)                                                                                               
|            | 
|3.1         |  | Amended and Restated Certificate of Incorporation (2)                                                                                                                                                          
|            | 
|3.2         |  | Bylaws as amended (1)                                                                                                                                                                                          
|            | 
|4.2         |  | Specimen Common Stock certificate of the Company (1)                                                                                                                                                           
|            | 
|4.3         |  | Indenture dated as of June 4, 2003 between the Company and U.S. Bank National Association, as Trustee, relating to convertible senior debentures due 2023 (8)                                                  
|            | 
|4.4         |  | Form of Convertible Senior Debenture due 2023 (Exhibit A to Indenture filed as Exhibit 4.3 above) (8)                                                                                                          
|            | 
|4.5         |  | Registration Rights Agreement, dated as of June 4, 2003, among the Company, UBS Warburg LLC, C.E. Unterberg Towbin and Morgan Stanley Incorporated (8)                                                         
|            | 
|10.1+       |  | Agreement dated December 6, 2000, by and between Adobe Systems Incorporated and the Company (5)                                                                                                                
|            | 
|10.2        |  | 1990 Stock Plan of the Company (1)                                                                                                                                                                             
|            | 
|10.3        |  | Management Graphics, Inc. 1985 Nonqualified Stock Option Plan (17)                                                                                                                                             
|            | 
|10.4        |  | The 1999 Equity Incentive Plan as amended (3)                                                                                                                                                                  
|            | 
|10.5        |  | 2000 Employee Stock Purchase Plan as amended (3)                                                                                                                                                               
|            | 
|10.7        |  | Splash Technology Holdings, Inc. 1996 Stock Option Plan as amended to date (13)                                                                                                                                
|            | 
|10.8        |  | Prographics, Inc. 1999 Stock Option Plan (10)                                                                                                                                                                  
|            | 
|10.9        |  | Printcafe Software, Inc. 2000 Stock Incentive Plan (10)                                                                                                                                                        
|            | 
|10.10       |  | Printcafe Software, Inc. 2002 Key Executive Stock Incentive Plan (10)                                                                                                                                          
|            | 
|10.11       |  | Printcafe Software, Inc. 2002 Employee Stock Incentive Plan (10)                                                                                                                                               
|            | 
|10.12       |  | T/R Systems, Inc. 1999 Stock Option Plan (11)                                                                                                                                                                  
|            | 
|10.13       |  | Electronics for Imaging, Inc. 2004 Equity Incentive Plan (12)                                                                                                                                                  
|            | 
|10.14       |  | Form of option grant agreement                                                                                                                                                                                 
|            | 
|10.15       |  | Form of restricted stock award agreement                                                                                                                                                                       
|            | 
|10.16       |  | Form of Indemnification Agreement (1)                                                                                                                                                                          
|            | 
|10.17       |  | Employment Agreement dated August 1, 2003, by and between Fred Rosenzweig and the Company (9)                                                                                                                  
|            | 
|10.18       |  | Employment Agreement dated August 1, 2003, by and between Joseph Cutts and the Company (9)                                                                                                                     
|            | 
|10.19       |  | Employment Agreement dated August 1, 2003, by and between Guy Gecht and the Company (9)                                                                                                                        



88



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##### Table of Contents

|            |  |                                                                                                                                                                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                    
|            | 
|10.20       |  | Lease Financing of Properties Located in Foster City, California, dated as of July 16, 2004, among the Company, Société Générale Financial Corporation and
Société Générale (14)                                                                                                               
|            | 
|10.21       |  | Lease Financing of Properties Located in Foster City, California, dated as of September 30, 2004, among the Company, Société Générale Financial Corporation and
Société Générale (16)                                                                                                          
|            | 
|10.22+      |  | OEM Distribution and License Agreement dated September 19, 2005 by and among Adobe Systems Incorporated, Adobe Systems Software Ireland Limited and the Company, as amended by Amendment No. 1
dated as of October 1, 2005                                                                     
|            | 
|12.1        |  | Computation of Ratios of Earnings to Fixed Charges                                                                                                                                                                                                                                             
|            | 
|21          |  | List of Subsidiaries                                                                                                                                                                                                                                                                           
|            | 
|23.1        |  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                       
|            | 
|24.2        |  | Power of Attorney (see signature page)                                                                                                                                                                                                                                                         
|            | 
|31.1        |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                             
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                             
|            | 
|32.1        |  | Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Chief Financial Officer Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

---

|+ | 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 Registration Statement on Form S-8 on June 24, 2003 and incorporated herein by reference.
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(4) | Filed as an exhibit to the Companys Report of Unscheduled Events on Form 8-K on September 8, 1999 (File No. 000-18805) and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | 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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Filed as exhibit (d) (1) to the Companys Schedule TO-T on September 14, 2000 and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------

|(7) | Filed as exhibit (d) (5) to the Companys TO/A Number 3 on October 20, 2000 and incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------

|(8) | Filed as an exhibit to the Companys Quarterly Report on Form 10Q for the quarter ended June 30, 2003 (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 September 30, 2003 (File No. 000-18805) and incorporated herein by reference.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Filed as an exhibit to Printcafe Software, Inc.s Registration Statement on Form S-1 (File No. 333-82646) and incorporated herein by reference.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Filed as an exhibit to T/R Systems, Inc.s Registration Statement on Form S-1 (File No. 333-82646) and incorporated herein by reference.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------

|(12) | Filed as an exhibit to the Companys Registration Statement on Form S-8 on June 16, 2004 and incorporated herein by reference.
|---- | ------------------------------------------------------------------------------------------------------------------------------

|(13) | Filed as an exhibit to the Companys Quarterly Report on Form 10Q for the quarter ended March 31, 2004 (File No. 000-18805) and incorporated herein by reference.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) | Filed as an exhibit to the Companys Quarterly Report on Form 10Q for the quarter ended June 30, 2004 (File No. 000-18805) and incorporated herein by reference.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



89



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##### Table of Contents

|(15) | Filed as exhibit 10 to Amendment No. 2 to the Schedule 13D filed on February 26, 2003 and incorporated herein by reference.
|---- | ---------------------------------------------------------------------------------------------------------------------------

|(16) | Filed as an exhibit to the Companys Form 8-K filed on October 6, 2004 (File No. 000-18805 and incorporated herein by reference.
|---- | --------------------------------------------------------------------------------------------------------------------------------

|(17) | Filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 000-18805) and incorporated herein by reference.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(18) | Filed as an exhibit to the Companys Form 8-K filed on April 18, 2005 (File No. 000-18805) and incorporated herein by reference.
|---- | --------------------------------------------------------------------------------------------------------------------------------



90