Forward-looking Statements

This Quarterly Report on Form 10-Q ("Report"), including the "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements regarding future events and the future results of the Company that are based on current expectations, estimates, forecasts, and projections about the industry in which the Company operates and the beliefs and assumptions of the management of the Company. Words such as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," variations of such words, and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Report under the section entitled "Risk Factors" in Item 1A of Part II and elsewhere, and in other reports the Company files with the Securities and Exchange Commission ("SEC"). The following discussion should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (the "2007 Form 10-K") and the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. The Company undertakes no obligation to revise or update publicly any forward-looking statements for any reason, except as required by law.

Business Overview

We are the world leader in color digital print controllers, super-wide format printers and inks and print management solutions. Our award-winning solutions, integrated from creation to print, deliver increased performance, cost savings and productivity. Our robust product portfolio includes Fiery digital color print servers, VUTEk superwide digital inkjet printers, UV and solvent inks, Jetrion industrial inkjet printing systems, print production workflow and management information software, and corporate printing solutions. Our integrated solutions and award-winning technologies are designed to automate print and business processes, streamline workflow, provide profitable value-added services and produce accurate digital output.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported. Please see the discussion of critical accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2007.

Recent Accounting Pronouncements

See Note 1 of our Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption.

Results of Operations

The following table sets forth items in our condensed consolidated statements of
operations as a percentage of total revenue for the three and nine months ended
September 30, 2008 and 2007. These operating results are not necessarily
indicative of our results for any future period.



                                      Three months ended September 30,               Nine months ended September 30,
                                       2008                      2007                 2008                      2007
Revenue                                     100 %                     100 %                100 %                     100 %
Gross Profit                                 57 %                      58 %                 57 %                      59 %
Operating expenses:
Research and development                     23 %                      23 %                 25 %                      23 %
Sales and marketing                          21 %                      19 %                 21 %                      19 %
General and administrative                    9 %                      10 %                 10 %                      11 %
Restructuring and other                       3 %                       1 %                  2 %                      -  %
Amortization of identified
intangibles and in-process
research & development                        7 %                       5 %                  6 %                       6 %

Total operating expenses                     63 %                      58 %                 64 %                      59 %

Income (loss) from
operations                                   (6 )%                     -  %                 (7 )%                     -  %
Interest and other income,
net                                          -  %                       4 %                  3 %                       4 %

Income (loss) before income
taxes                                        (6 )%                      4 %                 (4 )%                      4 %
Benefit from income taxes                     3 %                       1 %                  2 %                      -  %

Net income (loss)                            (3 )%                      5 %                 (2 )%                      4 %

Revenue

We currently classify our revenue into three categories. The first category, "Controllers," includes products and technology which connect digital copiers with computer networks, and is made up of stand-alone controllers and embedded desktop controllers, bundled solutions and design-licensed solutions primarily for the office market and commercial printing. This category includes our Fiery series (external print servers and embedded servers), Splash and MicroPress, color and black and white server products, software options for Fiery products and parts. It also includes server-related revenue comprised of scanning solutions. The second category, "Inkjet Products," consists of sales of the super-wide format inkjet printers, industrial inkjet printers, inks, and parts and services revenue from the VUTEk and Jetrion businesses. The third category, "Advanced Professional Print Software," or "APPS", consists of software technology focused on printing workflow, print management information systems, proofing, web submission and job tracking tools.

On a sequential basis, the revenue performance in the third quarter of 2008 was $0.8 million or 1% higher than second quarter of 2008 results, with all product categories contributing to the increase with the exception of Controller products. Revenue in the Controller category decreased by $4.2 million or 6% largely due to the decline in sales growth of embedded products and print servers. Inkjet Products increased by $2.8 million or 5% was primarily driven by increased sales of inkjet printers and accessories. Revenue in the APPS category increased by $2.2 million or 16% mainly due to the inclusion of revenue contributed by Pace which we acquired in late July, 2008.

Revenues by Product Category

For the three months ended September 30, 2008 and 2007, revenues by product
category were as follows (in thousands):



                                                           Three months ended September 30,
                                                      Percent                  Percent           Change
                                            2008      of total     2007 (1)    of total         $          %
Controllers                               $  68,036         47 %   $  86,303         55 %   $ (18,267 )   (21 )%
Inkjet Products                              60,805         42 %      57,057         36 %       3,748       7 %
Advanced Professional Printing Software      15,825         11 %      14,935          9 %         890       6 %

Total revenue                             $ 144,666        100 %   $ 158,295        100 %   $ (13,629 )    (9 )%

(1) Revenues in the Controllers and Advanced Professional Print Software categories for the three and nine months ended September 30, 2007 have been revised to reflect the reclassification of Controllers-related software revenue from the Advanced Professional Print Software category to the Controllers category. Total revenue for the three and nine months ended September 30, 2007 has not changed.

Total revenues decreased by 9% to $144.7 million in the third quarter of 2008, compared to $158.3 million in the third quarter of 2007. The Controllers category decrease of 21% in the third quarter of 2008 when compared to the same period in 2007 was mostly due to a decline in sales of stand alone print servers and embedded products. The decline was caused by

reduced demand from most of our OEM customers throughout the world due to a slowing global economy. The tightening of the global credit markets also indirectly contributed to the decline as it has become relatively more difficult for some customers to obtain equipment financing. Inkjet revenue increased by 7% in the third quarter of 2008 when compared to the third quarter of 2007 due mostly to higher sales in ink and services year-over-year. Also, the introduction of the Jetrion 4000 Series printers launched near the end of the second quarter of 2008 contributed to the increase in sales of inkjet printers. APPS revenue increased by 6% compared to the third quarter of 2007 primarily due to revenue from the Pace acquisition.

For the nine months ended September 30, 2008 and 2007, revenues by product category were as follows (in thousands):

                                                            Nine months ended September 30,
                                                      Percent                  Percent           Change
                                            2008      of total     2007 (1)    of total         $          %
Controllers                               $ 208,547         49 %   $ 264,517         56 %   $ (55,970 )   (21 )%
Inkjet Products                             172,185         41 %     159,989         34 %      12,196       8 %
Advanced Professional Printing Software      44,384         10 %      44,061         10 %         323       1 %

Total revenue                             $ 425,116        100 %   $ 468,567        100 %   $ (43,451 )    (9 )%

(1) Revenues in the Controllers and Advanced Professional Print Software categories for the three and nine months ended September 30, 2007 have been revised to reflect the reclassification of Controllers-related software revenue from the Advanced Professional Print Software category to the Controllers category. Total revenue for the three and nine months ended September 30, 2007 has not changed.

Total revenue decreased by 9% to $425.1 million for the nine months ended September 30, 2008, compared to $468.6 million in the same period of 2007. Controller revenue decreased by 21% for the nine months ended September 30, 2008 primarily due to a significant slowdown in sales of standalone printer servers and a slight decline in sales of embedded products year-over-year caused by reduced demand from our OEM customers as a result of the slowing economy. The growth of Inkjet Products revenue, which increased by 8%, was mainly due to a strong recurring ink revenue stream. Revenue in APPS increased by 1% for the nine months ended September 30, 2008 compared to the same period in 2007 mainly due to benefits from the Pace acquisition completed in July, 2008.

Revenues by Geographic Area

Revenues by geographic regions for the three months ended September 30, 2008 and
2007 were as follows (in thousands):



                                                           Three months ended September 30,
                                                      Percent                  Percent           Change
                                            2008      of total       2007      of total         $          %
Americas                                  $  77,274         53 %   $  84,609         54 %   $  (7,335 )    (9 )%
EMEA                                         49,885         35 %      53,808         34 %   $  (3,923 )    (7 )%
Japan                                        13,755          9 %      14,768          9 %   $  (1,013 )    (7 )%
Other international locations                 3,752          3 %       5,110          3 %   $  (1,358 )   (27 )%

Total revenue                             $ 144,666        100 %   $ 158,295        100 %   $ (13,629 )    (9 )%

Americas accounted for 54% of the overall decrease in revenues for the three months ended September 30, 2008 compared to the same period in 2007, primarily due to weakness in sales of our Controllers products that was caused by the reduction in demand from our OEMs' customers due to a slowing of the economy. Europe, Middle East, and Africa ("EMEA") decreased 7% in revenue primarily due to the slowing economy and tightening of credit markets in Europe while Japan decreased 7% in revenue as a result of lower demand in our Controllers products. Other international locations decreased by 27% in revenue mainly driven by lower sales from the impact of macro economic conditions.

The following table shows revenue by geographic area for the nine months ended September 30, 2008 and 2007 (in thousands):

                                                            Nine months ended September 30,
                                                      Percent                  Percent           Change
                                            2008      of total       2007      of total         $          %
Americas                                  $ 220,830         52 %   $ 250,232         53 %   $ (29,402 )   (12 )%
EMEA                                        152,468         36 %     161,667         35 %   $  (9,199 )    (6 )%
Japan                                        38,224          9 %      42,977          9 %   $  (4,753 )   (11 )%
Other international locations                13,594          3 %      13,691          3 %   $     (97 )    (1 )%

Total revenue                             $ 425,116        100 %   $ 468,567        100 %   $ (43,451 )    (9 )%

Americas accounted for 68% of the overall decrease in revenues for the nine months ended September 30 2008 compared to the same period in 2007 mainly due to weakness in sales of our Controllers products that was caused by the reduction in demand from our customers as a result of the slowing economy. EMEA decreased 6% and Japan decreased 11% in revenue respectively, due to weakness in sales of Controller products.

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

A substantial portion of our revenue over the years has been attributable to sales of products through our OEM customers and independent distributor channels. For the nine month period ended September 30, 2008, two customers - Canon and Xerox - each provided more than 10% of our revenue individually and approximately 30% of revenue in the aggregate. For the nine month period ended September 30, 2007, three customers - Canon, Konica Minolta and Xerox - each provided more than 10% of our revenue individually and approximately 47% of revenue in the aggregate.

The decreasing revenue reliance from our major OEM partners is attributable to the increase in the Inkjet Products business where most of the revenue is generated from sales to distributors and direct customers. No assurance can be given that our relationships with these and other significant OEM customers will continue or that we will be successful in increasing the number of our OEM customers or the size of our existing OEM relationships. Several of our OEM customers have reduced their purchases from us at various times in the past and any customer could do so in the future as there are no contractual obligations by most of our OEMs to purchase our products at all, or in significant amounts. Such reductions have in the past and could in the future have a significant negative impact on our consolidated financial position and results of operations. We expect that if we continue to increase our revenues from Inkjet products and our professional printing applications, the percentage of our revenue that comes from individual OEMs will continue to decrease.

We intend to continue to develop new products and technologies for each of our product lines including new generations of server and controller products and other new product lines and to distribute those new products to or through current and new OEM customers, distribution partners, and end-users in 2008 and beyond. No assurance can be given that the introduction or market acceptance of current or future products will be successful.

To the extent sales of our products do not grow over time in absolute terms, or if we are not able to meet demand for higher unit volumes, it could have a material adverse effect on our operating results. There can be no assurance that any products that we introduce in the future will successfully compete, be accepted by the market, or otherwise effectively replace the volume of revenue and/or income from our older products. Market acceptance of our software products, products acquired through acquisitions and other products cannot be assured. In addition, we may experience potential loss of sales, unexpected costs or adverse impact on relationships with customers or suppliers as a result of acquisitions.

We also believe that in addition to the factors described above, price reductions for all of our products will affect revenues in the future. We have previously reduced and in the future will likely change prices for our products. Depending upon the price-elasticity of demand for our products, the pricing and quality of competitive products, and other economic and competitive conditions, price changes have had and may in the future have an adverse impact on our revenues and profits.

Gross Margins

For the three months ended September 30, 2008 our gross margin was 57% compared to 58% for the same period in 2007. For the nine months ended September 30, 2008 our gross margin was 57% compared to 59% for the same period in 2007. The decrease in overall margins was impacted by the mix of revenues as Inkjet margins tend to be lower than Controller and

APPS margins. If our Inkjet revenue continues to increase as a percentage of overall revenues, our gross margins may continue to decline. For the three months ended September 30 2008, revenue from Inkjet increased to 42% from 36% of total revenue as compared to the same period in 2007. For the nine months ended September 30 2008, revenue from Inkjet increased to 41% from 34%.

Operating Expenses

The following table shows operating expenses for the three and nine months ended
September 30, 2008 and 2007 (in thousands):



                                      Three months ended September 30,                Nine months ended September 30,
                                                                Change                                        Change
                                    2008         2007         $          %         2008        2007          $          %
Research and development         $   33,782    $  36,268   $ (2,486 )    (7 )%   $ 106,157   $ 106,941   $    (784 )    (1 )%
Sales and marketing                  30,249       30,204   $     45       0 %       90,650      89,990   $     660       1 %
General and administrative           13,517       15,388   $ (1,871 )   (12 )%      40,540      53,022   $ (12,482 )   (24 )%
Restructuring and other               3,576        1,196   $  2,380     199 %        8,790       1,500   $   7,290     486 %
Amortization of identified
intangibles and in-process
research & development                9,560        8,655   $    905      10 %       23,952      26,085   $  (2,133 )    (8 )%

Total operating expenses         $   90,684    $  91,711   $ (1,027 )            $ 270,089   $ 277,538   $  (7,449 )

Operating expenses including amortization of intangible assets, in-process research & development, and stock-based compensation costs as a percentage of revenue were 63% and 58% for the three months ended September 30, 2008 and 2007, respectively. Total operating expenses including amortization of intangible assets and in-process research & development, and stock-based compensation costs as a percentage of revenue, were 64% and 59% for the nine month periods ended September 30, 2008 and 2007, respectively. Total operating expenses decreased for the three and nine months ended September 30, 2008 compared to the same periods in 2007. This was mainly due to a decrease of expenses in the general and administrative area primarily as a result of a reduction in expenses related to the stock option review in 2007 offset by an increase in Restructuring and other, and stock-based compensation costs. The Company incurred an in-process research & development write-off cost of $2.0 million for the three months ended September 30, 2008 as a result of the acquisition of Pace in July, 2008.

Research and Development

Expenses for research and development consist primarily of costs associated with personnel, consulting and prototype materials.

Research and development expenses for the three months ended September 30, 2008 totaled $33.8 million or 23% of revenue compared to $36.3 million or 23% of revenue for the three months ended September 30, 2007, a decrease of $2.5 million or 7%. The reduction of $2.5 million was primarily due to decreases in salaries and bonus expenses of $1.2 million as a result of headcount reductions in the first and third quarters of 2008, consulting and prototype expense of $1.0 million, and the absence of a one-time bonus expense of $1.8 million paid in 2007 to employees which were unable to participate in the employee stock purchase plan during the stock option investigation offset primarily by increases in stock-based compensation cost of $0.5 million, and allocation of overhead expenses of $1.0 million due to a change in allocation methodology in certain overhead expenses.

Research and development expenses for the nine months ended September 30, 2008 were $106.2 million or 25% of revenue compared to $107.0 million or 23% of revenue for the nine months ended September 30, 2007. The reduction of $0.8 million or 1% was primarily due to decreases in salaries and bonus expenses of $1.7 million as a result of headcount reductions in the first and third quarters of 2008, prototype and engineering expenses of $2.6 million, and the absence of a one-time bonus expense of $1.8 million paid in 2007 to employees which were unable to exercise their stock purchase plan during the stock option investigation offset mainly by increases in stock-based compensation expense of $2.6 million, and a higher allocation of overhead cost of $2.6 million due to a change in allocation methodology.

We believe that the development of new products and the enhancement of existing products are essential and intend to continue to devote substantial resources to research and new product development efforts. Accordingly, research and development expenses may increase in absolute dollars and also as a percentage of revenue in future periods.

Sales and Marketing

Sales and marketing expenses include personnel expenses, costs of trade shows, marketing programs and promotional materials, sales commissions, travel and entertainment expenses, depreciation, and costs associated with sales offices in the United States, Europe, and other locations around the world.

Sales and marketing expenses for the three months ended September 30, 2008 totaled $30.2 million or 21% of revenue compared to $30.2 million or 19% of revenue for the three months ended September 30, 2007. Sales and marketing expenses remained flat was primarily due to increases in salaries expense of $0.9 million and stock-based compensation expense of $0.6 million offset primarily by decreases in consulting and trade show expenses of $1.1 million, and the absence of a one-time bonus expense of $0.4 million paid in 2007 to employees which were unable to participate in the employee stock purchase plan during the stock option investigation.

Sales and marketing expenses for the nine months ended September 30, 2008 were $90.7 million or 21% of revenue compared to $90.0 million or 19% of revenue for the nine months ended September 30, 2007, an increase of $0.7 million or 1% was primarily due to increases in stock-based compensation cost of $1.6 million, salaries cost of $3.2 million, and a higher overhead allocation cost of $0.6 million due to change in allocation methodology in certain overhead expenses. The increase of these costs were offset primarily by decreases in commissions and benefits expenses of $1.5 million, traveling and consulting costs of $1.4 million, marketing expenses of $1.4 million. The absence of a one-time bonus cost of $0.4 million paid in 2007 also contributed to the decrease.

We expect that our sales and marketing expenses may increase in absolute dollars as we continue to actively promote our products, introduce new products and services, and continue to build our sales and marketing organization, particularly in Europe and Asia Pacific. Sales and marketing expenses may also increase as we continue to grow our software solutions, Inkjet products, and other new product lines, which require greater sales and marketing support from us. We expect that if the U.S. dollar remains volatile against the Euro or other currencies, sales and marketing expenses reported in U.S. dollars could fluctuate.

General and Administrative

General and administrative expenses consist primarily of expenses associated with administrative personnel, legal, and finance.

General and administrative expenses for the three months ended September 30, 2008 totaled $13.5 million or 9% of revenue compared to $15.4 million or 10% of revenue for the three months ended September 30, 2007, a decrease of $1.9 million or 12% due to decreases in accounting expense of $2.9 million related to the stock option investigation completed in 2007, and lower allocation of overhead cost of $1.5 million as a result of a change in allocation methodology of certain overhead expenses. The cost reductions were mainly offset by increases in stock-based compensation expense of $1.0 million, and legal expense of $1.6 million.

General and administrative expenses for the nine months ended September 30, 2008 were $40.5 million or 10% of revenue compared to $53.0 million or 11% of revenue for the nine months ended September 30, 2007, a reduction of $12.5 million or 24% due to decreases of $12.5 million in legal and accounting expenses related to the stock option investigation completed in 2007 and U.S. Internal Revenue . . .