We present an analysis of the diffraction efficiency of diffractive lenses displayed on spatial light modulators that depends on the modulation response of the display. An ideal display would produce continuous phase-only modulation, reaching a maximum phase-modulation depth of 2π. We introduce the concept of modulation diffraction efficiency that accounts for the effect of nonlinearities only in the phase modulation of the display. We review a diffractive model with which to evaluate this modulation efficiency, including modulation defects such as nonlinear phase modulation, coupled amplitude modulation, phase quantization, and a limited modulation depth. We apply this diffractive model to Fresnel lenses and show that these modulation defects produce a lens multiplex effect. Finally we demonstrate that the application of a minimum Euclidean projection principle leads to high modulation diffraction efficiency even if the phase-modulation depth is much less than 2π. We demonstrate that the modulation efficiency can exceed 90% for a modulation depth of 1.4π and can exceed 40% (the equivalent for a binary phase element) for a modulation depth of only 0.7π. Experimental results from use of a twisted nematic liquid-crystal display are presented to confirm these conclusions. © 2004 Optical Society of America.