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


                                   FORM 10-K

(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, 1998     Commission File Number:  0-18805


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



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

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

2855 Campus Drive, San Mateo, CA                               94403   
(Address of principal executive offices)                     (Zip Code)
                                                               

                                 (650) 286-8600
              (Registrant's telephone number, including area code)


<TABLE>
<CAPTION>
<S>                                                                 <C>
Securities registered pursuant to Section 12(b) of the Act:                   None.


Securities  registered  pursuant to Section 12(g) of the Act:       Common Stock, $.01 Par Value
                                                                         (Title of Class)
</TABLE>


         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
                                    ---     ---

         The aggregate  market value of the voting stock held by  non-affiliates
of the registrant as of March 11, 1999.

         Common Stock, $.01 par value: $1,370,167,760**


     The number of shares  outstanding  of each of the  registrant's  classes of
common stock as of March 11, 1999.

    Common Stock, $.01 par value: 53,696,238


                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions  of  the  definitive   Proxy  Statement  to  be  delivered  to
stockholders in connection with the Annual Meeting of Stockholders to be held on
May 6, 1999 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 March 11, 1999. Excludes  approximately  16,974,824 shares of
common  stock  held  by  Directors,  Officer  and  holders  of 5% or more of the
Registrant's  outstanding Common Stock on December 31, 1998. 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.


                                       1

<PAGE>


PART I

         This Annual Report on Form 10-K includes certain registered  trademarks
and trademarks of Electronics for Imaging,  Inc. and others.  EFI, the EFI logo,
Fiery,  the  Fiery  logo,  Fiery  Driven,  the  Fiery  Driven  logo,  ColorWise,
RIP-While-Print,  PowerPage, the PowerPage logo, PowerBand, PowerSmooth, PSClone
and PSView are registered  trademarks of Electronics for Imaging,  Inc. with the
U.S. Patent and Trademark Office, and certain other foreign jurisdictions. Fiery
Prints,  Fiery  ZX,  Fiery LX,  Fiery  SI,  Fiery XJ,  Fiery  XJe,  Fiery  XJ-W,
BookletMaker,  Fiery Downloader,  Fiery Scan, Fiery Spooler, RIPChips, WebTools,
WebSpooler,  WebInstaller,  WebStatus,  Command  Workstation,  Continuous Print,
DocBuilder,  EFICOLOR,  EFICOLOR Works,  FreeForm,  Memory Multiplier,  NetWise,
STARR  Compression  and Welcome to the  Revolution are trademarks of Electronics
for Imaging, Inc. All other terms and product names may be registered trademarks
or trademarks of their respective owners, and are hereby acknowledged.

         Certain of the  information  contained  in this  Annual  Report on Form
10-K,  including  without  limitation  statements made under this Part I, Item 1
"Business"  and  Part II,  Item 7,  "Management's  Discussion  and  Analysis  of
Financial  Condition and Results of Operations  and Item 7A,  "Quantitative  and
Qualitative  Disclosures  about Market Risk" which are not historical facts, may
include  "forward-looking  statements"  within the meaning of Section 21E of the
Securities   Exchange  Act  of  1934,  as  amended,   which  involve  risks  and
uncertainties.  When used herein, the words "anticipate," "believe," "estimate,"
"expect" and similar expressions as they relate to the Company or its management
are intended to identify such statements as  "forward-looking  statements."  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  "--Competition,"  in
"Item 7. Management's  Discussion and Results of Operations--Factors  That Could
Adversely  Affect  Performance" and elsewhere in this Annual Report on Form 10-K
and in the Company's other filings with the Securities and Exchange  Commission,
including the Company's most recent Quarterly Report on Form 10-Q. Certain other
factors and assumptions not identified above or herein were also involved in the
derivation of the forward-looking  statements contained in this Annual Report on
Form 10-K and the failure of such other  assumptions to be realized,  as well as
other  factors,  may also cause actual results to differ  materially  from those
projected.  The Company  assumes no obligation  to update these  forward-looking
statements  to reflect  actual  results  or  changes  in factors or  assumptions
affecting such forward-looking statements.



ITEM 1: BUSINESS

General

         Electronics for Imaging, Inc., a Delaware corporation (the "Company" or
"EFI"),  was founded in 1989 to develop  innovative  solutions  to enable  color
desktop  publishing  in the same  manner  that  laser  printers  and  PostScript
software first enabled  black-and-white  desktop publishing in the mid-1980s. In
pursuit of this goal,  the Company  first  developed  the Fiery(R) line of color
servers ("Fiery Color Servers") to enable in-house,  short-production  run color
printing,  together with  application  and system  software to facilitate  color
correction and  device-independent  color. Fiery Color Servers are sophisticated
stand-alone  computers that enable digital copier  machines to accept,  process,
and print digital images from personal computers and computer networks.

         Historically,   the  Company  primarily  focused  its  efforts  on  its
stand-alone  Fiery Color Servers that support  printing on digital color copiers
and, until 1998,  substantially all of its revenue resulted from the development
and sale of these  stand-alone  products.  During 1998, the Company expanded its
focus to include several additional  embedded solutions that support printing on
a broader  range of  devices,  including  digital  black-and-white  copiers  and
desktop color laser and inkjet printers ("Fiery  Controllers" and, together with
Fiery Color  Servers,  "Fiery  Products").  In 1998,  the Company also developed
stand-alone  Fiery Color  Servers for  wide-format  color  inkjet  printers  and
restructured  its sales model by entering  into  direct  relationships  with the
manufacturers  of  such  wide-format  printers  rather  than  selling  to  sales
distributors.  Throughout  1998,  the Company  continued to develop  Fiery Color
Servers for existing and new generations of digital color copiers.

Background

         Prior to the  mid-1980s,  in order to obtain  quality  black-and-white,
typeset  documents,  a manuscript was typically sent to a specialized trade shop
where craftspeople labored on typesetting and photocomposition


                                        2

<PAGE>

machines. This process was expensive and frequently involved delays and numerous
proofing cycles.  As a result,  only a limited number of documents were typeset,
typically  books or  periodicals  printed in  thousands  or  millions of copies.
However,  the advent of desktop  publishing  in the  mid-1980s  enabled users to
create the professional look of typeset documents in an office environment. As a
result,  desktop publishing systems offered users without  specialized  training
increased control over the  black-and-white  document creation process.  It also
enabled the  production  of documents  more quickly  without  relying on special
trade shops and outside services. A single copy of a letter, a hundred copies of
a memo, or a thousand  copies of a newsletter  could be produced with a personal
computer,  a laser printer and a  black-and-white  copier.  These systems became
increasingly  popular  with  users  of  low-volume   printing,   such  as  small
businesses, large corporations,  government agencies,  educational institutions,
graphic artists and business professionals.

         However,  users were  still  limited  in their  ability to use  desktop
systems to produce color documents for short-run  printing at a reasonable cost.
In the late 1970s,  color images were typically  prepared on an electronic color
pre-press  system.  These  pre-press  systems were  expensive,  ran  proprietary
software,  were not compatible with other systems,  and required  highly-trained
operators to properly edit and render color.  Users routinely  endured a lengthy
pre-press process,  including the review of numerous interim proofs before final
printing.  While suitable for high volume printing applications such as catalogs
or  magazines,  pre-press  equipment  and  commercial  printing  presses were of
limited value to in-house users. EFI was founded to develop innovative solutions
for those users who wished to design and proof material  in-house and to produce
a limited number of color copies quickly and cost-effectively.

         The Company believes that consumers generally prefer color as evidenced
by  the  migration  of   photographs,   motion   pictures  and  television  from
black-and-white  to color.  In the personal  computer  field,  EFI believes this
preference  is shown by the almost  exclusive  use of color  monitors with color
oriented graphical user interfaces,  application  software and internet content.
In each of these cases,  once the enabling  technology  developed  sufficiently,
consumer adoption of color quickly followed. The Company believes that consumers
prefer color in documents  created through desktop  publishing.  Until recently,
however,  the technology  was not available to do this in a high quality,  quick
and cost-effective manner.  Accurate color reproduction is far more complex than
black-and-white   reproduction.   In  black-and-white  printing,  the  principal
variable is the amount of black ink printed on the page. By contrast,  producing
color on a page  requires,  in most  cases,  a  combination  of four inks (cyan,
magenta,  yellow and black)  applied in differing  percentages to create varying
colors. In addition, the human eye is extremely sensitive to variations in color
images.  Minor  inconsistencies  in the way  various  input,  display and output
devices  display  color,   and  even  small   differences  in  ambient  lighting
conditions,  can result in  significant  variations  in the way a color image is
printed and perceived.

         The Company also  believes  that the  black-and-white  copier market is
migrating  toward the  development and use of digital  black-and-white  copiers.
Fiery Controllers  allow users to print documents  directly from their computers
to the digital copier. The Company plans to continue to develop products for use
with these devices.

The Electronics for Imaging Solution

         The  Company  develops   products  with  a  wide  range  of  price  and
performance  levels  designed to make  high-quality  color printing in short-run
productions easier and more accessible to the broader market. More specifically,
Fiery Color  Servers  permit  users of digital  color  copiers to  transmit  and
convert  digital data from a computer to a color copier so that the color copier
can print color documents  easily,  quickly and  cost-effectively.  As a result,
Fiery Color Servers  transform  digital  color  copiers into fast,  high-quality
networked color printers.

         In addition to Fiery Color  Servers  for  digital  color  copiers,  the
Company has leveraged its technology to develop and  manufacture  other products
that support both color and black-and-white printing. These products include (i)
Fiery servers for digital black-and-white  copiers; (ii) Fiery Color Servers for
wide-format  inkjet printers;  and (iii) embedded Fiery  Controllers for digital
black-and-white  copiers and desktop color laser printers.  Unlike Fiery servers
which  are sold as  stand-alone  products  to be  connected  to  copiers,  Fiery
Controllers are embedded inside copiers and desktop printers.  The Company seeks
to have printing  solutions that include an embedded Fiery  Controller  marketed
with the "Fiery  Driven(R)"  logo. The Company  believes that the Fiery name and
trademark,  including the  trademark  "Fiery  Driven(R),"  are  associated  with
substantial goodwill and recognition in the marketplace.


                                       3

<PAGE>


Strategy

         The Company's  overall  objective is to establish Fiery Products as the
solution  of  choice to  enable  short-run  digital  printing  on a  variety  of
peripheral printing devices. With respect to its current products, the Company's
primary goal is to provide a range of  processing  and printing  solutions  that
address broad sections of the color printing  market and to continue to leverage
its  technology  to  enable  digital  black-and-white   printing  on  additional
peripheral devices including digital  black-and-white copiers and multi-function
devices.  The Company's  strategy to accomplish these goals consists of four key
elements.

         Proliferate and Expand the Fiery Product Line

         Traditionally, the Company has sold products that support three to nine
page-per-minute  ("ppm") digital color copiers.  While the Company believes that
the demand for color  laser  copiers is still  expanding,  the  Company has also
expanded the uses of its technology.  For example,  in 1996 the Company expanded
its line of color servers,  the Fiery XJ family, to drive a wide range of output
devices  including  desktop color laser  printers and  wide-format  color inkjet
printers with poster-size  output. In 1997, the Company further expanded the use
of its  technology,  shipping its first  products  that support  black-and-white
printing systems and copiers.

         In 1998, the Company  introduced its next  generation of products based
upon EFI's new Fiery ZX and Fiery X2 platforms. These new platforms include more
advanced  hardware,   EFI's  newly  developed   proprietary  software  (such  as
ColorWise(R) and NetWise(TM)) and PostScript(R) 3 interpreter  software licensed
from Adobe Systems Incorporated  ("Adobe"). By utilizing the advantages of these
new  platforms,  the Company  intends to continue to develop new Fiery  Products
that are  scalable  and offer a broad range of  features  and  performance  when
connected to or integrated with digital color and  black-and-white  copiers,  as
well as desktop color laser printers.

         Develop and Expand Relationships with Key Industry Participants

         The Company has established relationships with such companies as Canon,
Danka, ENCAD, Epson, Fuji Film, Fuji-Xerox,  Hewlett-Packard,  Hitachi,  Konica,
KME, Minolta,  Mita, Oce, Ricoh,  Sharp,  Toshiba and Xerox  (collectively,  the
"Strategic  Partners").  The Company is also seeking to establish  relationships
with other digital copier and printer  companies for the  distribution  of Fiery
Products with their copiers and printers.  EFI seeks to expand its relationships
with its Strategic  Partners in pursuit of the goal of offering  Fiery  Products
for  additional  digital  color  and  black-and-white  devices  produced  by its
Strategic Partners.

         Establish Enterprise Coherence

         In  its  development  of new  products  and  platforms,  EFI  seeks  to
establish  coherence across its entire product line by designing  products which
provide a consistent "look and feel" to the end-user.  The Company believes that
this effort to achieve  enterprise  coherence will continue to engender goodwill
among its Strategic  Partners and the end-users of Fiery  Products and assist in
the development of new strategic relationships and markets for the Company.

         Leverage Color Expertise to Expand the Scope of Products and Markets

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

Products and Technology

         Since the  introduction  of the first Fiery Color  Server in 1991,  the
Company has expanded  its product  line.  In 1995,  the Company  introduced  its
third-generation  platform,  the Fiery XJ. During 1996, the Company migrated the
majority of its product line to the XJ platform and later refined these products
by transitioning to a variation of the XJ platform known as the Fiery XJ+, which
included  shifting from a 100Mhz to 133Mhz CPU, an improvement in bus speed from
50Mhz to 66Mhz and an improvement in the application-specific integrated circuit
("ASIC") chip sets  incorporated  into Fiery Products.  During 1998, the Company
introduced two new platforms,  the Fiery ZX and the Fiery X2 and began migrating
its  product  line to these  platforms.  The Fiery ZX  platform  is  designed to
support 5 to 65 ppm color copiers and high speed digital presses that print at


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<PAGE>


rates in excess of 65 ppm.  The Fiery X2 platform is designed to support 4 to 25
ppm color copiers,  digital black-and-white  copiers, desktop color printers and
wide-format color inkjet printers.

         Stand-alone  Fiery Color Servers and embedded  color Fiery  Controllers
(collectively,  "Fiery Color Products") enable color laser copiers to perform as
high  performance,  plain-paper  color printers with the ability to produce full
color pages at up to 400  dots-per-inch  ("dpi")  resolution for copiers and 600
dpi  resolution  for  printers  in  continuous  tone (upto 2400 dpi in  bi-level
printers).  In addition,  Fiery Color Products support the scanning capabilities
of certain color laser copiers  providing full color scanning  capability to the
network.  Fiery Color  Products  are  designed  to provide a solution  for short
production  runs and on-demand  color proofing for the desktop  environment.  In
addition,  Fiery Products enable digital  black-and-white  copiers to perform as
plain-paper printers. Fiery Products are capable of connecting color and digital
black-and-white  copiers with networked  desktop computers such as Windows-based
PCs,  Apple  Macintosh  computers and UNIX  workstations.  In 1998,  the Company
shipped stand-alone Fiery Color Servers for use with color copiers, color inkjet
printers and wide-format color printers  distributed by such companies as Canon,
Epson,  Fuji-Xerox,  Minolta, Oce, Ricoh and Xerox and stand-alone Fiery servers
for use with digital  black-and-white  copiers  distributed by Oce and Sharp. In
1998, the Company also shipped Fiery  Controllers  embedded in color and digital
black-and-white copiers and desktop color printers distributed by such companies
as Canon,  Fuji-Xerox,  Konica, Minolta, Mita, Panasonic and Ricoh. In addition,
the  Company  shipped  software  and  components  to  Hewlett-Packard  to enable
Hewlett-Packard  to build a Fiery  Controller  that is embedded in a color laser
printer  distributed by  Hewlett-Packard.  With the exception of sales to Canon,
stand-alone Fiery servers are sold under the Fiery trademark.  The Company seeks
to have  products  incorporating  Fiery  Controllers  marketed  with  the  Fiery
Driven(R) logo.

         In 1998, the Company focused its development efforts on improvements to
its  products'  performance,  features,  and ease of use.  In 1998,  the Company
developed a Fiery Color Server utilizing  Microsoft's Windows NT system software
and shipped its first Fiery Color Server  utilizing such system software for the
Xerox  DocuColor 70 high speed digital  press.  The Company also shipped a Fiery
server   utilizing   Microsoft's   Windows   NT  for  Oce's   600  ppm   digital
black-and-white  device.  In 1998,  the Company  developed and shipped  products
utilizing its  ColorWise(R)  color  management  system and  NetWise(TM)  network
architecture software features. The ColorWise(R) color management system enables
production  of  precise  colors  with  better   consistency   across   different
applications,  computer  platforms and color file formats while the  NetWise(TM)
network  architecture  automatically  switches  among most major  protocols  and
supports 10BaseT and 100BaseT  ethernet  connections.  In addition,  the Company
developed and announced  ColorWise(R) Pro Tools, which enables remote control of
the capabilities of the color management  system, and shipped the Fiery LX Color
Server for the Epson Stylus Pro 5000, the Company's first product to utilize its
ColorWise(R)  Pro  Tools  software.  Also in 1998,  the  Company  developed  and
announced its DocBuilder  Pro(TM)  software which allows more than one page in a
document  to be imposed  onto a single  page  before  raster  image  processing,
thereby  decreasing  the amount of memory  required and  increasing the speed at
which pages can be imposed.  Finally in 1998,  the  Company  developed  enhanced
compression  software,  which decreases the amount of memory  necessary to store
documents during processing and enables faster printing of documents.

         As the Company  migrated  its product line to the Fiery ZX and Fiery X2
platforms  during 1998,  it continued to ship several  versions of its Fiery XJ+
Color  Servers,  Fiery XJe  Controllers,  Fiery XJ-W Color  Servers and Fiery SI
products.

         Fiery ZX Color Servers

         The  Company  first  shipped the Fiery ZX Color  Server,  a new product
designed to drive 5 to 65 ppm color copiers and high speed digital  presses that
print at rates in excess of 65 ppm, in mid-1998 and began migrating  portions of
its Fiery XJ+ product line to its Fiery ZX product line.  Fiery ZX Color Servers
utilize the  Company's  next  generation  hardware  platform  and are shipped in
configurations that include a 400 or 533 MHz DEC Alpha microprocessor and 160 to
512 MB of DRAM. The  microprocessor is augmented by specially designed RipChips-
ASICs,  which off-load data movement from the  microprocessor and reduce overall
print times.  Fiery ZX Color Servers deliver better  performance than comparable
Fiery XJ+ Color Servers.

         Fiery  ZX Color  Servers  support  Adobe  Postscript(R)  3 and  include
software  features  developed  or further  refined by the Company  during  1998.
Software features developed during 1998 include the ColorWise(R) color


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<PAGE>


management system and the NetWise(TM)  network  architecture.  Software features
further refined during 1998 include STARR(TM) Compression which optimizes memory
usage and permits faster printing and  reprinting;  Fiery  DocBuilder(TM)  which
enables electronic collation,  reverse order printing,  job merging and editing;
and Fiery  WebTools(TM)  which  enables  print  job  management  from  different
computer  platforms via a Java--enabled  Web Browser.  Fiery  WebTools(TM)  also
provides remote access to the print queue so an administrator can obtain instant
updates on job status and error  messages,  allowing  for a timely  response  to
problems,  and provides job accounting and job security  capabilities  which are
essential in network printing environments.  In addition, Fiery ZX Color Servers
utilize the Company's proprietary  RIP-While-Print(R)  technology,  which allows
one page to be printed while subsequent pages are  simultaneously  processed and
the  Company's  proprietary   Continuous  Print(TM)  technology,   which  allows
processed pages to be stored in memory before printing, eliminating the need for
the copier or  printer  to cycle  down  between  unique  pages.  These  printing
technologies were further refined by the Company during 1998.

         The Fiery ZX Color Server is currently sold in four configurations, the
Fiery ZX-2100,  the Fiery ZX-3300,  the Fiery ZX-5300 and the Fiery ZX-7200, all
of which,  except for those sold to Canon, are marketed under the name Fiery ZX.
The Fiery  ZX-2100 and ZX-3300  Color  Servers are designed for use with 5 to 25
ppm color copiers, the Fiery ZX-5300 Color Server is designed for use with 25 to
65 ppm color copiers and the Fiery ZX-7200 Color Server is designed for use with
high speed digital  presses that print in excess of 65 ppm. In 1998, the Company
shipped Fiery ZX Color Servers for use with color  copiers  distributed  by such
companies as Canon, Danka,  Fuji-Xerox,  Minolta, Oce, Ricoh and Xerox, and high
speed digital presses distributed by Fuji-Xerox and Xerox.

         Fiery XJ+ Color Servers

         Throughout  1998, the Company  continued to ship its product line based
upon the  Fiery  XJ+  architecture  while  migrating  portions  of its Fiery XJ+
product line to its Fiery ZX product line. The Fiery XJ+  architecture  delivers
improved  performance at lower costs than earlier models.  The Company  designed
specialized    RipChips(TM)   that   accompany   the   MIPS   R4600/R4700/R5000,
100MHz/133MHz/200MHz  RISC  microprocessors  and accelerate color  PostScript(R)
processing. Through the use of these ASICs in Fiery Controllers, the Company has
minimized the chip count and reduced the key technology of its color server to a
single board.  Additional cost reductions result from the Company's  proprietary
STARR(TM) Compression technology, which allows for faster printing with half the
memory  previously  required.  The Fiery XJ+ architecture  also incorporates the
Company's   proprietary   RIP-While-Print(R)   and   Continuous   Print-printing
technologies.  As with  previous  Fiery  Products,  the Fiery  XJ+  architecture
incorporates  PostScript(TM)  Level 2 interpreter  software from Adobe,  related
system software and the Company's  proprietary software utilities for use on the
user's networked personal computer.

         The Fiery XJ+ Color Server is sold in four configurations which, except
for those  sold to  Canon,  are  marketed  under the name  Fiery  XJ+.  The four
configurations  are  Fiery XJ+ 170,  Fiery XJ+ 250,  Fiery XJ+ 325 and Fiery XJ+
525. In 1998, the Company continued to ship Fiery XJ+ Color Servers for use with
Canon, Danka, Fuji-Xerox, Minolta, Ricoh and Xerox products.

         Fiery X2 Product Line

         In 1998,  the Company  continued to ship products based on its Fiery LX
architecture,   the  Company's   first  Fiery   architecture  to  support  Adobe
PostScript(R)  3,  and  expanded  its  product  line  based  upon  the  Fiery LX
architecture.  The Company developed the Fiery LX architecture in 1997. In 1998,
the Company introduced its Fiery X2 Color Server, Fiery X2e Controller, Fiery LX
server and Fiery LX-W Color Server,  each based upon the Fiery LX  architecture,
and began migrating portions of its product line from the Fiery XJ+ architecture
to the Fiery LX architecture.

         The streamlined  design of the Fiery LX architecture is a key component
in increasing the speed and reducing the cost of Fiery Products,  thereby making
the  Company's  technology  available  to a wider  range of copier  and  printer
devices. In addition,  the Fiery LX architecture  utilizes proprietary ASICs for
faster document  processing time during printing.  Fiery Products based upon the
Fiery LX  architecture  have similar  end-user  interfaces,  thereby  increasing
coherence across the Company's Fiery X2 product line.


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<PAGE>


         Fiery X2 Color Servers

         The Fiery X2 Color Server is a newly designed chassis for use with 5 to
25 ppm color copiers.  The hardware platform for Fiery X2 Color Servers includes
a 200 MHz MIPS  R5000  microprocessor  and 64 to 160 MB of DRAM.  Fiery X2 Color
Servers utilize the Company's  printing  technologies that maximize  throughput,
including  RIP-While-Print(R)  and Continuous Print(TM).  Fiery X2 Color Servers
utilize  software  features  which  include the  ColorWise(R)  color  management
system,  STARR(TM)  Compression,  the NetWise(TM)  network  architecture,  Fiery
DocBuilder(TM)  and Fiery  WebTools(TM).  In 1998,  the Company began  migrating
portions of its Fiery XJ+ and SI product lines to Fiery X2 Color Server products
and began  shipping  Fiery X2 Color Servers which are connected to color copiers
distributed by such companies as Canon, Minolta and Xerox.

         Fiery SI

         In 1998,  the Company  continued  to ship the Fiery SI Color Server and
began  migrating  Fiery SI Color  Server  products to its Fiery X2 Color  Server
product  line.  The Fiery SI Color Server is a  stand-alone,  entry-level  color
server that is optimized for fast,  high-quality  performance on common business
graphics applications.  In 1998, the Company shipped Fiery SI Color Servers that
support  color  copiers and  printers  distributed  by such  companies as Canon,
Fuji-Xerox,  Minolta,  Oce,  and Xerox.  In  addition,  the  Company  shipped an
embedded version of the Fiery SI designed for a Canon product.

         Fiery X2e Controllers

         The Fiery X2e  Controller  is  designed  for use with color and digital
black-and-white  laser  copiers and desktop color laser  printers.  The hardware
platform  for Fiery X2e  Controllers  generally  includes  a 200 MHz MIPS  R5000
microprocessor  and 16 to 160 MB of DRAM.  Fiery X2e Controllers  have a smaller
footprint than Fiery XJe  Controllers  which enhances the ability to embed Fiery
X2e Controllers in digital copiers and printers.  Fiery X2e Controllers  utilize
the  Company's  printing   technologies  that  maximize  throughput,   including
RIP-While-Print(R)  and Continuous Print(TM).  Fiery X2e Controllers may utilize
software  features  which  include the  ColorWise(R)  color  management  system,
STARR(TM)  Compression,  the NetWise(TM) network architecture,  Fiery DocBuilder
and Fiery  WebTools(TM).  In 1998,  the Company  began  migrating  its Fiery XJe
Controller  products to Fiery X2e  Controller  products and began shipping Fiery
X2e Controllers embedded in color and digital  black-and-white copiers and color
laser  printers  distributed  by such  companies as Canon,  Fuji-Xerox,  Konica,
Minolta,  Mita,  Panasonic and Ricoh. In addition,  the Company shipped software
and components to Hewlett-Packard to enable Hewlett-Packard to build a Fiery X2e
Controller for a color laser printer distributed by Hewlett-Packard.

         Fiery XJe Embedded Controllers

         During  1998,  the Company  continued to offer  manufacturers  of color
laser  printers  and  copiers  embedded  Fiery XJ+  technology  in the Fiery XJe
Controller and began  migrating its Fiery XJe  Controller  products to Fiery X2e
Controller  products.  Fiery XJe  Controllers  are based on the  technology  and
scalable  architecture  developed for the Company's Fiery XJ+ Color Servers. The
single-board  design of the Fiery XJ+  architecture  allows  the Fiery XJe to be
installed inside a color laser printer or color copier. The Fiery XJe Controller
employs both a  RISC-based  CPU and ASICs for faster  raster  image  processing.
These  specially-designed  Fiery XJ  RipChips(TM)  speed up the  output of color
documents by off loading all data movement  functions from the controller's main
CPU, which is then available for PostScript(R) processing. Fiery XJe Controllers
utilize the  Company's  Rip-While-Print(R)  and  Continuous  Print(TM)  printing
technologies.

         In 1998,  the Company  continued to ship Fiery XJe  Controllers to such
companies  as Canon and Ricoh.  The Fiery XJe for the Ricoh  Aficio 2000 was the
Company's first embedded controller for a color laser copier.

         Fiery LX Servers

         The Fiery LX  server  is a  stand-alone  server  designed  for use with
digital  black-and-white  copiers and high-end  desktop  color inkjet  printers.
Fiery  LX  servers  utilize  the  Company's  RIP-While-Print(R)  and  Continuous
Print(TM)  printing   technologies  and  software  features  which  include  the
ColorWise(R)  Pro  Tools  color  management   system  (in  color  models),   the
NetWise(TM) network  architecture and Fiery  WebTools(TM).  In 1998, the Company
shipped  Fiery  LX  servers  for  use  with  a  digital  black-and-white  copier
distributed by Sharp and a color inkjet printer distributed by Epson.


                                       7

<PAGE>


         Fiery LX-W Color Servers

         The Fiery  LX-W  Color  Server  is a  stand-alone  server  for use with
wide-format  color  inkjet  printers.  Fiery  LX-W  Color  Servers  utilize  the
Company's  RIP-While-Print(R) and Continuous Print(TM) printing technologies and
software features which include the ColorWise(R)  color management  system,  the
NetWise(TM) network architecture, Fiery WebTools(TM) and Fiery Spooler for print
job  management  and job  accounting.  In 1998, the Company began shipping Fiery
LX-W Color Servers for wide-format printers distributed by ENCAD and Epson. Also
in 1998,  the Company  announced an agreement  with ENCAD whereby ENCAD is given
the right to distribute Fiery LX-W Color Servers for use with ENCAD  wide-format
devices.

         Fiery XJ-W Color Servers

         Based on the Fiery XJ+ architecture, the Fiery XJ-W Color Server drives
wide-format color inkjet printers at their maximum-rated speed for most software
applications.  In 1998,  the Company  transitioned  its Fiery XJ-W Color  Server
products  to Fiery LX-W  Color  Server  products  and  shipped  Fiery XJ-W Color
Servers  for use with  wide-format  color  inkjet  printers  marketed  by ENCAD,
Hewlett-Packard  and  VivigrafX.  During 1998, the Company sold Fiery XJ-W Color
Servers through distributors and wide-format color inkjet printer dealers.

Significant Relationships

         The Company has  established,  and continues to try to build and expand
relationships  with its Strategic  Partners and other leading copier and printer
companies  (collectively,  the  "OEMs"),  in order  to  benefit  from the  OEMs'
products,  distribution  channels and  marketing  resources.  These OEMs include
domestic and  international  manufacturers,  distributors and sellers of digital
copiers (both black-and-white and color), wide-format printers and desktop color
printers.  The Company  works  closely with the OEMs with the aim of  developing
solutions that incorporate  leading technology and which are optimally suited to
work in conjunction  with such companies'  products.  OEMs that the Company sold
products to in 1998 include:  Agfa,  Canon,  Danka,  ENCAD,  Epson,  Fuji Xerox,
Hewlett-Packard,  Konica, Minolta, Mita, Panasonic,  Oce, Ricoh, Sharp and Xerox
and Xerox's worldwide subsidiaries and affiliates.  Together, sales to Canon and
Xerox  accounted  for 59% of the Company's  1998 revenue,  with sales to each of
these customers accounting for more than 10% of the Company's revenue.

         In 1998, the Company announced a new relationship with  Hewlett-Packard
pursuant  to  which  the   Company   provides   software   and   components   to
Hewlett-Packard  to enable  Hewlett-Packard  to build Fiery Controllers that are
embedded in desktop color laser printers  distributed by Hewlett-Packard.  These
Fiery  Controllers are the first of the Company's  products to be distributed by
Hewlett-Packard.  The  Company's  Fiery  Color  Servers  designed  for use  with
wide-format color inkjet printers marketed by  Hewlett-Packard  were distributed
through  distributors and wide-format  color inkjet printer dealers during 1998.
The  Company  also  announced a worldwide  strategic  partnership  with the Copy
Systems Division of Agfa Gevaert N.V.  ("Agfa"),  a European developer of analog
and  digital  black-and-white  copiers and color  copying  and digital  printing
systems, pursuant to which Agfa distributes Fiery SI Color Servers in Europe. In
1998,  Agfa was acquired by Lanier  Worldwide,  Inc.  Also in 1998,  the Company
announced a strategic  relationship with ENCAD,  pursuant to which ENCAD has the
right to sell the  Company's  Fiery LX-W server in support of ENCAD's  family of
wide-format color inkjet printers.

         The  Company  customarily  enters  into  development  and  distribution
agreements with its 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 the  Company's OEM customers  will
continue to purchase  products  from the  Company in the  future,  despite  such
agreements.  The  Company  recognizes  the  importance  of,  and  works  hard to
maintain,  its good  relationships  with its customers.  However,  the Company's
relationships  with  its  customers  can be  affected  by a  number  of  factors
including,  among others:  competition  from other  suppliers,  competition from
internal development efforts by the customers  themselves  (including the OEMs),
and  changes in general  economic,  competitive  or market  conditions  (such as
changes in demand for the Company's or the OEM's  products,  or  fluctuations in
currency  exchange  rates).  There can be no  assurance  that the  Company  will
continue to maintain or build the relationships it has developed to date.

         In addition to its development and sales  relationships  with the OEMs,
to increase the  distribution  and presence of Fiery Color Servers  connected to
both color and black-and-white copiers and wide-format printing


                                       8

<PAGE>


devices,  the Company has  developed  strategic  relationships  with  well-known
print-for-pay   companies,   including  Kinko's,   AlphaGraphics,   the  CopyMax
operations of office products superstore OfficeMax, the American Speedy group of
franchised  printing  centers  (including  Allegra  Print and Imaging,  American
Speedy,  Speedy Printer,  Zippy Print and Quik Print) and the SAMPA Corporation,
franchiser of Signal Graphics Printing Centers.

         The Company  also has a continuing  relationship  pursuant to a license
agreement with Adobe and licenses  PostScript(R)  software from Adobe for use in
many Fiery Products.  This  relationship is important because each Fiery Product
requires  page  description  language  software  in  order to  operate.  Adobe's
PostScript(R)  software  is  widely  used to  manage  the  geometry,  shape  and
typography of hard copy documents and Adobe is a recognized  leader in providing
page  description  software.  Pursuant to its October  1997  acquisition  of the
former  Pipeline  Associates,   Inc.  and  Pipeline  Asia,  Inc.  (collectively,
"Pipeline"),  the Company acquired  software  development  expertise and certain
intellectual    property   associated   with   Pipeline's    specialization   in
PostScript(R), HTML and PCL interpreter technologies.

Distribution and Marketing

         The  Company's  primary  distribution  method for its Fiery servers has
been to sell the Fiery  servers  to its OEMs.  The  Company's  OEMs in turn sell
these  products  to  end-users  for use with  the  OEMs'  copiers  as part of an
integrated  printing  system.  For  Fiery  Controllers,  the  Company's  primary
distribution  method  has been to sell the  products  to the OEMs that embed the
products  into their copiers and  printers.  There can be no assurance  that the
risks of  distributing  the Company's Fiery Products  primarily  through its OEM
customers   will  not  negatively   impact  the  Company  in  the  future.   See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations--Factors  That Could Adversely  Affect  Performance--Reliance  on OEM
Resellers; Risks Associated With Significant OEM Group Concentration".

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

Research and Development

         Research  and  development  costs for 1998,  1997,  and 1996 were $57.9
million,  $40.3  million,  and $22.4 million,  respectively.  As of December 31,
1998, 299 of the Company's 583 full-time employees were involved in research and
development.   The  Company  believes  that  development  of  new  products  and
enhancement  of existing  products are essential to its continued  success,  and
management intends to continue to devote  substantial  resources to research and
new product development. The Company expects to make significant expenditures to
support its research and development programs for the foreseeable future.

         The Company is developing  Fiery Products to support  additional  color
and black-and-white printing devices including desktop printers,  high-end color
copiers,  digital  black-and-white  copiers  and  multi-function  devices.  This
ongoing  development  work includes a  multiprocessor  architecture for high-end
systems and  lower-cost  designs for desktop color laser  printers.  Substantial
additional  work will be required to complete the development of these projects.
See "Management's  Discussion and Analysis of Financial Condition and Results of
Operations--Factors    That   Could   Adversely   Affect    Performance--Product
Transitions".

Manufacturing

         The  Company  subcontracts  with other  companies  to  manufacture  its
products. These companies are closely supervised by the Company and work closely
with the Company to assure low costs and good quality in the  manufacture of the
Company's products.  Subcontractors purchase components needed for the Company's
products from third  parties.  The Company is totally  reliant on the ability of
its  subcontractors  to produce  products sold by the Company,  and although the
Company  supervises  its  subcontractors,  there can be no  assurance  that such
subcontractors  will continue to perform for the Company as well as they have in
the past.  There can also be no assurance that  difficulties  experienced by the
Company's  subcontractors (such as interruptions in a subcontractor's ability to
make or ship the Company's  products or quality  assurance  problems)  would not
adversely affect the Company's operations.

         Certain  components  necessary  for the  manufacture  of the  Company's
products,  including  ASICs and  certain  other  semiconductor  components,  are
obtained from a sole supplier or a limited group of suppliers. The


                                       9

<PAGE>


purchase of certain of these key components may involve  significant lead times.
Accordingly, in the event of interruptions in the supply of these key components
or  unanticipated  increases in demand for the Company's  products,  the Company
could be unable to manufacture  certain of its products in a quantity sufficient
to  meet  customer  demand.  There  can be no  assurance  that  such  supply  or
manufacturing  problems  would not  adversely  affect the  Company's  results of
operations or financial condition.

Human Resources

         As of  December  31,  1998,  the Company  employed  583  persons,  with
approximately  396  full  time  employees  located  primarily  in  its  Northern
California offices. Of the 583 total employees,  approximately 173 were in sales
in  marketing,   65  were  in  management   and   administration,   46  were  in
manufacturing,  and 299 were in research and development. Of the total number of
employees,  the Company had  approximately 100 employees located in Canadian and
U.S.  offices  outside  of  Northern  California,  and 87  employees  located in
international   offices  including   employees  based  in  Great  Britain,   The
Netherlands,  Germany, Japan, France, Italy, Finland, Spain, Australia, and Hong
Kong. The Company's  employees are not represented by any collective  bargaining
organization and the Company has never experienced a work stoppage.

Competition

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

         The Company competes directly with other  independent  manufacturers of
color  servers,   independent   manufacturers  of  embedded  solutions,   copier
manufacturers,  printer  manufacturers  and others.  The Company has a number of
direct competitors for color server products and embedded  solutions,  including
Splash Technology Holdings,  Inc., Management Graphics Incorporated and Peerless
Systems  Corporation.  The  Company's  Fiery XJ-W and Fiery LX-W  products  face
competition  from  wide-format  printer  manufacturers  that  develop  their own
controllers  and  other  companies  that  develop  controllers  for  wide-format
printers. These companies include Lasermaster, Onyx, Visual Edge and Cactus. The
Company also faces competition from copier and printer  manufacturers that offer
internally  developed server products or that incorporate  internally  developed
embedded  solutions or server features into their copiers and printers,  thereby
eliminating   the  need  for  the   Company's   products  and  limiting   future
opportunities for the Company.  In addition,  the Company faces competition from
manufacturers  of desktop color laser printers which do not utilize a controller
and which offer increasing speed and color capability. The Company believes that
it competes  effectively due to, among other things,  its efforts to continually
advance its technology,  name  recognition,  sizable  installed base,  number of
products  supported  and price.  The Company  expects  that  competition  in its
markets  will  increase due to, among other  factors,  market  demand for higher
performance  products at lower prices,  rapidly changing  technology and product
offerings from  competitors  and  customers.  There can be no assurance that the
Company will be able to continue to compete effectively against other companies'
product offerings, and any failure to do so would have a material adverse effect
upon the Company's business, operating results and financial condition.

Intellectual Property Rights

         The Company relies on a combination of patent, copyright, trademark and
trade secret laws, non-disclosure agreements and other contractual provisions to
establish,  maintain and protect its intellectual  property rights, all of which
afford only limited  protection.  As of December  31,  1998,  the Company had 13
issued U.S.  patents,  52 pending U.S. patent  applications  and various foreign
counterparts.  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 the Company's  technology.
Failure of any patents to protect


                                       10

<PAGE>


the Company's  technology  may make it easier for the Company's  competitors  to
offer  equivalent  or  superior  technology.  In  addition,  third  parties  may
independently  develop similar  technology without breach of the Company's trade
secrets or other  proprietary  rights.  Any  failure by the  Company to take all
necessary  steps to protect  its trade  secrets or other  intellectual  property
rights may have a material adverse effect on the Company's ability to compete in
its markets.

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

         From time to time,  litigation  may be  necessary to defend and enforce
the Company's  proprietary  rights.  Such  litigation,  whether or not concluded
successfully  for  the  Company,  could  involve  significant  expense  and  the
diversion of management's attention and other Company resources.

Risk Factors

         In addition to the above information,  a discussion of factors that may
adversely affect the Company's future  performance and financial  results can be
found in Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operation.

Financial Information About Foreign and Domestic Operations and Export Sales 

         See  Note  10  of  the  Company's  Notes  to   Consolidated   Financial
Statements.



I
TEM 2: PROPERTIES

         The Company's  principal offices are located in San Mateo,  California.
The  Company has also leased  additional  facilities  in San Mateo and in Foster
City,  California  for  research  and  development,  quality  assurance,  sales,
marketing,  administration,  and other  support  operations.  These  offices  in
Northern California  collectively include  approximately  127,000 square feet of
space.  Employees  formerly  with  Pipeline  Associates,  Inc.,  acquired by the
Company in 1997, are based in an office in Parsippany, New Jersey.

         In 1997, the Company  entered into an operating lease for a building to
be constructed on land which the Company owns in Foster City,  California.  This
facility,  which includes  approximately  295,000 square feet of space, is to be
used as a corporate headquarters for the Company.  Construction of this facility
began in 1997 and is scheduled  to be  completed in the first half of 1999.  The
Company  plans to vacate and sublease its existing  facilities  in San Mateo and
Foster City upon  completion of the new corporate  headquarters.  In addition to
its principal offices in San Mateo, the Company also leases a number of domestic
and international sales offices.

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



ITEM 3: LEGAL PROCEEDINGS

         On December 15,  1997, a  shareholder  class action  lawsuit,  entitled
Steele,  et al. v.  Electronics  for Imaging,  Inc., et al., No. CV 403099,  was
filed  against  the Company and certain of its  officers  and  directors  in the
California  Superior Court,  San Mateo County (the "San Mateo Superior  Court").
Five virtually  identical class action complaints were subsequently filed in the
San Mateo Superior  Court.  On December 31, 1997, a putative  shareholder  class
action entitled Smith v. Electronics for Imaging, Inc., et al., No. C97-4739 was
filed  against  the Company and certain of its  officers  and  directors  in the
United States District Court for the Northern District of California.  The state
court class actions allege that the Company made false and misleading statements
concerning its business during a putative class period of April 10, 1997 through
December 11, 1997 and allege violations of California Corporations Code Sections
25400 and 25500 and Civil Code Sections 1709 and 1710.


                                       11

<PAGE>


The federal court class action complaint makes the same factual allegations, but
alleges  violations  of certain  United  States  federal  securities  laws.  The
complaints do not specify the damages  sought.  The Company  believes that these
lawsuits are without merit and intends to contest them vigorously, but there can
be no assurance that if damages are ultimately awarded against the Company,  the
litigation will not adversely affect the Company's results of operations.

         In addition,  the Company is involved  from time to time in  litigation
relating to claims  arising in the normal  course of its  business.  The Company
believes that the ultimate  resolution of such claims will not materially affect
the  Company's  business  or  financial  condition.  See  "Item 7.  Management's
Discussion    and   Analysis   of   Financial    Condition    and   Results   of
Operations--Factors  That Could Adversely Affect  Performance--Infringement  and
Potential Litigation."



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

         No matters were  submitted  to the  Company's  stockholders  for a vote
during the fourth quarter of 1998.



PART II



ITEM 5: MARKET FOR REGISTRANT'S  COMMMON EQUITY AND RELATED  STOCKHOLDER MATTERS

<TABLE>

         The  Company's  common  stock was first  traded on the NASDAQ  National
Market  System  under the symbol EFII on October 2, 1992.  The table below lists
the high and low closing  quotation  during each quarter the stock was traded in
1998 and 1997 and reflects the Company's  February 1997 two-for-one stock split.
As of February 22, 1999,  there were  approximately  422 stockholders of record.
The Company has never paid cash  dividends  on its  capital  stock.  The Company
currently anticipates that it will retain all available funds for business,  and
does not anticipate paying any cash dividends in the foreseeable future.

<CAPTION>
                                    1998                                            1997
                ---------------------------------------------   ---------------------------------------------
                  Q1          Q2          Q3          Q4          Q1          Q2          Q3          Q4
                ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------
<S>              <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
High ..........  $ 28.00     $ 25.19     $ 22.38     $ 40.00     $ 49.00     $ 50.00     $ 56.00     $ 54.63
Low ...........    15.66       18.69       13.80       15.63       38.00       35.63       47.25       13.63
</TABLE>


                                       12

<PAGE>



ITEM 6: SELECTED FINANCIAL DATA

<TABLE>

         The following tables summarize selected consolidated  financial data as
of, and for the five years ended December 31, 1998. This  information  should be
read in  conjunction  with the audited  consolidated  financial  statements  and
related notes thereto.

<CAPTION>
                                                                         As of and for the years ended December 31,
                                                          -------------------------------------------------------------------------
                                                            1998            1997            1996            1995            1994
                                                          ---------       ---------       ---------       ---------       ---------
                                                                          (In thousands, except per share amounts)
<S>                                                       <C>             <C>             <C>             <C>             <C>      
                 Operations                   

Revenue ............................................      $ 430,723       $ 360,631       $ 298,013       $ 190,451       $ 130,381
Cost of revenue ....................................        242,096         163,955         145,399          95,451          64,333
                                                          ---------       ---------       ---------       ---------       ---------
Gross profit .......................................        188,627         196,676         152,614          95,000          66,048
                                                          ---------       ---------       ---------       ---------       ---------
Operating expenses .................................
   Research and development ........................         57,887          40,318          22,440          12,922          10,387
   Sales and marketing .............................         57,214          43,414          30,221          21,938          18,601
   General and administrative ......................         15,486          12,348          10,107           7,023           6,690
   In-process research and development * ...........           --             9,400            --              --              --
                                                          ---------       ---------       ---------       ---------       ---------
      Total operating expenses .....................        130,587         105,480          62,768          41,883          35,678
                                                          ---------       ---------       ---------       ---------       ---------
Income from operations .............................         58,040          91,196          89,846          53,117          30,370
Other income, net ..................................          9,668          10,181           7,318           5,476           2,931
                                                          ---------       ---------       ---------       ---------       ---------
Income before income taxes .........................         67,708         101,377          97,164          58,593          33,301
Provision for income taxes .........................        (21,667)        (36,495)        (34,980)        (21,093)        (11,995)
                                                          ---------       ---------       ---------       ---------       ---------
Net income .........................................      $  46,041       $  64,882       $  62,184       $  37,500       $  21,306
                                                          =========       =========       =========       =========       =========
Net income per basic common share ** ...............      $    0.87       $    1.24       $    1.23       $    0.76       $    0.46
Net income per diluted common share ** .............      $    0.85       $    1.15       $    1.13       $    0.71       $    0.43
Shares used in computing net income per
 basic common share ** .............................         53,029          52,359          50,672          49,210          47,208
Shares used in computing net income per
 diluted common share ** ...........................         54,481          56,198          54,828          53,100          49,836

             Financial Position

Cash and short-term investments ....................      $ 323,033       $ 242,731       $ 212,100       $ 144,018       $ 106,974
Working capital ....................................        346,303         286,827         237,366         157,059         108,071
Long term debt, less current portion ...............          3,777           4,064            --              --              --
Total assets .......................................        472,032         385,998         298,953         194,469         135,461
Stockholders' equity ...............................      $ 398,923       $ 338,865       $ 249,370       $ 163,940       $ 113,529

            Ratios and Benchmarks

Current ratio ......................................            6.0             7.7             5.8             6.1             5.9
Inventory turns ....................................           12.9             9.4            15.5            11.8             9.9
Full-time employees ................................            583             538             354             222             192

<FN>
- ------------
*    See Item 7: Management's Discussion and Analysis of Financial Condition and
     Results: Operating expenses--Acquisition.

**   See Note 1 of Notes to Consolidated Financial Statements.
</FN>
</TABLE>


                                       13


<PAGE>


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

Results of Operations

<TABLE>

         The  following  tables set forth  items in the  Company's  consolidated
statements of income as a percentage  of total revenue for 1998,  1997 and 1996,
and the  year-to-year  percentage  change from 1998 over 1997 and from 1997 over
1996,  respectively.  These operating results are not necessarily  indicative of
results for any future period.

<CAPTION>
                                                     Years ended December 31,                 % change
                                               -------------------------------------   -----------------------
                                                                                          1998         1997
                                                                                          over         over
                                                 1998        1997          1996           1997         1996
                                               ----------   ---------   ------------   ----------   ----------
<S>                                               <C>          <C>           <C>          <C>           <C>
Revenue    .................................      100%         100%          100%          19%          21%
Cost of revenue  ...........................       56%          46%           49%          48%          13%
                                               ----------   ---------   ------------   ----------   ----------
Gross profit  ..............................       44%          54%           51%          (4)%         29%
                                               ----------   ---------   ------------   ----------   ----------
Research and development  ..................       13%          11%            8%          44%          80%
Sales and marketing    .....................       13%          12%           10%          32%          44%
General and administrative   ...............        4%           3%            3%          25%          22%
In-process research and development   ......       --            3%           --           N/A          N/A
                                               ----------   ---------   ------------   ----------   ----------
Operating expenses  ........................       30%          29%           21%          24%          68%
Income from operations    ..................       14%          25%           30%         (36)%          2%
Other income, net   ........................        2%           3%            3%          (5)%         39%
                                               ----------   ---------   ------------   ----------   ----------
Income before income taxes   ...............       16%          28%           33%         (33)%          4%
Provision for income taxes   ...............        5%          10%           12%         (41)%          4%
                                               ----------   ---------   ------------   ----------   ----------
Net income    ..............................       11%          18%           21%         (29)%          4%
</TABLE>
                                                    


Revenue

         Revenue increased to $430.7 million in 1998, compared to $360.6 million
in 1997 and $298.0  million in 1996,  which  yielded a 19%  increase  in 1998 as
compared  to  1997  and  a 21%  increase  in  1997  as  compared  to  1996.  The
corresponding unit volume increased by 164% in 1998 over 1997 and by 40% in 1997
over 1996. The increase in revenue was primarily due to significant increases in
unit volumes,  positive market  acceptance of new product  introductions and the
impact of new customers,  partially  offset by price reductions on older product
lines early in the year in anticipation of new product introductions.

         The Company's revenue for 1998 was principally derived from three major
categories.  The first category was made up of stand-alone servers which connect
digital color copiers with computer  networks.  This category includes the Fiery
XJ+, X2 and ZX products and accounted  for a majority of the  Company's  revenue
prior to 1998. The second category was made up of embedded desktop  controllers,
bundled color solutions and chipsets  primarily for the office market. The third
category is made up of controllers for digital black and white products.


                                       14


<PAGE>


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

<CAPTION>
                                            1998                    1997                     1996
                                           Revenue                 Revenue                 Revenue
                                    ---------------------   ---------------------   ----------------------
                                                                (in thousands)
<S>                                  <C>           <C>      <C>             <C>     <C>             <C>
                Revenue

Stand-alone Servers Connecting to
 Digital Color Copiers  .........   $282,081        66%     $290,347        81%     $252,041         85%

Embedded Desktop Controllers,
 Bundled Color Solutions &
 Chipset Solutions   ............     90,133        21%       34,133         9%       25,465          8%

Controllers for Digital Black and
 White Solutions  ...............     19,196         4%          --         --           --          --

Spares, Licensing & Other misc.
 sources    .....................     39,313         9%       36,151        10%       20,507          7%
                                    ---------     ----      ---------     ----      ---------      ----
   Total Revenue  ...............   $430,723       100%     $360,631       100%     $298,013        100%
                                    =========     ====      =========     ====      =========      ====
</TABLE>



                                                    1998       1997       1996
                                                   Volume     Volume     Volume
                                                   --------   --------   -------
                          Volume

Stand-alone Servers Connecting to Digital
 Color Copiers  ..................................    27%        73%        69%

Embedded Desktop Controllers, Bundled
 Color Solutions & Chipset Solutions  ............    62%        27%        31%

Controllers for Digital Black and
 White Solutions    ..............................    11%        --         --

Spares, Licensing & Other misc. sources   ........    --         --         --
                                                    ----       ----       ----
Total Volume    ..................................   100%       100%       100%
                                                    ====       ====       ====


         Growth in 1998 primarily took place in the category of embedded desktop
controllers,  bundled color solutions and chipset  solutions.  This reflects the
bifurcation  of the  market  moving  from  mid-range  to  high-end  and  desktop
products.  The desktop product  category made up 21% of total revenue and 62% of
total unit volume in 1998.  Whereas,  it made up 9% of total  revenue and 27% of
total unit  volume in 1997 and 8% of total  revenue and 31% of total unit volume
in 1996.  These  products,  except  for the  chipset  solutions,  are  generally
characterized  by much higher unit volumes but lower unit prices and  associated
margins than the Company has  experienced  in its more  traditional  stand-alone
server line of products.  The chipset  solutions can be  characterized  by lower
unit prices and higher per unit margins compared to the traditional  stand-alone
server line of products.  The Company  anticipates further growth in the desktop
category as a percentage of total revenue.  To the extent this category does not
grow over time in absolute  terms,  or if the Company is not able to meet demand
for  higher  unit  volumes,  it could  have a  material  adverse  effect  on the
Company's  results.  The Company believes that stand-alone  server products have
not  experienced  year over year  revenue  growth in 1998 due  largely  to price
reductions on the Company's older  generations of product.  The Company believes
these  products  are being  effectively  replaced  by newer  products as its OEM
customers  continue to qualify the new products and begin to order in increasing
volumes.  In addition,  low-end products which previously shipped as stand-alone
products  have  begun  to ship in 1998 as  embedded  products.  There  can be no
assurance that the


                                       15

<PAGE>

new  products  for 1999 will be  qualified  by all the  OEMs,  or that they will
successfully  compete,  or be accepted by the market,  or  otherwise  be able to
effectively replace the volume of revenue and/or income from the older products.

         The Company  also  believes  that in addition to the factors  described
above,  price  reductions  for all of its  products  may affect  revenues in the
future. The Company has made and may in the future make price reductions for its
products.  Depending  upon the  price-elasticity  of  demand  for the  Company's
products,  the pricing and quality of competitive  products,  and other economic
and competitive conditions,  such price reductions may have an adverse impact on
the Company's revenues and profits. If the Company is not able to compensate for
lower gross  margins  that may result from price  reductions  with an  increased
volume of sales,  its results of  operations  could be  adversely  affected.  In
addition,  if the  Company's  revenue in the future  depends  more upon sales of
products with relatively lower gross margins  (excluding chipset solutions) than
the  Company  obtained  in 1998  (such as  embedded  controllers  for  printers,
embedded  controllers  for color and  black-and-white  copiers,  and stand-alone
controllers for black-and-white copiers), results of operations may be adversely
affected.


<TABLE>
         Shipments by  geographic  area for the years ended 1998,  1997 and 1996
were as follows:

<CAPTION>
                                  Years ended December 31,                     % change
                          ----------------------------------------   ----------------------------
                                                                        1998            1997
                                                                        over            over
                            1998          1997           1996           1997            1996
                          ----------   ------------   ------------   -------------   ------------
<S>                           <C>         <C>            <C>            <C>             <C>
North America * ..........    48%          48%            52%            21 %            11%
Europe * .................    33%          30%            25%            30 %            47%
Japan ....................    16%          18%            21%             9 %             1%
Rest of World ............     3%           4%             2%           (24)%           187%
                          ---------     --------     ----------     -----------     ----------
                             100%         100%           100%            19 %            21%
                          =========     ========     ==========     ===========     ==========
<FN>
- ------------
* In the  middle of the  second  quarter  of 1997,  one of the  Company's  major
  customers began having its products for the European  market shipped  directly
  to Europe rather than through the United States. The Company does not know the
  dollar amount of the  corresponding  shipments that went through North America
  to Europe  for the  periods  prior to the second  quarter  of 1997.  Therefore
  shipments to North America in 1996 and early 1997 are slightly  overstated and
  shipments that went to Europe in the same period are slightly understated when
  compared to 1998. Consequently the above indicated revenue information and the
  increases and decreases  from 1998 over 1997 and from 1997 over 1996 for North
  America and Europe should be read with caution.
</FN>
</TABLE>


         Whereas shipments to North America,  Europe and Japan increased in 1998
compared  to 1997  and in 1997  compared  to  1996,  the  Rest of  World  region
experienced  a  decrease  in 1998  over  1997.  Although  export  sales to Japan
increased  sequentially,  the future  results  might be impaired by the economic
turmoil in that region.  The Rest of World is  predominantly  represented by the
Southeast  Asian  region,  and the decrease in export sales in 1998  compared to
1997 is a  reflection  of the  challenging  economic  situation  in that region.
Although such  conditions are difficult to predict,  the Company does not assume
that there will be a significant  improvement in economic  conditions in Asia in
1999,  and limited  demand from Asia may have an adverse impact on the Company's
results of operations.

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

         Substantially  all  of  the  revenue  for  the  last  three  years  was
attributable  to sales of products  through the Company's OEM channels with such
partners as Canon, Epson, Fuji-Xerox, IBM, Hewlett-Packard, Kodak/Danka Business
Systems,  Konica, Minolta, Oce, Ricoh, Sharp, Xerox and others. During 1998, the
Company has continued to work on both increasing the number of OEM partners, and
expanding the size of


                                       16

<PAGE>

existing  relationships  with OEM  partners.  The  Company  relied  on three OEM
customers,  Canon,  Xerox and Ricoh in  aggregate  for 67%,  85% and 82% of it's
revenue for 1998,  1997 and 1996,  respectively.  In the event that any of these
OEM relationships are scaled back or discontinued,  the Company may experience a
significant  negative impact on its consolidated  financial position and results
of  operations.  In  addition,  no  assurance  can be given  that the  Company's
relationships with these OEM partners will continue.

         On  October  28,  1998,  the  Company  announced  that it has  provided
Hewlett-Packard with embedded Fiery X2e technology for the new HP Color Laserjet
8500  Printer  which  is HP's  first  A3/Tabloid  Color  Laser  Printer  for the
corporate workgroup market.  Hewlett-Packard is the market leader among computer
printer  manufacturers  for the Desktop  market.  The 8500 project calls for the
Company to provide chipsets and embedded  software to HP which will have a lower
per unit revenue but a much higher per unit margin as a  percentage  of revenues
than the Company's  traditional  products  have had. The HP chipset  solution is
classified in the embedded, desktop and bundled category.

         The Company continues to work on the development of products  utilizing
both the Fiery  architecture  and other  products  and  intends to  continue  to
introduce new  generations of Fiery products and other new product lines in 1999
and beyond. No assurance can be given that the introduction or market acceptance
of new, current or future products will be successful.

         It is also  possible  that  revenues  in the future may be  affected if
individuals  with  responsibility  for purchasing the Company's  Fiery products,
such  as  information  technology  professionals,  choose  to  devote  available
discretionary  resources to other perceived needs,  such as technology  expenses
associated  with  Year  2000  preparation.  At this  time,  the  Company  cannot
determine how much impact, if any, this factor may have.

Cost of Revenue

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

Gross Margins

         The Company's gross margin was 44%, 54% and 51% for 1998, 1997 and 1996
respectively.  The  decrease  in gross  margin  in 1998  from  1997 was due to a
combination  of  factors,  including  a  higher  mix of  low-end  products  with
relatively  lower  margins  and a different  mix of OEM  partners  purchasing  a
different  mix of products  during 1998 as  compared to 1997.  The Company  also
initiated  price  reductions on older products as of January 1, 1998 in light of
pending introductions of newer generations of products. The Company expects that
sales of products  with  relatively  lower  margins  may  further  increase as a
percentage of revenue. Such products include older products for which prices are
reduced during product transitions,  embedded products for both desktop printers
and   copiers,   and   stand-alone   servers  and   embedded   controllers   for
black-and-white copiers. If such sales increase as a percentage of the Company's
revenue, gross margins may further decline. The increase in gross margin in 1997
as compared to 1996 was due to the fact that the Company  benefited in 1997 from
lower  component  prices  used in the  Company's  products  in addition to lower
manufacturing costs due to economies of scale.

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

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


                                       17

<PAGE>

Operating Expenses

         Operating  expenses  increased  by 24% in 1998  over 1997 and by 68% in
1997 over 1996.  Operating  expenses as a percentage of revenue amounted to 30%,
29% and 21% for  1998,  1997 and  1996,  respectively.  Increases  in  operating
expenses  in absolute  dollars of $25.1  million in 1998  compared to 1997,  and
$42.7  million  in 1997  compared  to  1996,  were  primarily  caused  by  costs
associated with the development and  introduction of new products and the hiring
of  additional  full time  employees  to support  the  growing  business  (a net
increase of 45 people at  December  31,  1998 over  December  31, 1997 and a net
increase of 184 people at December 31, 1997 over December 31, 1996). The Company
has hired  additional  employees to support  product  development  as well as to
support expanded operations.

         The increase in operating  expenses in 1997 compared to 1996 includes a
$9.4 million charge for in process  technology that was expensed in 1997 as part
of the  acquisition of Pipeline  Associates,  Inc. and Pipeline Asia,  Inc. (the
"Pipeline   Acquisition"),   a  leading  software   developer   specializing  in
PostScript,  HTML and PCL interpreter  technologies.  Excluding the $9.4 million
charge in 1997, the increase in operating  expenses in 1998 over 1997 would have
been 36% or $34.5  million  and in 1997 over 1996  would  have been 53% or $33.3
million.  The lower percentage  increase in operating expenses in 1998 over 1997
compared to 1997 over 1996 is the result of the  Company's  successful  spending
control.

         The Company  anticipates that operating  expenses will continue to grow
and may increase  both in absolute  dollars and as a percentage  of revenue.  In
addition,  the Company anticipates additional  non-recurring  operating expenses
beginning  in the first  quarter of 1999,  and  possibly for one or two quarters
thereafter,  related to the Company's  pending move to a new central facility in
Foster City, California.

         The components of operating expenses are detailed below.

         Research and Development

         Expenses for research and  development  consist  primarily of personnel
         expenses and, to a lesser extent, consulting, depreciation and costs of
         prototype  materials.  Research  and  development  expenses  were $57.9
         million or 13% of revenue in 1998  compared to $40.3  million or 11% of
         revenue in 1997 and $22.4  million  or 8% of revenue in 1996.  The year
         over year increase in research and development  expenses was mainly due
         to an increase in research and  development  projects.  The majority of
         the 44% increase of research and development  expenses in 1998 compared
         to 1997 was due to  headcount  related  costs as well as a  significant
         increase in costs of prototype materials used for pre-production  units
         on  projects  under  development.  The 80%  increase  of  research  and
         development  expenses  in 1997  over 1996 was  primarily  due to an 80%
         growth in  engineering  headcount in 1997 compared to 1996. The Company
         believes that the  development  of new products and the  enhancement of
         existing products are essential to its continued  success,  and intends
         to continue to devote substantial resources to research and new product
         development efforts. Accordingly, the Company expects that its research
         and development  expenses may continue to increase in absolute  dollars
         and also as a percentage of revenue.

         Sales and Marketing

         Sales and marketing  expenses  include  personnel  expenses,  costs for
         trade  shows,  marketing  programs  and  promotional  materials,  sales
         commissions, travel and entertainment expenses, depreciation, and costs
         associated with sales offices in the United States,  Europe,  Japan and
         other locations around the world. Sales and marketing expenses for 1998
         were $57.2  million or 13% of revenue  compared to $43.4 million or 12%
         of revenue in 1997 and $30.2  million or 10% of revenue in 1996.  Sales
         and marketing  expenses  increased  steadily as a percentage of revenue
         and in absolute dollars over the past three years. Contributing to this
         increase  is a 7% and 29%  increase  in  headcount  in 1998  and  1997,
         respectively.   In  addition,  costs  required  for  the  introduction,
         promotion and support of a broader range of current  products with both
         existing  and new OEM  relationships  as  well as  technology  alliance
         partners have also increased.  The Company has also developed strategic
         relationships  with  well  known  print-for-pay  companies,   including
         Kinko's,  AlphaGraphics,  the  CopyMax  operations  of office  products
         superstore OfficeMax,  the American Speedy group of franchised printing
         centers (including Allegra Print and Imaging,  American Speedy,  Speedy
         Printer,  Zippy  Print  and  Quik  Print)  and the  SAMPA  Corporation,
         franchiser  of  Signal  Graphics  Printing   Centers.   Although  these
         relationships increase the demand for Fiery products they also increase
         the sales and marketing expenses.


                                       18

<PAGE>

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

         General and Administrative

         General and  administrative  expenses  consist  primarily  of personnel
         expenses  and, to a lesser  extent,  depreciation  and facility  costs,
         professional  fees and other costs  associated  with public  companies.
         General and administrative expenses were $15.5 million or 4% of revenue
         in 1998,  compared to $12.3  million or 3% of revenue in 1997 and $10.1
         million or 3% of  revenue in 1996.  While  general  and  administrative
         expenses  have  remained  relatively  constant as a percentage of total
         revenue  over the three year period  ended 1998,  these  expenses  have
         increased in absolute  dollars.  The increases in 1998 over 1997 and in
         1997 over 1996 were  primarily  due to the  increase  in  headcount  to
         support the needs of the growing  Company's  operations,  including the
         use of outside  consultants.  The Company  expects that its general and
         administrative  expenses may  continue to increase in absolute  dollars
         and possibly  also as a  percentage  of revenue in order to support the
         Company's efforts to grow its business.

         Acquisition

         In October of 1997, the Company acquired Pipeline Associates,  Inc. and
         Pipeline Asia, Inc. ("the Pipeline Acquisition") for $12.6 million, net
         of cash received.  The Pipeline  acquisition was intended to expand the
         Company's  core  technologies  and thereby  decrease its  dependence on
         software licensed from outside sources. The Pipeline acquisition allows
         the Company to offer the industry's only  Hewlett-Packard  approved PCL
         interpreter not produced by  Hewlett-Packard.  In conjunction  with the
         acquisition,  the  Company  recorded  a charge of $9.4  million  for in
         process research and development.

Other Income

         Other income relates mainly to interest  income and expense,  and gains
and losses on foreign  currency  transactions.  Other  income of $9.7 million in
1998  decreased by 5% from $10.2 million in 1997.  Other income of $10.2 million
in 1997  increased by 39% from $7.3  million in 1996.  The decrease in 1998 from
1997 is mainly due to  approximately  $1.3  million in losses  suffered on Asian
currency  denominated  transactions in the first half of 1998. Although to date,
the Company's  exposure to currency  fluctuations has been relatively  minor, in
response  to  recent  currency  fluctuations  in  Asia,  the,  Company  began to
implement  a hedging  program in June 1998.  In  addition,  the Company has been
earning  less on  interest  in 1998  compared to 1997 due to a decline in market
interest  rates.  The  increase  in 1997  compared  to 1996 is mainly  due to an
increase of the average investment balance.

Income Taxes

         The  Company's  effective  tax rate was 32% in 1998 and 36% in 1997 and
1996, respectively. In each of these years, the Company benefited from increased
tax-exempt  interest  income,  increases in foreign sales and the utilization of
research and development credits in achieving a consolidated  effective tax rate
lower  than  that  prescribed  by  the  respective   Federal  and  State  taxing
authorities. The Company anticipates that the tax rate for 1999 will increase to
reflect  the fact that the Federal R&D credit is  scheduled  to expire  mid-year
1999.

Liquidity and Capital Resources

         Cash, cash  equivalents and short-term  investments  increased by $80.3
million to $323.0  million as of December  31, 1998,  from $242.7  million as of
December 31, 1997.  Working capital increased by $59.5 million to $346.3 million
as of December 31, 1998, up from $286.8  million as of December 31, 1997.  These
increases  are  primarily  the result of net  income,  changes of balance  sheet
components and the exercise of employee stock options.

         Net cash  provided by operating  activities  was $79.1  million,  $72.5
million and $71.3 million in 1998, 1997 and 1996, respectively. Cash provided by
operating activities increased in 1998 primarily due to a reduction in


                                       19

<PAGE>

inventory levels, a reduction of receivables from subcontractors and an increase
in accounts payable and accrued liabilities, partially offset by, an increase in
accounts  receivable due to the increased  volume of revenue,  and a decrease in
net income in 1998 from 1997.

         The Company has  continued  to invest cash in  short-term  investments,
mainly  municipal  securities.  Purchases  in  excess  of  sales  of  short-term
investments  were $84.3 million,  $45.4 million and $42.1 million in 1998,  1997
and 1996, respectively.  The Company's capital expenditures generally consist of
investments in computers and related  peripheral  equipment and office furniture
for use in the Company's operations.  The Company purchased  approximately $12.3
million,  $11.5 million and $10.7 million of such equipment and furniture during
1998,  1997 and 1996,  respectively.  During 1997,  the Company  invested  $12.6
million, net of cash received,  in the Pipeline  Acquisition.  Also in 1997, the
Company began  development of a corporate  campus on a 35-acre parcel of land in
Foster  City,  California.  During 1998 the  Company  spent  approximately  $0.3
million  on  land   improvement   costs  and  during  1997  the  Company   spent
approximately  $27.0 million on the land and associated  improvement  costs.  In
addition to purchasing the land, the Company  entered into an agreement to lease
a ten-story 295,000 square foot building to be constructed in 1998 and 1999. The
lessor of the  building has  committed to fund up to a maximum of $65.0  million
for the  construction  to be  directed by the  Company.  Rent  payments  for the
building  will  commence  upon  completion  of  construction  and  bear a direct
relationship  to the carrying  cost of the amount drawn on the  commitment.  The
initial term of the lease is 7 years with options to purchase at any time. As of
December 31, 1998,  the Company has drawn $36.3 million on the  commitment.  The
building  construction  is scheduled  to be  completed in the second  quarter of
1999.  Also in  conjunction  with the lease,  the  Company  has  entered  into a
separate  ground  lease with the lessor of the  building  for  approximately  35
years.  The Company has guaranteed a residual value associated with the building
to the lessor of  approximately  82% of the  lessor's  funding.  If the  Company
defaults on the lease,  does not renew the lease, does not purchase the building
or does not arrange for a third party purchase of the building at the end of the
lease  term,  it may be  liable to the  lessor  for the  amount of the  residual
guarantee.  As part of the lease  agreement  the Company must maintain a minimum
tangible net worth.  In  addition,  the Company has pledged  certain  marketable
securities  ($44.0 million at December 31, 1998) to be held in proportion to the
amount  drawn in order to secure a more  favorable  lease  rate and avoid  other
covenant  restrictions.  The Company may use these funds at any time,  but their
conversion would also result in an increase to the lease rate and the imposition
of additional financial covenant restrictions.

         Net cash  provided  by  financing  activities  of $13.9  million,  $9.9
million and $7.7 million in 1998,  1997 and 1996,  respectively,  were primarily
the result of  exercises  of common  stock  options and the tax  benefits to the
Company  associated  with  those  exercises.  Net  cash  provided  by  financing
activities in 1998 and 1997 includes approximately $0.3 million and $0.1 million
of  repayment  of bonds  assumed as part of the  Foster  City,  California  land
acquisition.

         The  Company's  inventory  consists  primarily  of  memory  subsystems,
processors and ASICs, which are consigned to third-party contract  manufacturers
responsible  for  manufacturing  substantially  all of the  Company's  products.
Should the Company decide to purchase  components and do its own  manufacturing,
or should it become necessary for the Company to purchase and consign components
other  than  the  processors,  ASICs  or  memory  subsystems  for  its  contract
manufacturers, inventory balances would increase significantly, thereby reducing
the Company's available cash resources.  Further,  these contract  manufacturers
produce substantially all of the Company's products.  The Company believes that,
should the services of any of these contract manufacturers become unavailable, a
significant negative impact on the Company's consolidated financial position and
results of  operations  could  result.  The  Company is also  reliant on several
sole-source  suppliers for certain key components and could experience a further
significant  negative impact on its consolidated  financial position and results
of operations if such supply were reduced or not available.

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


                                       20

<PAGE>

         The Company believes that its existing capital resources, together with
cash  generated  from  continuing  operations  will be  sufficient  to fund  its
operations and meet capital requirements through at least 1999.

Year 2000 Status

         Although the Company has not  completed a formal  contingency  plan for
potential Year 2000 related  problems,  Management has taken steps and continues
to assess the possible effects and potential  solutions for a Year 2000 problem.
The Company has updated  substantially all of its computer system infrastructure
over the last few years,  thus  management  believes that all critical pieces of
hardware and software have been  represented  to be Year 2000 compliant by their
manufacturers.  In some cases this  compliance is expected to be met by releases
of software updates from the  manufacturers  that are currently  scheduled to be
released in the first half of 1999. For software that is currently available and
represented  to be  compliant,  the Company has  performed  limited tests on the
manufacturer's representations.  In addition, because the Company is moving into
a new building  during the first half of 1999 and has a relatively  new computer
system,  the Company has spent a  comparatively  small amount of time to date on
testing.  Incremental  costs  incurred to date  related to the Year 2000 problem
have been less than $0.1 million.  However,  the Company  currently  anticipates
spending  approximately  $1  million  over  the  next  fiscal  year on  internal
resources and consultants to implement  software  updates,  assist with testing,
analyze  risks  associated  with third parties and further  develop  contingency
plans and capabilities. Although the Company continues to review and test, based
on the reviews to date,  the Company  currently  believes  that Year 2000 issues
will not materially  affect its internal MIS systems.  However,  there can be no
assurance that the Company will have identified or procured all of the resources
necessary  to address all  critical  Year 2000  deficient  hardware and software
systems on a timely basis and the Company may need to spend  additional  amounts
to identify, modify or repair internal systems.

         Also,  the Company has tested its products to determine if the products
will successfully  rollover from the years 1999 to 2000 and 2000 to 2001, and if
the products will correctly recognize the date February 29, 2000. Products first
released after November 1, 1997 have passed  internal tests for these  criteria,
and future  products  will be required to pass the same  internal  tests  before
shipping.  Because the Company cannot control other companies'  products used in
conjunction with the Company's products (such as other companies' software), the
Company does not intend to assure its customers  that its products will meet the
above  referenced  criteria when used in conjunction  with any other software or
hardware not manufactured by the Company.

         To date the Company has not reviewed  Year 2000 plans and  preparations
of its manufacturers,  suppliers, customers and other third parties with whom it
does  business.  The  Company is  currently  in the process of  identifying  and
contacting  these  critical  third  parties.  The Company hopes to complete this
process  by the  end of  June  1999.  The  Company  has  also  begun  to work on
contingency plans and currently  believes that internal problems  encountered in
handling  transactions  could be processed  manually for a short period of time.
The contingency plans will be more fully developed by the third quarter of 1999.
The Company  continues to assess the effects and costs  associated with possible
Year 2000  problems,  however,  the total  effects  and costs are unknown to the
Company at this time,  and there can be no assurance that such effects and costs
will  not  have a  materially  adverse  effect  on the  Company,  its  financial
condition, or results of operations.

Euro Assessment

         Eleven of the  fifteen  member  countries  of the  European  Union have
established fixed conversion rates between their existing  sovereign  currencies
and the Euro and have  adopted  the Euro as a common  currency  as of January 1,
1999.  The Euro is trading on currency  exchanges  and is available for non-cash
transactions.  The  conversion  to the Euro is not  expected  to have a material
adverse  effect  on  the  operating  results  of  the  Company  as  the  Company
predominantly invoices in US Dollars. The Company is currently in the process of
evaluating  the  reporting  requirements  in the  respective  countries  and the
related  system,  legal and  taxation  requirements.  The Company  expects  that
required   modifications   will  be  made  on  a  timely  basis  and  that  such
modifications will not have a material adverse impact on the Company's operating
results.  There  can be no  assurance,  however,  the  Company  will  be able to
complete such modifications to comply with Euro requirements, which could have a
material adverse effect on the Company's operating results.


                                       21

<PAGE>

Factors That Could Adversely Affect Performance

         The  following  factors  may  adversely  impact  the  Company's  future
performance and financial results:

         Reliance on OEM Resellers;  Risks Associated with Significant OEM Group
         Concentration

         The Company's strategy of selling  principally to OEMs anticipates that
the Company will be relying on high sales  volumes to a relatively  small number
of  customers.  Although  there can be no  assurance  that the  Company's  major
customers will continue to utilize the Company's  products at current levels, if
at all,  the Company  expects to continue  to depend upon such  customers  for a
significant  percentage of its revenues. A decline in demand for color and black
and white copiers or laser  printers,  or other  factors  affecting the computer
industry in general, or major customers in particular,  may adversely affect the
Company's results of operations.

         The  Company  relies  upon  the  ability  of its  OEMs to  develop  new
products,  applications and product  enhancements on a timely and cost-effective
basis. The ability of these OEMs to meet changing  customer needs and respond to
emerging industry standards and other technological  changes is essential to the
Company's continued success.  There is no assurance that the Company's OEMs will
effectively meet these technological challenges.  These OEMs, who are not within
the control of the Company, may incorporate into their products the technologies
of other  companies in addition to, or instead of the  Company's  products,  and
with the exception of certain minimum purchase obligations, are not obligated to
purchase products from the Company.  There can be no assurance that any OEM will
continue to carry the Company's products;  and the loss of important OEMs, or an
inability to recruit  additional OEMs, may have a material adverse effect on the
Company's business, operating results, and financial condition.

         The  Company's  sales  have  been  and  will  continue  to  be  heavily
influenced by order  quantities and timing of delivery to its OEMs. No assurance
can be given that the Company will be able to successfully maintain sales of its
products in any OEM channel. The Company's sales may be adversely affected if an
OEM introduces or supports  additional  products that compete with the Company's
products, fails to effectively market the Company's products, modifies its color
and black and white copiers or printers such that the Company's  products are no
longer compatible, introduces new copiers or printers that are incompatible with
the Company's products,  or does not allow the Company's products to support all
of the features available on its new copiers or printers.

         Although  the Company is  pursuing,  and will  continue to pursue,  the
business of additional  copier and printer  OEMs,  customer  concentration  will
continue to be a risk due to the limited  number of OEMs  producing  copiers and
printers in sufficient volume to be attractive to the Company.

         Product Transitions

         Although the Company  plans to introduce  new  products,  delays in the
launch or  availability  of these  products  could have an adverse effect on the
Company's  financial  results.  Product  transitions  also  carry  the risk that
customers will delay or cancel orders for existing  products.  If the Company is
not able to  successfully  manage product  transitions  or cannot  guarantee the
availability  of  products  once they  have  been  introduced,  its  results  of
operations may be adversely affected.

         Product Diversification and Coordination of Development with Customers

         The Company's customers have historically  requested a broader range of
products with different and unique features,  and the Company believes that this
trend may continue.  If the Company  cannot  successfully  manage the effort and
risks associated with a broader range of products, its results of operations may
be adversely affected.

         The  Company's  customers  work  closely  with the  Company  to develop
products that are specific to each customer. Many of the products the Company is
developing  require the Company and its  customers  to  coordinate  development,
quality  testing,  marketing and other tasks.  The Company  cannot control other
companies' efforts,  and such coordination may result in delays that the Company
cannot manage by itself.  If the Company cannot  successfully  manage the effort
and risks  associated  with  coordination,  its  results  of  operations  may be
adversely affected.


                                       22

<PAGE>

         Reliance on Continued  Demand for the  Company's  Products  That Enable
         Color Printing of Digital Data and the Effects of a Potential Decrease

         Although the Company has expanded its product line in recent years, and
continues  to explore  opportunities  to further  diversify  its  business,  the
Company's business has been focused heavily on sales of products that enable the
color printing of digital data.  Should  conditions arise that reduce the demand
for this service, the Company's results of operations may be adversely affected.
The Company believes that purchases of the Company's products may be affected by
a  variety  of  economic  conditions  and  considerations,  and  there can be no
assurance  that  demand for the  Company's  products  will  continue  at current
levels.  For example,  although such  conditions  are difficult to predict,  the
Company is not assuming that there will be  significant  improvement in economic
conditions in Asia,  including  Japan,  during 1999.  The Company  believes that
continued economic distress in Japan and elsewhere in Asia might limit demand in
these regions for the Company's  products.  Economic  distress in other parts of
the world such as Brazil may also limit demand for the Company's  products.  The
move to a single  European  currency,  the Euro, and the resulting  central bank
management of interest rates to maintain fixed currency exchange rates among the
member nations may lead to economic  conditions  which adversely impact the sale
of the Company's  products.  In addition,  it is possible that  individuals with
responsibility  for  purchasing  the  Company's  products,  such as  information
technology professionals, may choose to devote available discretionary resources
to other perceived needs, such as technology  expenses associated with Year 2000
preparation and/or Euro currency conversion projects.

         New Product Introductions

         The Company continues to explore opportunities to develop product lines
distinct  from its Fiery  color  servers.  Such new  products  may  require  the
investment  of capital for the  development  of new  distribution  and marketing
channels at an unknown cost to the Company.  There can be no guarantee  that the
Company would be successful in the  development of such channels or that any new
products  would  gain  market  acceptance.   If  the  Company  is  not  able  to
successfully manage the introduction of new products,  its results of operations
may be  adversely  affected.  In  addition  to these  risks,  if the  Company is
successful  in  introducing  new products,  there can be no assurance  that such
product  introductions  (including more powerful products sold at a lower price)
will not adversely impact gross margins or sales of existing products.

         Competition

         The  Company has seen  competition  in the market  from  companies  and
products  that  provide  similar  functionality  to the  Company's  products and
believes  that such  competition  will  continue and may  intensify.  It is also
possible that the  Company's  customers may  themselves  internally  develop and
supply  products  presently sold by the Company.  There can be no assurance that
the Company  will be able to  continue to  successfully  compete  against  other
companies' product offerings or their financial and other resources. In addition
to competition among suppliers of the Company's  products,  the Company believes
that  competition  among  the  Company's  customers  and  potential   customers,
including  competition  over price,  may increase.  Such competition may have an
adverse impact on the Company's results of operations.

         Managing Growth

         The Company  continues  to increase  its  headcount,  and is working to
build  relationships with OEMs and other customers.  As a result, the number and
complexity of  relationships  the Company must manage,  including  relationships
with  customers,  manufacturers,  and suppliers,  has increased and may increase
further.  If the  Company  cannot  successfully  manage  growth,  its results of
operations may be adversely affected.

         Hiring and Retention of Employees

         The Company  depends  upon  skilled  employees,  such as  software  and
hardware   engineers,   quality   assurance   engineers,   marketing  and  sales
professionals,  and persons in administrative and managerial  positions.  Demand
for such employees in Northern California,  where the Company's main offices are
located,  is high.  To  assure  that the  Company  can  adequately  support  its
business,  the  Company  undertakes  a number  of  efforts  to hire  and  retain
qualified  employees.  If  the  Company  cannot  successfully  hire  and  retain
employees, its results of operations could be adversely affected.


                                       23

<PAGE>

         Fluctuations in Operating Results

         Operating  results may  fluctuate due to factors such as demand for the
Company's products,  success and timing of the new product introductions,  price
reductions  by  the  Company  and  its  competitors,   delay,   cancellation  or
rescheduling of orders, product performance,  or availability of key components.
Operating results may also fluctuate due to seasonal  purchasing patterns of its
OEM partners or the status of the Company's  relationships with its OEM partners
as well  as  performance  of  third-party  manufacturers  or the  status  of the
Company's  relationships  with its key  suppliers.  The  Company's  results have
followed a seasonal  pattern  reflecting  the buying  patterns  of its large OEM
customers.  In the past, that pattern has indicated the Company's  fiscal fourth
quarter results may be adversely affected by a desire on the part of some or all
of its OEM customers to slow down, or otherwise  delay fourth  quarter orders in
an effort to minimize  their  inventory  investment  at the end of their  fiscal
year.  Additionally,  the first fiscal  quarter is also a  traditionally  weaker
quarter as the Company's  OEM partners  focus on training of their sales forces.
Moreover,  the Company's ability to develop and market new products,  the timing
and amount of sales and marketing expenditures,  and the general demand for what
are  discretionary  purchase  items  (color  copiers,   digital  black-and-white
copiers,  and color laser printers) and general global economic  conditions will
also effect operating results.

         Interest Rate risk

         The  Company  has  an  investment  portfolio  of  mainly  fixed  income
securities  classified as  available-for-sale  securities.  These securities are
subject to interest  rate risk and will fall in value if market  interest  rates
increase.  The Company attempts to limit these exposures by investing  primarily
in short-term securities.

         Limited Backlog

         The  Company  typically  does  not  obtain  long-term  volume  purchase
contracts from its customers, and a substantial portion of the Company's backlog
is scheduled  for delivery  within 90 days or less.  Customers may cancel orders
and change volume levels or delivery times without penalty.  Sales and operating
results  therefore  depend on the volume  and  timing of the  backlog as well as
bookings received.  Significant portions of the Company's operating expenses are
fixed,  and planned  expenditures  are based  primarily on sales  forecasts  and
product development programs. If sales do not meet the Company's expectations in
any given period,  the adverse  impact on operating  results may be magnified by
the Company's  inability to adjust  operating  expenses  sufficiently or quickly
enough to compensate for such a shortfall.

         Volatility of Stock Price

         Due to various  factors,  including  those noted above,  the  Company's
future earnings and stock price might be subject to significant volatility.  Any
shortfall in revenue or earnings  from levels  expected by  securities  analysts
could have an immediate and  significant  adverse effect on the trading price of
the Company's  common stock in any given period.  The Company  participates in a
highly dynamic industry,  which often results in significant  volatility for the
Company's common stock price.

         Risks  Associated  With The  Company's  Ownership of Real  Property And
         Transition To New Facilities

         In  early  1999,  the  Company  anticipates  moving  into a new  leased
headquarters  in Foster City,  California  on land that the Company owns. If the
Company cannot successfully  manage the transition,  disruption to the Company's
business and delays in sales or  development  of new products  could arise,  and
results of operations may be adversely affected.

         International Operations and Currency Fluctuations

         Approximately 52%, 52% and 48%, respectively,  of the Company's product
revenue for the years ended 1998, 1997 and 1996, respectively, were attributable
to sales  outside  North  America,  primarily  to Europe and Japan.  The Company
expects that sales to  international  destinations  will continue to represent a
significant  portion  of its total  revenue.  The  Company is subject to certain
risks associated with international operations, including tariff regulations and
requirements  for export  licenses,  particularly  with respect to the export of
certain  technologies,  which may on occasion be delayed or difficult to obtain.
Given the  significance  of export  sales to the  Company,  the Company  faces a
continuing risk in that the strengthening of the U.S. dollar versus the Japanese
yen, the Euro and other major European currencies,  and numerous Southeast Asian
currencies  could  adversely  impact the  Company's  revenues and gross  margin.
Although the Company typically  invoices in U.S. dollars,  these adverse impacts
could occur through lower unit demand and the necessity to lower average selling
prices to compensate  for the reduced  strength of local  currencies.  Where the
Company does invoice in


                                       24

<PAGE>

local   currency,   the  Company's  cash  flows  and  earnings  are  exposed  to
fluctuations in interest rates and foreign currency  exchange rates. The Company
attempts to limit  these  exposures  through  operational  strategies  and where
appropriate the use of hedge oriented financial market instruments.  To date the
Company has  primarily  utilized  forward  contracts to mitigate its exposure in
these markets.

         Proprietary Information

         The Company  relies on a  combination  of  copyright,  patent and trade
secret protection,  nondisclosure agreements,  and licensing and cross-licensing
arrangements  to establish and protect its proprietary  rights.  There can be no
assurance  that any  patents  that may be  issued to the  Company,  or which the
Company may license from third parties,  or that any other proprietary rights of
the Company will not be  challenged,  invalidated or  circumvented,  or that any
rights granted thereunder would provide proprietary protection to the Company.

         Infringement and Potential Litigation

         The  Company  may  receive  in the  future,  communications  from third
parties asserting that the Company's  products  infringe,  or may infringe,  the
proprietary rights of third parties. There can be no assurance that any of these
claims  will not result in  protracted  and costly  litigation.  While it may be
necessary or desirable in the future to obtain licenses  relating to one or more
of its products or relating to current or future  technologies,  there can be no
assurance  that the  Company  will be able to do so on  commercially  reasonable
terms, or at all.

         Reliance on Adobe Systems, Incorporated

         Under the Company's  license  agreements with Adobe, a separate license
must be  granted  from Adobe to the  Company  for each type of copier or printer
used with a Fiery Server or Controller.  To date,  the Company has  successfully
obtained  licenses to use Adobe's  PostScript(TM)  software for products that it
offers.  However,  there can be no assurance  that Adobe will  continue to grant
future  licenses to Adobe  PostScript(TM)  software on  reasonable  terms,  in a
timely manner,  or at all, or that Adobe will continue to give quality assurance
approvals.  Such actions by Adobe may adversely affect the Company's  results of
operations.  If Adobe does not grant the Company such licenses or approvals,  if
the Adobe license  agreements are terminated,  or if the Company's  relationship
with Adobe is otherwise  impaired,  the  Company's  operations  may be adversely
affected.

         Quarterly Fluctuations in Operating Results

         The  Company's  operating  results  have  historically  been subject to
quarterly  fluctuations  due, for example,  to the following  factors:  economic
situations in various geographic  locations around the world,  acceptance of new
products  by OEM  partners  and their  customers,  demand of the  Company's  OEM
partners,  which is in turn subject to  fluctuations  because of customer demand
and inventory  levels,  timing of training and product releases by the Company's
OEM partners and the Company's timing of expenses which could affect one quarter
significantly more than another (for example, the Pipeline acquisition which was
consummated  during the fourth  quarter of 1997 and  expenditures  in connection
with the move to the new corporate  headquarters).  The Company anticipates that
future operating results might be subject to quarterly fluctuations.



I
tem 7A: Quantitative and Qualitative Disclosures About Market Risk

         Market Risk

         The Company is exposed to various  market risks,  including the changes
in foreign  currency  exchange rates.  Market risk is the potential loss arising
from  adverse  changes in market  rates and  prices,  such as  foreign  currency
exchange and interest  rates.  The Company  does not enter into  derivatives  or
other  financial  instruments for trading or speculative  purposes.  The Company
enters into financial  instruments to manage and reduce the impact of changes in
foreign  currency  exchange  rates.  The   counterparties  are  major  financial
institutions.

         Foreign Exchange Contracts

         As of mid 1998,  the  Company  started  to enter into  forward  foreign
exchange   contracts  to  hedge  the  currency   fluctuations   in  transactions
denominated  in foreign  currencies,  thereby  limiting the Company's  risk that
would  otherwise  result  from  changes in  exchange  rates.  During  1998,  the
transactions  hedged were intercompany  accounts  receivable and payable between
the Company and its Japanese subsidiary. The periods


                                       25

<PAGE>

of the forward foreign exchange contracts correspond to the reporting periods of
the hedged  transactions.  Foreign  exchange  gains and  losses on  intercompany
balances  and the  offsetting  losses  and  gains on  forward  foreign  exchange
contracts are reflected in the income statement.

         As of  December  31,  1998,  the Company  had one  outstanding  forward
foreign exchange  contract to sell Yen equivalent to approximately  $5.6 million
with an expiration date of January 29, 1999.

         The estimated fair value of the foreign  currency  contract  represents
the amount  required to enter into offsetting  contracts with similar  remaining
maturities  based  on  quoted  market  prices.  As of  December  31,  1998,  the
difference  between the fair value of the outstanding  contract and the contract
amount was  immaterial.  Market risk was estimated as the potential  decrease in
fair value  resulting from a  hypothetical  10% increase of the amount of Yen to
purchase one US Dollar. A 10% fluctuation in the exchange rate for this currency
would change the fair value by approximately  $0.6 million.  However,  since the
contract hedges foreign  currency  denominated  transactions,  any change in the
fair value of the contract would be offset by changes in the underlying value of
the transactions being hedged.

         Interest Rate Risk

         The  fair  value  of  the  Company's  cash  and  short-term  investment
portfolio  at  December  31,  1998,  approximated  carrying  value  due  to  its
short-term duration. Market risk was estimated as the potential decrease in fair
value resulting from an instantaneous  hypothetical 100 basis-point  increase in
interest  rates for the issues  contained  in the  investment  portfolio.  As of
December  31, 1998,  the  Company's  cash and  short-term  investment  portfolio
includes debt  securities of $323 million,  subject to interest rate risk. A 100
basis-point increase in market interest rates would result in a decrease of fair
value of approximately $2.9 million.

         The fair  value of the  Company's  long-term  debt,  including  current
maturities was estimated to be $4.1 million as of December 31, 1998, and equaled
the carrying  value.  The Company's  long-term debt requires  interest  payments
based on a variable  rate and  therefore is subject to interest rate risk. A 10%
fluctuation in interest rates would not have a material effect on the fair value
of the outstanding long-term debt of the Company as of December 31, 1998.


                                       26

<PAGE>



ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                         Electronics for Imaging, Inc.

                          Consolidated Balance Sheets


                                                                December 31,
                                                             -------------------
                                                               1998      1997
                                                             --------   --------
                                                           (In thousands, except
                                                            share and per share
Assets
Current assets:
 Cash and cash equivalents ...............................   $ 53,210   $ 57,195
 Short-term investments ..................................    269,823    185,536
 Accounts receivable, net ................................     57,494     30,930
 Inventories .............................................     13,726     23,790
 Other current assets ....................................     21,382     32,445
                                                             --------   --------
   Total current assets ..................................    415,635    329,896
Property and equipment, net ..............................     46,579     46,502
Other assets .............................................      9,818      9,600
                                                             --------   --------
   Total assets ..........................................   $472,032   $385,998
                                                             ========   ========
Liabilities and Stockholders' Equity
Current liabilities:
 Accounts payable ........................................   $ 32,707   $ 20,255
 Accrued and other liabilities ...........................     26,953     19,891
 Income taxes payable ....................................      9,672      2,923
                                                             --------   --------
   Total current liabilities .............................     69,332     43,069
                                                             --------   --------
Long-term debt, less current portion .....................      3,777      4,064
                                                             --------   --------
Commitments and Contingencies (Note 6) ...................
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
 authorized; none issued and outstanding .................       --         --
Common stock, $.01 par value; 150,000,000 shares
 authorized; 53,499,233 and 52,558,383 shares issued and
 outstanding, respectively ...............................        535        524
Additional paid-in capital ...............................    151,270    137,264
Retained earnings ........................................    247,118    201,077
                                                             --------   --------
   Total stockholders' equity ............................    398,923    338,865
                                                             --------   --------
    Total liabilities and stockholders' equity ...........   $472,032   $385,998
                                                             ========   ========

          See accompanying notes to consolidated financial statements.

                                       27


<PAGE>



                          Electronics for Imaging, Inc.

                        Consolidated Statements of Income


                                                   Years ended December 31,
                                            -----------------------------------
                                              1998          1997        1996
                                            ---------    ---------    ---------
                                                  (In thousands, except 
                                                     per share amounts)

Revenue .................................   $ 430,723    $ 360,631    $ 298,013
Cost of revenue .........................     242,096      163,955      145,399
                                            ---------    ---------    ---------
Gross profit ............................     188,627      196,676      152,614
                                            ---------    ---------    ---------
Operating expenses:
   Research and development .............      57,887       40,318       22,440
   Sales and marketing ..................      57,214       43,414       30,221
   General and administrative ...........      15,486       12,348       10,107
   In-process research and development ..        --          9,400         --
                                            ---------    ---------    ---------
                                              130,587      105,480       62,768
                                            ---------    ---------    ---------
Income from operations ..................      58,040       91,196       89,846
Other income, net .......................       9,668       10,181        7,318
                                            ---------    ---------    ---------
Income before income taxes ..............      67,708      101,377       97,164
Provision for income taxes ..............     (21,667)     (36,495)     (34,980)
                                            ---------    ---------    ---------
Net income ..............................   $  46,041    $  64,882    $  62,184
                                            =========    =========    =========
Net income per basic common share .......   $    0.87    $    1.24    $    1.23
                                            =========    =========    =========
Shares used in per-share calculation ....      53,029       52,359       50,672
                                            =========    =========    =========
Net income per diluted common share .....   $    0.85    $    1.15    $    1.13
                                            =========    =========    =========
Shares used in per-share calculation ....      54,481       56,198       54,828
                                            =========    =========    =========


          See accompanying notes to consolidated financial statements.

                                       28


<PAGE>


<TABLE>

                                                    Electronics for Imaging, Inc.

                                           Consolidated Statements of Stockholders' Equity

<CAPTION>

                                                          Common Stock                Additional                           Total
                                                    --------------------------         Paid-In          Retained       Stockholders'
                                                     Shares           Amount           Capital          Earnings          Equity
                                                    ---------        ---------        ---------         ---------        ---------
                                                                      (In thousands)
<S>                                                    <C>           <C>              <C>               <C>              <C>      
Balances as of December 31, 1995 ............          24,971        $     250        $  89,679         $  74,011        $ 163,940
Exercise of common stock options ............             780                8            7,691              --              7,699
Tax benefit related to stock plans ..........            --               --             15,547              --             15,547
Effect of two-for-one stock split ...........          25,752              257             (257)             --               --
Net income for the year ended
 December 31, 1996 ..........................            --               --               --              62,184           62,184
                                                    ---------        ---------        ---------         ---------        ---------
Balances as of December 31, 1996 ............          51,503              515          112,660           136,195          249,370
Exercise of common stock options ............           1,055                9           10,059              --             10,068
Tax benefit related to stock plans ..........            --               --             14,545              --             14,545
Net income for the year ended
 December 31, 1997 ..........................            --               --               --              64,882           64,882
                                                    ---------        ---------        ---------         ---------        ---------
Balances as of December 31, 1997 ............          52,558              524          137,264           201,077          338,865
Exercise of common stock options ............             941               11            8,567              --              8,578
Tax benefit related to stock plans ..........            --               --              5,638              --              5,638
Functional currency adjustment ..............            --               --               (199)             --               (199)
Net income for the year ended
 December 31, 1998 ..........................            --               --               --              46,041           46,041
                                                    ---------        ---------        ---------         ---------        ---------
Balances as of December 31, 1998 ............          53,499        $     535        $ 151,270         $ 247,118        $ 398,923
                                                     =========        =========        =========         =========        =========

<FN>
                                    See accompanying notes to consolidated financial statements.
</FN>
</TABLE>


                                                                 29



<PAGE>


<TABLE>

                                                    Electronics for Imaging, Inc.

                                                Consolidated Statements of Cash Flows

<CAPTION>
                                                                                            Years ended December 31,
                                                                                    -----------------------------------------------
                                                                                      1998               1997               1996
                                                                                    ---------          ---------          ---------
                                                                                                    (In thousands)
<S>                                                                                 <C>                <C>                <C>      
Cash flows from operating activities:
Net income ................................................................         $  46,041          $  64,882          $  62,184
Adjustments to reconcile net income to net cash provided
  by operating activities:
   Depreciation and amortization ..........................................            13,551              7,376              5,484
   Deferred taxes .........................................................            (1,938)            (4,144)            (4,135)
   Change in reserve for bad debts ........................................               250               (150)               758
   In-process research and development ....................................              --                9,400               --
   Other ..................................................................              (199)              --                 --
   Changes in operating assets and liabilities:
      Accounts receivable .................................................           (26,814)            10,528            (14,045)
      Inventories .........................................................            10,064            (12,786)            (3,195)
      Receivable from subcontract manufacturers ...........................            12,276             (5,854)            (9,600)
      Other current assets ................................................              (374)            (4,107)              (778)
      Accounts payable and accrued liabilities ............................            19,498             (2,870)            19,682
      Income taxes payable ................................................             6,749             10,220             14,919
                                                                                    ---------          ---------          ---------
   Net cash provided by operating activities ..............................            79,104             72,495             71,274
                                                                                    ---------          ---------          ---------
Cash flows from investing activities:
Purchases of short-term investments .......................................          (327,483)          (195,669)          (213,919)
Sales/maturities of short-term investments ................................           243,196            150,287            171,777
Investment in property and equipment, net .................................           (12,566)           (38,530)           (10,655)
Business acquired, net of cash received ...................................              --              (12,626)              --
Purchase of other assets ..................................................              (181)              (644)              (236)
                                                                                    ---------          ---------          ---------
   Net cash used for investing activities .................................           (97,034)           (97,182)           (53,033)
                                                                                    ---------          ---------          ---------
Cash flows from financing activities:
Repayment of bonds payable ................................................              (271)              (132)              --
Issuance of common stock ..................................................            14,216             10,068              7,699
                                                                                    ---------          ---------          ---------
   Net cash provided by financing activities ..............................            13,945              9,936              7,699
                                                                                    ---------          ---------          ---------
Increase (decrease) in cash and cash equivalents ..........................            (3,985)           (14,751)            25,940
Cash and cash equivalents at beginning of year ............................            57,195             71,946             46,006
                                                                                    ---------          ---------          ---------
Cash and cash equivalents at end of year ..................................         $  53,210          $  57,195          $  71,946
                                                                                    =========          =========          =========
Supplemental disclosures of Cash Flow Information:
Cash paid for interest ....................................................         $     313          $     154          $    --
Cash paid for income taxes ................................................            11,218             30,225             23,715
Assumption of debt in conjunction with land acquisition ...................              --            $   4,467               --

<FN>
                                    See accompanying notes to consolidated financial statements.
</FN>
</TABLE>


                                                                 30


<PAGE>


                         Electronics for Imaging, Inc.


                  Notes to Consolidated Financial Statements


Note 1: The Company and Its Significant Accounting Policies


The Company and Its Business

     Electronics  For Imaging,  Inc., a Delaware  corporation  (the  "Company"),
designs and markets products that support color and black-and-white  printing on
a variety of peripheral devices.  Its Fiery- products  incorporate  hardware and
software  technologies  that  transform  digital  copiers and printers from many
leading copier  manufacturers into fast,  high-quality  networked printers.  The
Company's Fiery products  include  stand-alone  servers,  which are connected to
digital copiers and other peripheral devices,  and Fiery controllers,  which are
embedded  in digital  copiers  and desktop  color  laser  printers.  The Company
operates in one industry and sells its products  primarily to original equipment
manufacturers  in North  America,  Europe  and Japan.  Substantially  all of the
Company's revenue to date has resulted from the sale of Fiery products.


Basis of Presentation

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


Revenue Recognition

     Revenue is recognized when the product is shipped,  provided no significant
obligations  remain and  collectibility is reasonably  probable.  Provisions for
estimated  warranty costs and potential  sales returns are recorded when revenue
is recognized.


Fair Value of Financial Instruments

     The carrying  amounts of cash, cash  equivalents,  short-term  investments,
accounts receivable,  accounts payable, accrued liabilities and bonds payable as
presented  in the  financial  statements,  approximate  fair value  based on the
nature of these instruments and prevailing interest rates.


Concentration of Credit Risk

     The Company is exposed to credit risk in the event of default by any of its
customers to the extent of amounts recorded on the  consolidated  balance sheet.
The Company performs ongoing  evaluations of the  collectibility of the accounts
receivable  balances for its  customers  and  maintains  reserves for  estimated
credit losses; such actual losses have been within management's expectations.


Cash, Cash Equivalents and Short-Term Investments

     The Company generally invests its excess cash in deposits with major banks,
money  market  securities,   municipal,   U.S.  government  and  corporate  debt
securities.  By policy,  the Company invests primarily in high-grade  marketable
securities. The Company is 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.

     The Company  considers  all highly  liquid  investments,  generally  with a
maturity  of  three  months  or  less  at  the  time  of  purchase,  to be  cash
equivalents.  The cost of these  investments  has  generally  approximated  fair
value.  Investments with longer maturities are classified as  available-for-sale
and  therefore  treated as current  assets.  Available-for-sale  securities  are
stated at fair value with  unrealized  gains and losses  reported  as a separate
component  of  stockholders'  equity.  Such  unrealized  gains and  losses  have
historically not been material.


Inventories

     Inventories  are stated at  standard  cost which  approximate  the lower of
actual  cost  using  a  first-in,  first-out  method,  or  market.  The  Company
periodically reviews its inventories for potential slow-moving or obsolete items
and writes down specific items to net realizable value as appropriate.


                                       31

<PAGE>

Property and Equipment

     Property  and  equipment  are recorded at cost.  Depreciation  on assets is
computed using the  straight-line  method over the estimated useful lives of the
assets,  generally  three to five years.  Leasehold  improvements  are amortized
using  the  straight-line   method  over  the  estimated  useful  lives  of  the
improvements or the lease term, if shorter.


Amortization of Intangibles

     Current  goodwill and other  intangible  assets  acquired to date are being
amortized on a straight-line basis over periods ranging from 3 to 5 years.


Income Taxes

     The Company  accounts for income taxes under the provisions of Statement of
Financial  Accounting  Standards  No.  109 (SFAS  109),  "Accounting  for Income
Taxes". 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.  No provision for U.S.  income tax is made
for undistributed earnings of the Company's foreign subsidiaries,  to the extent
it is the Company's  intention to  indefinitely  reinvest  these earnings in the
respective subsidiaries.


Foreign Currency Translation

     The functional currency for all of the Company's foreign operations, except
for Japan, is the U.S. dollar. The functional currency for Japan is the Japanese
Yen. Where the U.S. dollar is the functional currency,  translation  adjustments
are  recorded in income.  Where the  Japanese  Yen 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.


Accounting for Derivative Instruments and Risk Management

     The  Company  operates  internationally,  giving rise to exposure to market
risk from changes in foreign exchange rates.  Derivative  financial  instruments
are used by the Company to reduce  those  risks.  The  Company  does not hold or
issue financial or derivative  financial  instruments for trading or speculative
purposes.  The magnitude and volume of such  transactions  were not material for
the periods presented.  As of December 31, 1998, the Company had one outstanding
forward foreign exchange  contract to sell Yen equivalent to approximately  $5.6
million with an expiration date of January 29, 1999.

     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards No. 133 (SFAS 133)  "Accounting  for Derivative
Instruments  and  Hedging".   SFAS  133  establishes  accounting  and  reporting
standards for derivative  instruments  and for hedging  activities and requires,
among other  things,  that all  derivatives  be  recognized  as either assets or
liabilities in the statement of financial position and measure those instruments
at fair  value.  SFAS 133 is  effective  for fiscal  quarters  and fiscal  years
beginning after June 15, 1999. The Company is currently  studying the provisions
of the  SFAS  133  and  the  potential  impact  it  may  have  on its  financial
statements.


Stock Options

     In 1997, the Company adopted  Statement of Financial  Accounting  Standards
No. 123 (SFAS 123),  "Accounting  for  Stock-Based  Compensation".  As permitted
under this  standard,  the Company has elected to follow  Accounting  Principles
Board  Opinion No. 25 (APB 25),  "Accounting  for Stock Issued to  Employees" in
accounting  for its stock options and other  stock-based  employee  awards.  Pro
forma  information  regarding  net income and earnings per share,  as calculated
under the provisions of SFAS 123, are disclosed in Note 9.


Computation of Net Income per Common Share

     Net 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


                                       32

<PAGE>

number of common  shares and  potential  common  shares  outstanding  during the
period.  Potential  common  shares result from the assumed  exercise,  using the
treasury  stock method,  of  outstanding  common stock options having a dilutive
effect.


Comprehensive Income

     Effective  January 1, 1998,  the Company  adopted  Statement  of  Financial
Accounting Standards No. 130 (SFAS 130), "Reporting  Comprehensive Income". This
Statement  requires  that all items  recognized  under  accounting  standards as
components  of  comprehensive  earnings  be  reported  in  an  annual  financial
statement that is displayed with the same  prominence as other annual  financial
statements.  This Statement also requires that an entity classify items of other
comprehensive  earnings by their nature in an annual financial statement.  There
was no material difference between  Comprehensive  income and Net income for the
twelve months period ended December 31, 1998.


Segment Reporting

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial Accounting  Standards No. 131 (SFAS 131),  "Disclosures about Segments
of an Enterprise and Related Information".  This statement establishes standards
for the way companies  report  information  about  operating  segments in annual
financial  statements.  It also  establishes  standards for related  disclosures
about products and services,  geographic areas, and major customers. The Company
has adopted SFAS 131 as of fiscal year 1998. See Note 10.


Reclassifications

     Certain  prior year  balances  have been  reclassified  to conform with the
current year presentation.


Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure  of  contingent  assets and  liabilites  at the date of the financial
statements  and reported  amounts of revenues and expenses  during the reporting
period. Actual results could differ from those estimates.


Note 2: Acquisitions


     In October of 1997,  the Company  acquired  Pipeline  Associates,  Inc. and
Pipeline Asia, Inc. (collectively,  "Pipeline")--a leading software developer of
PostScript, HTML and PCL interpreter technologies.  The acquisition cost, net of
cash received was $12.6 million and was accounted for as a purchase.  The excess
of the  acquisition  cost  over the fair  market  value of net  tangible  assets
acquired was $ 12.5 million,  of which $ 9.4 million was allocated to in-process
research and development and expensed immediately.  The allocation to in-process
research  and  development  was based on an  independent  appraiser's  valuation
report  which  included  the  value of  products  in the  development  stage not
considered to have reached technological feasibility.  The balance of the excess
acquisition  cost was allocated to acquired  technology  and  trademarks--$  2.8
million, and goodwill--$0.3 million which are being amortized over 3 and 5 years
respectively.  The Pipeline acquisition was not deemed material to the Company's
financial condition or results of operations, accordingly, pro forma disclosures
associated with purchase accounting have not been provided.


                                       33

<PAGE>


Note 3: Balance Sheet Components


                                                              December 31,
                                                         ----------------------
                                                           1998          1997
                                                         --------      --------
                                                             (In thousands)
Accounts receivable:
Accounts receivable ................................     $ 58,948      $ 32,315
Less reserves and allowances .......................       (1,454)       (1,385)
                                                         --------      --------
                                                         $ 57,494      $ 30,930
                                                         ========      ========
Inventories:
Raw materials ......................................     $ 13,261      $ 19,216
Work in process ....................................           17         3,183
Finished goods .....................................          448         1,391
                                                         --------      --------
                                                         $ 13,726      $ 23,790
                                                         ========      ========
Other current assets:
Receivable from subcontract manufacturers ..........     $  5,366      $ 17,642
Other ..............................................       16,016        14,803
                                                         --------      --------
                                                         $ 21,382      $ 32,445
                                                         ========      ========
Property and equipment:
Land ...............................................     $ 27,706      $ 27,351
Equipment and purchased software ...................       44,348        34,201
Furniture and leasehold improvements ...............        7,565         7,494
                                                         --------      --------
                                                           79,619        69,046
Less accumulated depreciation and amortization .....      (33,040)      (22,544)
                                                         --------      --------
                                                         $ 46,579      $ 46,502
                                                         ========      ========
Accrued and other liabilities:
Accrued product-related obligations ................     $  4,650      $  3,040
Accrued royalty payments ...........................        8,232         7,625
Accrued compensation and benefits ..................        6,383         4,043
Other accrued liabilities ..........................        7,688         5,183
                                                         --------      --------
                                                         $ 26,953      $ 19,891
                                                         ========      ========


Note 4: Marketable Securities

     The  following is a summary of the  estimated  fair value of available  for
sale securities classified as short-term  investments.  Gross unrealized holding
gain and  losses  for the  years  ended  December  31,  1998  and 1997  were not
material.  Gross realized gains and losses for the years ended December 31, 1998
and 1997 were also not material (in thousands);


                                                Cost (approximates Market Value)
                                                    1998         1997
                                                  ----------   ----------
          Municipal Securities    ............... $218,431     $183,859
          U.S. Government Securities    .........   16,457        1,677
          U.S. Corporate Debt Securities   ......   34,935          --
                                                  ---------    ---------
          Total debt securities   ............... $269,823     $185,536
                                                  =========    =========

                                       34


<PAGE>


Maturities  of  debt  securities  at market value as of December 31, 1998 are as
                            follows (in thousands);

                                                       1998
                                                    ----------
          Mature in one year or less   ............  $103,366
          Mature after one year through two years     106,366
          Mature after two years    ...............    60,091
                                                     ---------
               Total debt securities   ............  $269,823
                                                     =========

Note 5: Long-Term Debt


     Long Term  Debt  consists  of  amounts  due to the City of Foster  City for
certain bonds assumed by the Company during the purchase of land (see Note 6).
Principal amounts owing under the bonds are as follows:


                                      Year ending December 31, 1998     
                                      -------------------------------
                                             (In thousands)
       Total principal   ............             $4,064
       Less: current portion   ......               (287)
                                                  ------
                                                  $3,777
                                                  ======
    
     The  bonds are  secured  by the land and bear an  annual  interest  rate of
approximately 7%. Interest and principal payments are due semi-annually with the
last payment occurring in June 2009.  Principal payments under the bonds payable
are as follows:



          Year ending                                            
          December 31,                        (In thousands)
          ------------                        --------------
          1999   ...........................      $  287
          2000   ...........................         304
          2001   ...........................         323
          2002   ...........................         342
          2003   ...........................         362
          Thereafter   .....................       2,446
                                                  -------
                  Total  ...................      $4,064
                                                  =======
          
          
Note 6: Commitments and Contingencies


Leases

     The Company currently leases its principal operating  facilities under four
non-cancelable  operating  leases  expiring  between March 31, 1999 and June 30,
2000. In connection with the relocation to the new corporate campus in the first
half of 1999,  the Company is in the process of entering  into several  sublease
agreements.  Also the Company made a provision for the excess of future  minimum
lease  commitments  over estimated  minimum  sublease  rental income,  including
vacant facilities. Rent expense was approximately $4.5 million, $3.3 million and
$2.1 million in 1998, 1997 and 1996, respectively.


                                       35

<PAGE>

     The following  summarizes the future minimum lease payments under all other
non-cancelable operating lease obligations:



                    Fiscal Year                       (in millions) 
                    ------------                      ------------
                    1999   ..........................      $2.5
                    2000   ..........................      $0.8
                    Thereafter   ....................      $0.0
                                                           -----
                    Total  ..........................      $3.3
                                                           =====
                    

     On July  18,  1997,  the  Company  entered  into an  agreement  to  lease a
ten-story 295,000 square foot building to be constructed on 35 acres,  which the
Company  owns in  Foster  City,  California.  The  lessor  of the  building  has
committed to fund up to a maximum of $65.0 million for the  construction  of the
building,   with  the  portion  of  the  committed   amount  actually  used  for
construction  to be  determined  by the Company.  As of December  31, 1998,  the
Company had drawn down an aggregate of $36.3 million.  Rent  obligations for the
building will bear a direct  relationship to the carrying cost of the commitment
actually  drawn down.  The amount of this rent  obligation  is  contingent  upon
future events and is not included in the above future minimum lease  commitments
under non-cancelable operating leases. Currently,  carrying costs of funds drawn
also accrue as part of the  construction  cost being drawn from the  commitment.
The Company currently  anticipates that construction will be completed in second
quarter of 1999.

     The lease  associated  with the Foster  City  building  has a term of seven
years  with an option to renew the lease for an  additional  three to five years
subject to certain conditions. In connection with the lease, the Company entered
into a lease of its land in  Foster  City to the  lessor  of the  building  at a
nominal rate and for a term of 34 years and 11 months. If the Company terminates
or does not  negotiate  an extension  of its lease of the  building,  the ground
lease to the lessor converts to a market rate. The Company,  at its option,  may
purchase  the  building  during  or at the  end of the  terms  of the  lease  at
approximately  the amount expended by the lessor to construct the building.  The
Company has  guaranteed  a residual  value  associated  with the building to the
lessor of approximately 82% of the lessor's funding.  If the Company defaults on
its lease,  does not renew its lease,  does not purchase the building or arrange
for a third party  purchase of the building at the end of the lease term, it may
be liable to the lessor for the amount of the residual guarantee.  The lease has
been classified as an operating lease.

     As part of this agreement, the Company must maintain a minimum tangible net
worth.  In addition,  in order to obtain a favorable lease rate, the Company has
pledged certain securities ($44.0 million at December 31, 1998) in proportion to
the amount drawn  against the  commitment  to be held in a custodial  account as
collateral  to ensure  fulfillment  of the  obligations  to the lessor under the
lease  agreement.  The Company may invest these funds in certain  securities and
receive the full  benefit of the  investment.  However,  if the Company  uses or
transfers  these funds,  the rent on the building would increase and the Company
would be required to comply with certain additional financial covenants.

     The  following  summarizes  the future  minimum  lease  payments  under the
non-cancelable  operating lease obligations related to the new building based on
an estimated principal balance,  current market interest rates and pricing under
collateralized assumptions:



            Fiscal Year                             (in millions) 
            -----------                             ------------
            1999   ................................      $ 1.9
            2000   ................................        3.2
            2001   ................................        3.2
            2002   ................................        3.2
            2003   ................................        3.2
            Thereafter   ..........................        1.9
                                                         ------
            Total  ................................      $16.6
                                                         ======

Note:  Operating  lease  does  not  go into effect until approximately mid 1999.
Amounts above have been estimated.


                                       36

<PAGE>

Legal Proceedings

     The Company and certain  principal  officers  and  directors  were named as
defendants  in class action  complaints  filed in both the  California  Superior
Court of the County of San Mateo on  December  16,1997,  and the  United  States
District  Court for the Northern  District of  California  on January 2, 1998 on
behalf of purchasers of the common stock of the Company  during the class period
from April 10, 1997, through December 11, 1997. The complaints allege violations
of securities laws during the class period. Management believes the lawsuits are
without  merit and that the outcome will not have a material  adverse  effect on
the  financial  position or overall  trends in the results of  operations of the
Company.  However, due to the inherent uncertainties of litigation,  the Company
cannot  accurately   predict  the  ultimate  outcome  of  the  litigation.   Any
unfavorable  outcome  of the  litigation  could  have an  adverse  impact on the
Company's financial condition and results of operations.


Note 7: Income Taxes


     The provision for income taxes is summarized as follows:


                                                Years ended December 31,
                                          --------------------------------------
                                            1998         1997          1996
                                          ----------   ----------   ------------
                                                     (In thousands)
        Current:
        U.S. Federal   .................. $19,881      $34,623       $ 32,309
        State    ........................   3,678        5,744          6,186
        Foreign  ........................      46          272            620
                                          --------     --------      --------
               Total current    .........  23,605       40,639         39,115
                                          --------     --------      --------
        Deferred:
        U.S. Federal   ..................  (2,176)      (3,327)        (3,203)
        State    ........................     238         (817)          (932)
        Foreign  ........................       0            0              0
                                          --------     --------      --------
               Total deferred   .........  (1,938)      (4,144)        (4,135)
                                          ========     ========      ========
Total provision for income taxes   ...... $21,667      $36,495       $ 34,980
                                          ========     ========      ========

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

                                               December 31,
                                           ---------------------
                                            1998        1997
                                           ---------   ---------
                                              (In thousands)

        Depreciation   ...................  $ 1,175     $ 1,007
        Reserves and accruals   ..........    7,964       5,795
        State taxes payable  .............      672       1,140
        Deferred revenue  ................      631       1,466
        Intangibles    ...................    3,803       3,777
        Other    .........................    1,428         550
                                            --------    --------
          Total deferred tax assets ......  $15,673     $13,735
                                            ========    ========

                                       37


<PAGE>

<TABLE>

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

<CAPTION>
                                                                       Years ended December 31,
                                               -------------------------------------------------------------------------
                                                        1998                     1997                     1996
                                               ----------------------   ----------------------   -----------------------
                                                                            (In thousands)
                                                  $            %           $            %           $            %
                                               ----------   ---------   ----------   ---------   ----------   ----------
<S>                                            <C>            <C>       <C>            <C>       <C>             <C> 
Tax expense at federal statutory rate   ...... $23,698        35.0      $35,482        35.0      $34,007         35.0
State income taxes, net of federal benefit       2,999         4.4        3,203         3.2        3,415          3.5
Tax-exempt interest income  ..................  (2,717)       (4.0)      (2,245)       (2.2)      (2,099)        (2.2)
Tax credits  .................................  (1,874)       (2.8)      (1,091)       (1.1)        (501)        (0.5)
Other  .......................................    (439)       (0.6)       1,146         1.1          158          0.2
                                               --------      -----      --------      -----      --------       -----
                                               $21,667        32.0      $36,495        36.0      $34,980         36.0
                                               ========      =====      ========      =====      ========       =====
</TABLE>


     Income  before income taxes  includes  $3.2 million,  $1.0 million and $0.8
million of income  relating  to non- U.S.  operations  for 1998,  1997 and 1996,
respectively.


Note 8: Earnings Per Share


<TABLE>

     The following table presents a reconciliation of basic and diluted earnings
per share for the three years ended December 31, 1998:

<CAPTION>
                                                           Years ended December 31,
                                                       ---------------------------------
                                                        1998        1997        1996
                                                       ---------   ---------   ---------
                                                                (In thousands)
<S>                                                    <C>         <C>         <C>
Net income available to common shareholders   ......    $46,041     $64,882     $62,184
Shares
   Basic shares    .................................     53,029      52,359      50,672
   Effect of Dilutive Securities  ..................      1,452       3,839       4,156
                                                        --------    --------    --------
Diluted shares  ....................................     54,481      56,198      54,828
Earnings per common share
   Basic EPS    ....................................    $  0.87     $  1.24     $  1.23
   Diluted EPS  ....................................    $  0.85     $  1.15     $  1.13
</TABLE>


     Antidilutive  Options.  Options to purchase  2,737,629,  585,529 and 95,625
shares of common stock  outstanding  as of December 31,  1998,  1997,  and 1996,
respectively,  were not included in the  computations of diluted EPS because the
options'  exercise  prices were  greater  than the average  market  price of the
common shares for the years then ended.


                                       38

<PAGE>

Note 9: Stock Compensation Plans


<TABLE>

     As of December  31,  1998,  the Company  has two  stock-based  compensation
plans,  described below. The Company applies APB 25 and related  interpretations
in  accounting  for its  plans.  Accordingly,  no  compensation  cost  has  been
recognized for its fixed stock option plans. Had  compensation  cost for options
granted in 1998, 1997 and 1996 under the Company's  option plans been determined
based on the fair  value at the  grant  dates as  prescribed  by SFAS  123,  the
Company's  net  income  and pro forma net  income  per share  would have been as
follows:


<CAPTION>
                                                         Years ended December 31,
                                                     ---------------------------------
                                                      1998        1997        1996
                                                     ---------   ---------   ---------
                                                (In thousands, except per share amounts)
<S>                                  <C>             <C>         <C>         <C>
       Net income .................. As reported      $46,041     $64,882     $62,184
                                     Pro forma        $33,570     $52,015     $58,304

       Earnings per basic .......... As reported      $  0.87     $  1.24     $  1.23
       common share ................ Pro forma        $  0.63     $  0.99     $  1.15

       Earnings per diluted ........ As reported      $  0.85     $  1.15     $  1.13
       common share ................ Pro forma        $  0.62     $  0.93     $  1.06
</TABLE>


     Under the Company's 1989 and 1990 Stock Plans (the Plans),  the Company may
grant options to employees,  directors  and  consultants  for up to 20.5 million
shares of common  stock.  Under the Plans,  the  exercise  price of each  option
equals  the  market  price of the  Company's  stock on the date of grant  and an
option's maximum term is 10 years. Options are granted  periodically  throughout
the year and  generally  vest  ratably  over four years.  At December  31, 1998,
approximately 2.5 million shares were available for future grants.

<TABLE>

     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes  option-pricing  model, the attribution method with respect to
graded vesting and the following weighted-average assumptions:

<CAPTION>
                                                                       Years Ended December 31,
                                                        ------------------------------------------------------
                                                             1998               1997               1996
        Black Scholes Assumptions & Fair Value          ----------------   ----------------   ----------------
<S>                                                     <C>                <C>                <C>
Expected Volatility   .................................     76.0 %             69.0 %             48.0 %
Dividend Yield  .......................................      0.0 %              0.0 %              0.0 %
Risk Free Interest Rate  .............................. 4.49% to 4.65%     5.35% to 5.83%     5.68% to 6.71%
Weighted Average Expected Option Term   ...............   4.4 years          5.2 years          4.3 years
 Weighted Average Fair Value of Options Granted   ......    $6.97             $25.22              $9.42
</TABLE>



<TABLE>

     A summary of the status of the Company's stock option activity is presented
below:

<CAPTION>
                                                      Years ended December 31,
                             ---------------------------------------------------------------------------
                                     1998                      1997                       1996
                             ---------------------   ------------------------   ------------------------
                                         Average                    Average                    Average
                                        Exercise                   Exercise                   Exercise
                             Shares      Price        Shares        Price        Shares        Price
                             --------   ----------   -----------   ----------   -----------   ----------
                                                (In thousands, except exercise price)
<S>                          <C>        <C>          <C>           <C>          <C>           <C>
Beginning of Year   ......    6,342       $ 21.84       6,085        $ 13.19       6,338        $ 7.34
Granted    ...............    1,919         16.05       1,613          47.14       1,950         25.80
Exercised  ...............     (941)         9.20      (1,055)          9.51      (1,560)         4.89
Forfeited  ...............     (630)        31.16        (301)         25.70        (643)        13.86
                              -----                   -------                    -------
End of Year   ............    6,690       $ 21.09       6,342        $ 21.84       6,085        $13.19
                              -----                   -------                    -------
</TABLE>


                                       39


<PAGE>

<TABLE>

     The following table summarizes  information about stock options outstanding
at December 31, 1998:

<CAPTION>
                                          Options Outstanding                             Options Exercisable
                         ------------------------------------------------------   -----------------------------------
        Range of             Number          Weighted Avg.      Weighted Avg.         Number          Weighted Avg.
    Exercise Prices       Outstanding       Remaining Life     Exercise Price      Exercisable       Exercise Price
- ------------------------ ----------------   ----------------   ----------------   ----------------   ----------------
                         (in thousands)                                           (in thousands)
<S>                           <C>                <C>               <C>                 <C>               <C>   
$0.01 to $5.00 .........      1,052              4.39              $ 3.28              1,052             $ 3.28
$5.63 to $9.97 .........        434              5.89              $ 6.42                382             $ 6.07
$10.75 to $12.81 .......        801              6.51              $12.78                500             $12.78
$13.25 to $19.25 .......      1,721              8.93              $15.47                328             $16.01
$19.38 to $25.63 .......      1,073              7.67              $24.88                455             $25.13
$26.81 to $47.25  ......      1,339              8.34              $42.60                388             $41.65
$47.56 to $55.13 .......        270              8.70              $52.62                 71             $52.59
                              ------                                                   ------
$0.01 to $55.13 ........      6,690              7.40              $21.09              3,176             $15.35
                              ======                                                   ======
</TABLE>


Note 10: Information Concerning Business Segments and Major Customers


     Information about Products and Services

     The  Company  operates  in one  single  industry  segment,  technology  for
high-quality  printing  in short  production  runs.  The  Company  does not have
separate  operating  segments  for  which  discrete  financial   statements  are
prepared.  The  Company's  management  makes  operating  decisions  and assesses
performance based on primarily product revenues and related gross margins.

<TABLE>

     The  following is a breakdown of revenues for the years ended  December 31,
1998, 1997 and 1996 by product category:

<CAPTION>
                                                                     1998         1997         1996
                                                                    Revenue      Revenue      Revenue
                                                                   ----------   ----------   ----------
                                                                              (in thousands)
<S>                                                                <C>          <C>          <C>
                           Revenue

Stand-alone Servers Connecting to Digital Color Copiers   ......   $282,081     $290,347     $252,041

Embedded Desktop Controllers,
 Bundled Color Solutions & Chipset Solutions  ..................     90,133       34,133       25,465

Controllers for Digital Black and White Solutions   ............     19,196          --           --

Spares, Licensing & Other misc. sources    .....................     39,313       36,151       20,507
                                                                   ---------    ---------    ---------
   Total Revenue   .............................................   $430,723     $360,631     $298,013
                                                                   =========    =========    =========
</TABLE>




                                       40

<PAGE>


     Information about Geographic Areas

     Except for Japan,  all of the Company's  sales are originated in the United
States.  Shipments to some of the Company's OEM partners are made to centralized
purchasing  and  manufacturing  locations,  which in turn sell  through to other
locations.  As a result of these  factors,  the Company  believes  that sales to
certain geographic  locations might be higher or lower,  though accurate data is
difficult to obtain.

     The  following is a breakdown of revenues by shipment  destination  for the
years ended 1998, 1997 and 1996, respectively:

                                      Years ended December 31,         
                                ------------------------------------
                                  1998         1997         1996
                                ----------   ----------   ----------
                                           (in thousands)
       United States   ......   $198,467     $167,972     $149,055
       Netherlands  .........     79,878       62,017       35,224
       Japan  ...............     68,760       63,353       62,568
       Rest of World   ......     83,618       67,289       51,166
                                ---------    ---------    ---------
                                $430,723     $360,631     $298,013
                                =========    =========    =========
       
     Information about Major Customers

     Two customers  accounted for  approximately 36% and 23% of revenue in 1998.
Three customers  accounted for approximately 44%, 27% and 14% of revenue in 1997
and 47%, 23% and 12% of revenue in 1996,  respectively.  Three  customers,  with
accounts  receivable  balances greater than 10%, accounted for approximately 69%
and 85% of the accounts  receivable balance as of December 31, 1998 and December
31, 1997,  respectively.  Four  customers,  with  accounts  receivable  balances
greater than 10%,  accounted for  approximately  84% of the accounts  receivable
balance as of December 31, 1996.


                                       41

<PAGE>


 
                      Report of Independent Accountants


To the Board of Directors and Stockholders of Electronics For Imaging, Inc.


     In our  opinion,  the  accompanying  consolidated  balance  sheets  and the
related  consolidated  statements of income, of stockholders' equity and of cash
flows  present  fairly,  in all material  respects,  the  financial  position of
Electronics  For  Imaging,  Inc. and its  subsidiaries  at December 31, 1998 and
1997,  and the results of their  operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity  with generally
accepted   accounting   principles.   These   financial   statements   are   the
responsibility of the Company's management;  our responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  statements  in  accordance  with  generally  accepted  auditing
standards which require that we plan and perform the audit to obtain  reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit 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 the opinion expressed above.

PRICEWATERHOUSECOOPERS LLP


San Jose, California
January 20, 1999




                                       42



<PAGE>

                 Quarterly Consolidated Financial Information

<TABLE>

     The following  table presents the Company's  operating  results for each of
the  eight  quarters  in the  two-year  period  ended  December  31,  1998.  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 the audited
consolidated financial statements of the Company and the notes thereto appearing
in this Annual Report. These operating results are not necessarily indicative of
the results for any future period.

<CAPTION>
                                                 Q1          Q2           Q3           Q4
1998:                                          ---------   ---------   ----------   ----------
                                                    (In thousands, except per share data)
                                                                 (Unaudited)
<S>                                            <C>         <C>         <C>          <C>
Revenue    .................................    $82,523     $96,157    $125,327     $126,716
Gross profit  ..............................     37,167      41,179      53,891       56,390
Income from operations    ..................      4,300       9,260      20,900       23,580
Net income    ..............................      4,173       6,943      16,503       18,422
Net income per basic common share  .........       0.08        0.13        0.31         0.35
Net income per diluted common share   ......    $  0.08     $  0.13    $   0.31     $   0.34


                                                 Q1           Q2           Q3            Q4
1997:                                          ---------   ---------   ----------   ----------

Revenue  ...................................    $91,006    $100,633     $107,323     $ 61,669
Gross profit   .............................     49,913      55,226       59,028       32,509
Income (loss) from operations    ...........     29,356      32,633       34,842       (5,635)
Net income (loss)    .......................     20,428      22,609       23,914       (2,069)
Net income (loss) per basic common share  ..       0.40        0.44         0.46        (0.04)
Net income (loss) per diluted common share .    $  0.37    $   0.41     $   0.43     $  (0.04)
</TABLE>



PART III



ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information regarding directors of the Company is incorporated by reference
from the information  contained under the caption "Election of Directors" in the
Company's  1999  Proxy  Statement  for the  Company's  1999  Annual  Meeting  of
Stockholders. Information regarding current executive officers of the Registrant
is  incorporated  by  reference  from  information  contained  under the caption
"Executive  Officers"  in  the  Company's  1999  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 the Company's 1999 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  the
Company's 1999 Proxy Statement.



ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item is incorporated by reference from the
information  contained under the caption  "Security  Ownership" in the Company's
1999 Proxy Statement.



ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item is incorporated by reference from the
information  contained  under  the  caption  "Executive   Compensation"  in  the
Company's 1999 Proxy Statement.

                                       43



<PAGE>



PART IV



ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Documents Filed as Part of Form 10-K

(1) Index to Financial Statements
    
    The  Financial  Statements  required by this item are submitted in Item 8 of
    this report as follows:

         Report of Independent Accountants.
     
         Consolidated Balance Sheets at December 31, 1998 and 1997

         Consolidated  Statements  of Income for the three years ended  December
         31, 1998

         Consolidated  Statements  of  Stockholders'  Equity for the three years
         ended December 31, 1998

         Consolidated  Statements  of Cash  Flows  for  the  three  years  ended
         December 31, 1998


         Notes to Consolidated Financial Statements

(2) Index to Financial Statement Schedule

 
   Schedule  II -  Valuation  and  Qualifying  Accounts 

    Report of Independent Accountants on Financial Statement Schedule

    (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.)

(3) Exhibits




 Exhibit
   No.                               Description
 -------                             -----------
  3.1     Amended and Restated Certificate of Incorporation.(2)
  3.2     Bylaws as amended.(1)
  4.1     See Exhibit 3.1
  4.2     Specimen Common Stock certificate of the Company.(1)
 10.1     Agreement  of Lease  dated as of July 30,  1992,  by and  between  the
          Company and The Joseph and Eda Pell Revocable  Trust for the Company's
          new executive office in San Mateo, California.(1)
 10.2     First  Addendum to Lease dated as of July 30, 1992, by and between the
          Company and The Joseph and Eda Pell Revocable Trust.(1)
 10.3+    License  Agreement,  dated as of February 9, 1990, between the Company
          and the Massachusetts Institute of Technology.(1)
 10.4     Amendment to License  Agreement  dated December 31, 1990,  between the
          Company and the Massachusetts Institute of Technology.(1)
 10.5     Amendment to License  Agreement dated May 29, 1991 and March 19, 1991,
          by  and  between  the  Company  and  the  Massachusetts  Institute  of
          Technology.(1)
 10.6+    Third  Amendment  to License  Agreement  dated  June 1,  1992,  by and
          between the Company and the Massachusetts Institute of Technology.(1)
 10.7+    Patent Sublicense Agreement,  dated March 7, 1990, between the Company
          and Toyo Ink Mfg. Co., Ltd.(1)
 10.8+    Know-How License  Agreement,  dated March 7, 1990, between the Company
          and Toyo Ink Mfg. Co., Ltd.(1)
 10.9+    License  Agreement,  dated as of January 11, 1991,  by and between the
          Company and Eastman Kodak Company, as amended March 10, 1992.(1)
 10.10+   License Agreement, dated March 1, 1991, by and between the Company and
          Adobe Systems Incorporated, as amended May 22, 1991.(1)
 10.11+   Custom PostScript Interpreter OEM License Agreement, dated as of March
          1, 1991, by and between the Company and Adobe Systems Incorporated.(1)
 10.12+   Agreement  dated  September  6, 1991,  by and  between the Company and
          Xerox  Corporation.(1)
 10.13+   Patent License  Agreement  dated December 12, 1991, by and between the
          Company and Xerox Corporation.(1)

                                       44


<PAGE>

 Exhibit
   No.                            Description
 -------                             -----------

 10.14+   Patent  License  Agreement  dated January 29, 1992, by and between the
          Company and Minolta Camera Co., Ltd.(1)
 10.15    License  Agreement  dated December 3, 1991, by and between the Company
          and Scitex Corporation Ltd.(1)
 10.16+   Patent  License  Agreement  dated June 11,  1992,  by and  between the
          Company and Victor Company of Japan.(1)
 10.17+   License  Agreement  dated May 2, 1991,  by and between the Company and
          Pantone, Inc.(1)
 10.18    Advisory  Agreement,  dated May 25,  1989,  between  the  Company  and
          William F. Schreiber.(1)
 10.19**  1989 Stock Plan of the Company.(1)
 10.20**  1990 Stock Plan of the Company.(1)
 10.21**  Form of Indemnification Agreement.(1)
 10.22+   Patent  License  Agreement  dated May 28,  1991,  by and  between  the
          Company and Canon Inc.(1)
 10.23**  Employment Agreement dated July 17, 1995, by and between Dan Avida and
          the Company.(3)
 10.24**  Employment  Agreement dated July 17, 1995, by and between Jeff Lenches
          and the Company.(3)
 10.25**  Employment  Agreement  dated  July  17,  1995,  by  and  between  Fred
          Rosenzweig and the Company.(3)
 10.26**  Employment  Agreement  dated  October 15,  1995,  by and between  Eric
          Saltzman and the Company.(3)
 10.27**  Master Lease and Open End  Mortgages  dated as of July 18, 1997 by and
          between the Company and FBTC Leasing Corp. for the lease  financing of
          the Company's  corporate  headquarters  building to be built in Foster
          City, California.(4)
 21.1     List of Subsidiaries.(1)
 23.1     Consent of PricewaterhouseCoopers LLP.
 24.1     Power of Attorney (see signature page)

- ------------
**   Items that are management  contracts or compensatory  plans or arrangements
     required to be filed as exhibits pursuant to Item 14 (c) of Form 10-K.

+    The Company has received confidential treatment with respect to portions of
     these documents.

(1)  Filed as an exhibit to the  Company's  Registration  Statement  on Form S-1
     (No. 33-50966) and incorporated herein by reference.

(2)  Filed as an exhibit to the  Company's  Registration  Statement  on Form S-1
     (File No. 33-57382) and incorporated herein by reference.

(3)  Filed as an exhibit  to the  Company's  Annual  Report on Form 10-K for the
     year ended December 31, 1995 (File No. 0-18805) and incorporated  herein by
     reference.

(4)  Filed as an exhibit to the Company's  Quarterly Report on Form 10-Q for the
     quarter ended June 30, 1997 (File No. 0-18805) and  incorporated  herein by
     reference.


(b) Reports on Form 8-K

   None filed during the quarter ended December 31, 1998.

(c) List of Exhibits

  See Item 14 (a).

(d) Consolidated  Financial  Statement  Schedule II for the years ended December
    31, 1995, 1996 and 1997, respectively.

     See Page 46 of this Annual Report on Form 10-K.

                                       45


<PAGE>


<TABLE>

                                        ELECTRONICS FOR IMAGING, INC.

                                                 Schedule II
                                      Valuation and Qualifying Accounts


<CAPTION>
                                                               Balance at    Charged to    Charged to                     Balance at
                                                               beginning     costs and       other                           end of
            Description                                        of period      expenses      accounts      Deductions         period
            -----------                                        ---------      --------      --------      ----------         ------
                                                                 (In thousands)
<S>                                                              <C>            <C>          <C>             <C>             <C>   
Year Ended December 31, 1998
 Allowance for doubtful accounts and
 sales-related reserves .................................        $1,385         $250         $  --           $ (181)         $1,454
                                                                 ======         ====         =======         ======          ======
Year Ended December 31, 1997
 Allowance for doubtful accounts and
 sales-related reserves .................................        $1,912         $--          $  (150)        $ (377)         $1,385
                                                                 ======         ====         =======         ======          ======
Year Ended December 31, 1996
 Allowance for doubtful accounts and
 sales-related reserves .................................        $1,570         $ 56         $   702         $ (416)         $1,912
                                                                 ======         ====         =======         ======          ======
</TABLE>


                                       46



<PAGE>


                     Report of Independent Accountants on
                         Financial Statement Schedule




To the Board of Directors
of Electronics for Imaging, Inc.


Our audits of the  consolidated  financial  statement  referred to in our report
dated January 20, 1999 appearing in this Form 10-K also included an audit of the
Consolidated  Financial  Statement  Schedule  listed in Item  14(a) of this Form
10-K. In our opinion,  the Consolidated  Financial  Statement  Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.

PRICEWATERHOUSECOOPERS LLP



San Jose, California
January 20, 1999




                                       47




<PAGE>


                                  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 18, 1999
                              By: /s/ DAN AVIDA
                                  -------------------------------------
                                  Dan Avida
                                  President, Chief Executive
                                  Officer and Director


                               POWER OF ATTORNEY

     KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears
below  constitutes  and  appoints  Dan  Avida  and  Eric  Saltzman  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.

<TABLE>

     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.

<CAPTION>
        Signature                              Title                                   Date        
- ----------------------------   -----------------------------------------------    ----------------
<S>                            <C>                                                <C>
         /s/ DAN AVIDA         President, Chief Executive Officer and             March 18, 1999
- -----------------------------    Director (Principal Executive Officer)          
            Dan Avida                                                            

                                                                                 
       /s/ ERIC SALTZMAN       Chief Financial Officer                            March 18, 1999
- -----------------------------     (Principal Financial and Accounting Officer) 
          Eric Saltzman           Officer)                                       
                                                                                 

       /s/ EFRAIM ARAZI        Chairman of the Board                              March 18, 1999
- -----------------------------                                                    
           Efraim Arazi                                                          
                                                                                 

         /s/ GILL COGAN        Director                                           March 18, 1999
- -----------------------------                                                    
            Gill Cogan                                                           
                                                                                 

    /s/ JEAN-LOUIS GASSEE      Director                                           March 18, 1999
- -----------------------------                                                    
       Jean-Louis Gassee                                                         
                                                                                 

        /s/ DAN MAYDAN         Director                                           March 18, 1999
- -----------------------------                                                    
            Dan Maydan                                                           

                                                                                 
    /s/ THOMAS UNTERBERG       Director                                           March 18, 1999
- -----------------------------                                                    
        Thomas Unterberg                                                         
</TABLE>
                                                                      
                                                                         

                                       48



<PAGE>


                                 EXHIBIT INDEX


 Exhibit
   No.                               Description
 -------                             -----------
  3.1     Amended and Restated Certificate of Incorporation.(2)
  3.2     Bylaws as amended.(1)
  4.1     See Exhibit 3.1
  4.2     Specimen Common Stock certificate of the Company.(1)
 10.1     Agreement  of Lease  dated as of July 30,  1992,  by and  between  the
          Company and The Joseph and Eda Pell Revocable  Trust for the Company's
          new executive office in San Mateo, California.(1)
 10.2     First  Addendum to Lease dated as of July 30, 1992, by and between the
          Company and The Joseph and Eda Pell Revocable Trust.(1)
 10.3+    License  Agreement,  dated as of February 9, 1990, between the Company
          and the Massachusetts Institute of Technology.(1)
 10.4     Amendment to License  Agreement  dated December 31, 1990,  between the
          Company and the Massachusetts Institute of Technology.(1)
 10.5     Amendment to License  Agreement dated May 29, 1991 and March 19, 1991,
          by  and  between  the  Company  and  the  Massachusetts  Institute  of
          Technology.(1)
 10.6+    Third  Amendment  to License  Agreement  dated  June 1,  1992,  by and
          between the Company and the Massachusetts Institute of Technology.(1)
 10.7+    Patent Sublicense Agreement,  dated March 7, 1990, between the Company
          and Toyo Ink Mfg. Co., Ltd.(1)
 10.8+    Know-How License  Agreement,  dated March 7, 1990, between the Company
          and Toyo Ink Mfg. Co., Ltd.(1)
 10.9+    License  Agreement,  dated as of January 11, 1991,  by and between the
          Company and Eastman Kodak Company, as amended March 10, 1992.(1)
 10.10+   License Agreement, dated March 1, 1991, by and between the Company and
          Adobe Systems Incorporated, as amended May 22, 1991.(1)
 10.11+   Custom PostScript Interpreter OEM License Agreement, dated as of March
          1, 1991, by and between the Company and Adobe Systems Incorporated.(1)
 10.12+   Agreement  dated  September  6, 1991,  by and  between the Company and
          Xerox  Corporation.(1)  10.13+ Patent License Agreement dated December
          12, 1991, by and between the Company and Xerox Corporation.(1)
 10.14+   Patent  License  Agreement  dated January 29, 1992, by and between the
          Company and Minolta Camera Co., Ltd.(1)
 10.15    License  Agreement  dated December 3, 1991, by and between the Company
          and Scitex Corporation Ltd.(1)
 10.16+   Patent  License  Agreement  dated June 11,  1992,  by and  between the
          Company and Victor Company of Japan.(1)
 10.17+   License  Agreement  dated May 2, 1991,  by and between the Company and
          Pantone, Inc.(1)
 10.18    Advisory  Agreement,  dated May 25,  1989,  between  the  Company  and
          William F. Schreiber.(1)
 10.19**  1989 Stock Plan of the Company.(1)
 10.20**  1990 Stock Plan of the Company.(1)
 10.21**  Form of Indemnification Agreement.(1)
 10.22+   Patent  License  Agreement  dated May 28,  1991,  by and  between  the
          Company and Canon Inc.(1)
 10.23**  Employment Agreement dated July 17, 1995, by and between Dan Avida and
          the Company.(3)
 10.24**  Employment  Agreement dated July 17, 1995, by and between Jeff Lenches
          and the Company.(3)


<PAGE>
 
 Exhibit
   No.                               Description
 -------                             -----------
 10.25**  Employment  Agreement  dated  July  17,  1995,  by  and  between  Fred
          Rosenzweig and the Company.(3)
 10.26**  Employment  Agreement  dated  October 15,  1995,  by and between  Eric
          Saltzman and the Company.(3)
 10.27**  Master Lease and Open End  Mortgages  dated as of July 18, 1997 by and
          between the Company and FBTC Leasing Corp. for the lease  financing of
          the Company's  corporate  headquarters  building to be built in Foster
          City, California.(4)
 21.1     List of Subsidiaries.(1)
 23.1     Consent of PricewaterhouseCoopers LLP.
 24.1     Power of Attorney (see signature page)
 27       Financial Data Schedule

- ------------
**   Items that are management  contracts or compensatory  plans or arrangements
     required to be filed as exhibits pursuant to Item 14 (c) of Form 10-K.

+    The Company has received confidential treatment with respect to portions of
     these documents.

(1)  Filed as an exhibit to the  Company's  Registration  Statement  on Form S-1
     (No. 33-50966) and incorporated herein by reference.

(2)  Filed as an exhibit to the  Company's  Registration  Statement  on Form S-1
     (File No. 33-57382) and incorporated herein by reference.

(3)  Filed as an exhibit  to the  Company's  Annual  Report on Form 10-K for the
     year ended December 31, 1995 (File No. 0-18805) and incorporated  herein by
     reference.

(4)  Filed as an exhibit to the Company's  Quarterly Report on Form 10-Q for the
     quarter ended June 30, 1997 (File No. 0-18805) and  incorporated  herein by
     reference.









                                                                   EXHIBIT 23.1



                      CONSENT OF INDEPENDENT ACCOUNTANTS

     We hereby  consent to the  incorporation  by reference in the  Registration
Statements  on Forms  S-8  (Nos.  33-56422,  33-80523,  33-85762,  33-93602  and
333-11685) of Electronics for Imaging, Inc. of our report dated January 20, 1999
appearing in this Form 10-K. We also consent to the  incorporation  by reference
of our  report on the  Consolidated  Financial  Statement  Schedule,  which also
appears in this Annual Report on Form 10-K.

PRICEWATERHOUSECOOPERS LLP



San Jose, California
March 12, 1999

                                       49





<TABLE> <S> <C>


<ARTICLE>                     5
<LEGEND>
         This schedule contains summary financial information extracted from the
condensed  balance  sheet,  condensed  statement  of  operations  and  condensed
statement of cash flows  included in the Company's  Form 10-K for the year ended
December  31,  1998  and is  qualified  in its  entirety  by  reference  to such
financial statements and the notes thereto.
</LEGEND>
       
<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                              DEC-31-1998
<PERIOD-START>                                 JAN-01-1998
<PERIOD-END>                                   DEC-31-1998
<CASH>                                          53,210
<SECURITIES>                                   269,823
<RECEIVABLES>                                   58,948
<ALLOWANCES>                                     1,454
<INVENTORY>                                     13,726
<CURRENT-ASSETS>                               415,635
<PP&E>                                          79,619
<DEPRECIATION>                                  33,040
<TOTAL-ASSETS>                                 472,032
<CURRENT-LIABILITIES>                           69,332
<BONDS>                                          3,777
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                           535
<OTHER-SE>                                     398,388
<TOTAL-LIABILITY-AND-EQUITY>                   398,923
<SALES>                                        430,723
<TOTAL-REVENUES>                               430,723
<CGS>                                          242,096
<TOTAL-COSTS>                                  242,096
<OTHER-EXPENSES>                               130,587
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                   0
<INCOME-PRETAX>                                 67,708
<INCOME-TAX>                                    21,667
<INCOME-CONTINUING>                             46,041
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                    46,041
<EPS-PRIMARY>                                     0.87
<EPS-DILUTED>                                     0.85
        



</TABLE>