EFI reported a loss yesterday on quarterly revenue of $138.2 million - down from $142.1 million the same period a year ago. Non-GAAP (excluding charges) net income was $18.5 million compared to $21.8 million for the same period in 2005. A tough quarter, but recoverable considering EFI has one of the best portfolios in the industry and is still in the middle of integrating profitable acquisitions. Additionally, the rough quarter can be blamed on partners like Canon who have lagged in getting products to the market which EFI depends upon to sell their software and servers.

More importantly, the company announced an internal investigation of EFI's historical stock option grants. EFI has found "potential errors related to certain historical grants". EFI has notified the SEC of this ongoing review. The Company also announced that two shareholder derivative suits were filed. The complaints allege, among other things, that officers and directors breached their fiduciary duty to the Company by improperly backdating certain grants of EFI stock options to officers of the company and violating the terms of EFI's stock option plans.

The bad news is that many companies that have found potential errors in their stock grants have lost key executives since someone has to take the fall. Earlier this month the options backdating backlash led to executives at CNET Networks and McAfee being fired after internal probes. It is too soon to know what will happen at EFI, but shareholders should hope this investigation is over quickly and that current management is spared. It should go without saying that the top few executives at EFI are the ones with the vision for today's EFI - a more diversified and healthy company. It would be unfortunate if EFI lost any of its key executives as a result of this investigation.