Edgar Filing: PRESSTEK INC /DE/

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 29, 2007

		or

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

		For the transition period from to

Commission file number 0-17541

PRESSTEK, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware (State or other Jurisdiction of Incorporation or Organization)		02-0415170 (I.R.S. Employer Identification No.)


2 Greenwich Office Park Greenwich, Connecticut (Address of Principal Executive Offices)		06831 (Zip Code)

Registrant’s telephone number, including area code (866) 535-2230

Indicate by check mark whether the registrant (1) has filed all reports required to be filed 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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Act. (Check one):

Large accelerated filer £ Accelerated filer R Non-accelerated filer £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of January 28, 2008, there were 36,583,914 shares of the Registrant’s Common Stock, $0.01 par value, outstanding.

PRESSTEK, INC.

INDEX

		PAGE
PART I	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements

	Consolidated Balance Sheets as of September 29, 2007 and December 30, 2006 (Unaudited)	3

	Consolidated Statements of Operations for the three and nine months ended September 29, 2007 and September 30, 2006 (Unaudited)	4

	Consolidated Statements of Cash Flows for the nine months ended September 29, 2007 and September 30, 2006 (Unaudited)	5

	Notes to Consolidated Financial Statements (Unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4.	Controls and Procedures	43

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	47

Item 6.	Exhibits	47

	Signatures	48

	Exhibit Index	49

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

PRESSTEK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(Unaudited)
		September 29,			December 30,
		2007			2006

ASSETS
Current assets
Cash and cash equivalents		$	8,253		$	9,449
Accounts receivable, net			49,051			53,158
Inventories			50,226			46,050
Deferred income taxes			4,210			4,162
Other current assets			3,103			2,600
Assets of discontinued operations			74			3,321
	Total current assets		114,917			118,740

Property, plant and equipment, net			39,500			42,194
Goodwill			19,807			20,280
Intangible assets, net			6,750			8,741
Deferred income taxes			11,896			7,515
Other noncurrent assets			946			544

	Total assets	$	193,816		$	198,014

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt and capital lease obligation		$	7,039		$	7,037
Line of credit			21,000			15,000
Accounts payable			21,982			27,126
Accrued expenses			16,088			10,471
Deferred revenue			7,532			7,901
Liabilities of discontinued operations			722			3,707
	Total current liabilities		74,363			71,242

Long-term debt and capital lease obligation, less current portion			10,259			15,535

	Total liabilities		84,622			86,777

Commitments and contingencies (See Note 20)

Stockholders' equity
Preferred stock, $0.01 par value, 1,000,000 shares authorized, no shares issued			-			-
Common stock, $0.01 par value, 75,000,000 shares authorized, 36,548,682 and
	35,662,318 shares issued and outstanding at September 29, 2007 and
	December 30, 2006, respectively		366			357
Additional paid-in capital			115,276			108,769
Accumulated other comprehensive income			1,162			297
Retained earnings (accumulated deficit)			(7,610	)		1,814
	Total stockholders' equity		109,194			111,237

	Total liabilities and stockholders' equity	$	193,816		$	198,014


The accompanying notes are an integral part of these consolidated financial statements.

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PRESSTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share data)
(Unaudited)

	Three months ended						Nine months ended
	September 29,			September 30,			September 29,			September 30,
	2007			2006			2007			2006

Revenue
Product	$	50,124		$	50,578		$	164,239		$	164,924
Service and parts		9,488			10,841			29,276			34,705
Total revenue		59,612			61,419			193,515			199,629

Cost of revenue
Product		36,759			35,280			117,086			114,962
Service and parts		8,097			8,095			24,568			25,074
Total cost of revenue		44,856			43,375			141,654			140,036

Gross profit		14,756			18,044			51,861			59,593

Operating expenses
Research and development		1,492			1,660			4,746			4,885
Sales, marketing and customer support		9,503			9,920			30,319			29,824
General and administrative		9,150			5,585			24,407			14,738
Amortization of intangible assets		577			807			1,999			2,336
Restructuring and other charges		398			(208	)		1,527			(208	)
Total operating expenses		21,120			17,764			62,998			51,575

Operating income (loss)		(6,364	)		280			(11,137	)		8,018
Interest and other income (expense), net		(586	)		(96	)		(2,476	)		(1,264	)

Income (loss) before income taxes		(6,950	)		184			(13,613	)		6,754
Provision (benefit) for income taxes		(3,324	)		224			(4,267	)		1,237

Income (loss) from continuing operations		(3,626	)		(40	)		(9,346	)		5,517
Income (loss) from discontinued operations, net of tax	$	10			(383	)	$	(78	)		(470	)

Net income (loss)	$	(3,616	)	$	(423	)	$	(9,424	)	$	5,047



Earnings (loss) per share - basic
Income (loss) from continuing operations	$	(0.10	)	$	(0.00	)	$	(0.26	)	$	0.16
Loss from discontinued operations		0.00			(0.01	)		(0.00	)		(0.01	)
	$	(0.10	)	$	(0.01	)	$	(0.26	)	$	0.15
Earnings (loss) per share - diluted
Income (loss) from continuing operations	$	(0.10	)	$	(0.00	)	$	(0.26	)	$	0.16
Loss from discontinued operations		0.00			(0.01	)		(0.00	)		(0.01	)
	$	(0.10	)	$	(0.01	)	$	(0.26	)	$	0.15

Weighted average shares outstanding
Weighted average shares outstanding - basic		36,545			35,609			36,080			35,541
Dilutive effect of options		-			-			-			386
Weighed average shares outstanding - diluted		36,545			35,609			36,080			35,927


The accompanying notes are an integral part of these consolidated financial statements.

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PRESSTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

	Nine months ended
	September 29,			September 30,
	2007			2006
Operating activities
Net income (loss)	$	(9,424	)	$	5,047
Add loss from discontinued operations		78			470
Income (loss) from continuing operations		(9,346	)		5,517
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		5,232			5,247
Amortization of intangible assets		1,999			2,336
Restructuring and other charges		1,527			(208	)
Provision for warranty costs		2,854			2,703
Provision for accounts receivable allowances		1,542			78
Stock compensation expense		3,447			207
Deferred income taxes		(4,429	)		-
Loss on disposal of assets		117			72
Changes in operating assets and liabilities, net of effects from business acquisitions and divestitures:
Accounts receivable		2,113			(8,064	)
Inventories		(3,988	)		5,148
Other current assets		(503	)		(1,545	)
Other noncurrent assets		70			28
Accounts payable		(5,159	)		3,606
Accrued expenses		1,657			(6,360	)
Deferred revenue		(365	)		(541	)
Net cash provided by (used in) operating activities		(3,232	)		8,224

Investing activities
Purchase of property, plant and equipment		(2,533	)		(3,297	)
Business acquisitions, net of cash acquired		(20	)		(693	)
Investment in patents and other intangible assets		(58	)		(2,237	)
Net cash used in investing activities		(2,611	)		(6,227	)

Financing activities
Net proceeds from the exercise of stock options and the issuance of common stock		3,069			1,847
Repayments of term loan and capital lease		(5,274	)		(5,273	)
Net borrowings under line of credit agreement		6,000			2,964
Net cash provided by (used in) financing activities		3,795			(462	)

Cash provided by (used in) discontinued operations
Operating activities		185			(599	)
Investing activities		-			(178	)
Financing activites					-
Net cash provided by discontinued operations		185			(777	)

Effect of exchange rate changes on cash and cash equivalents		667			(28	)

Net increase (decrease) in cash and cash equivalents		(1,196	)		730
Cash and cash equivalents, beginning of period		9,449			5,615
Cash and cash equivalents, end of period	$	8,253		$	6,345


Supplemental disclosure of cash flow information
Cash paid for interest	$	2,417		$	1,704
Cash paid for income taxes	$	374		$	1,132


The accompanying notes are an integral part of these consolidated financial statements.

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PRESSTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(Unaudited)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

In the opinion of management, the accompanying consolidated financial statements of Presstek, Inc. and its subsidiaries (“Presstek,” the “Company,” “we” or “us”) contain all adjustments, including normal recurring adjustments, necessary to present fairly Presstek’s financial position as of September 29, 2007 and December 30, 2006, its results of operations for the three and nine months ended September 29, 2007 and September 30, 2006 and its cash flows for the nine months ended September 29, 2007 and September 30, 2006, in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and the interim reporting requirements of Form 10-Q. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.

The results of the three and nine months ended September 29, 2007 are not necessarily indicative of the results to be expected for the fiscal year ending December 29, 2007. The information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk” and the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2006, filed with the U.S. Securities and Exchange Commission (“SEC”) on April 25, 2007.

The Company’s operations are currently organized into two segments: (i) Presstek and (ii) Lasertel. The Presstek segment is primarily engaged in the development, manufacture, sale and servicing of the Company’s patented digital imaging systems and patented printing plate technologies as well as traditional, analog systems and related equipment and supplies for the graphic arts and printing industries, primarily the short-run, full-color market segment. The Lasertel segment manufactures and develops high-powered laser diodes and related laser products for the Presstek segment and for sale to external customers. Any future changes to this organizational structure may result in changes to the segments currently disclosed.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany transactions and balances have been eliminated.

The Company operates and reports on a 52- or 53-week, fiscal year ending on the Saturday closest to December 31. Accordingly, the accompanying consolidated financial statements include the thirteen and thirty-nine week periods ended September 29, 2007 (the “third quarter and nine months ended September 29, 2007” or the “three and nine months ended September 29, 2007”) and September 30, 2006 (the “third quarter and nine months ended September 30, 2006” or the “three and nine months ended September 30, 2006”).

Earnings (Loss) per Share

Earnings (loss) per share is computed in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings per Share (“SFAS 128”). Accordingly, basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. For periods in which there is net income, diluted earnings per share is determined by using the weighted average number

of common shares and dilutive common equivalent shares outstanding during the period unless the effect is antidilutive. Potential dilutive equivalent common shares consist of the incremental common shares issuable upon the exercise of stock options.

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PRESSTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(Unaudited)

Approximately 1,875,400 and 1,849,700 options to purchase common stock were excluded from the calculation of diluted earnings (loss) per share for the three months ended September 29, 2007 and September 30, 2006, respectively, as their effect would be antidilutive. Approximately 1,967,400 and 878,300 options to purchase common stock were excluded from the calculation of diluted earnings per share for the nine months ended September 29, 2007 and September 30, 2006, respectively, as their effect would be antidilutive.

Foreign Currency Translation and Transactions

The Company’s foreign subsidiaries use the local currency as their functional currency. Accordingly, assets and liabilities are translated into U.S. dollars at current rates of exchange in effect at the balance sheet date. Revenues and expenses from these subsidiaries are translated at average monthly exchange rates in effect for the periods in which the transactions occur. The resulting unrealized gains or losses are reported under the caption “Accumulated other comprehensive income (loss)” in the Company’s Consolidated Balance Sheets.

Gains and losses arising from foreign currency transactions are reported as a component of “Interest and other income (expense), net” in the Company’s Consolidated Statements of Operations. The Company recorded gains on foreign currency transactions of approximately $0.3 million and $29,000 for the three and nine months ended September 29, 2007, respectively. The Company recorded gains on foreign currency transactions of approximately $0.2 million and $0.1 million for the three and nine months ended September 30, 2006, respectively.

Reclassifications

Certain amounts in prior periods have been reclassified to conform to the current period presentation.

Use of Estimates

The Company prepares its financial statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates and assumptions also affect the amount of reported revenue and expenses during the period. Management believes the most judgmental estimates include those related to product returns; warranty obligations; allowance for doubtful accounts; slow-moving and obsolete inventories; income taxes; the valuation of goodwill, intangible assets, long-lived assets and deferred tax assets; stock-based compensation and litigation. The Company bases its estimates and assumptions on historical experience and various other appropriate factors, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of revenue and expenses that are not readily apparent from other sources. Actual results could differ from those estimates.

The following discussion supersedes the description of such policies in our Annual Report on Form 10-K for the fiscal year ended December 30, 2006, which was filed with the SEC on April 25, 2007. For a discussion of other critical accounting policies and estimates, refer to such Form 10-K.

Revenue Recognition

The Company derives revenue principally from the sale of products (equipment, printing plates and other consumables, and laser diodes) and services (equipment maintenance contracts, installation, training, support, and spare parts).

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PRESSTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(Unaudited)

Revenue is recognized when persuasive evidence of a sales arrangement exists, delivery has occurred or services have been rendered, the price to the customer is fixed or determinable, and collection is reasonably assured. Amounts invoiced to customers in excess of revenue recognized are recorded as deferred revenue until all revenue recognition criteria are met.

Product revenue

End-Users - Under the Company’s standard terms and conditions of sale of equipment, title and risk of loss are transferred to end-user customers upon completion of installation and revenue is recognized at that time, unless customer acceptance is uncertain or significant deliverables remain. Sales of other products, including printing plates, are generally recognized at the time of shipment.

OEMs - Product revenue and any related royalties for products sold to Original Equipment Manufacturers (“OEM” or “OEMs”) are recognized at the time of shipment as installation is not required and title and risk of loss pass at shipment. OEM contracts do not generally include price protection or product return rights; however, the Company may elect, in certain circumstances, to accept returns of product.

Distributors - Revenue for product sold to distributors, whereby the distributor is responsible for installation, is recognized at shipment, unless other revenue recognition criteria have not been met. Revenue for product sold to distributors under contracts which involve Company installation of equipment is recognized upon installation, unless end-user customer acceptance is uncertain, significant deliverables remain, or other revenue recognition criteria have not been met. Except in cases of contract termination (which may include limited product return rights), distributor contracts do not generally include price protection or product return rights; however, the Company may elect, in certain circumstances, to accept returns of product.

Service and parts revenue

Revenue for installation services, including time and material billings, are recognized as services are rendered. Revenue associated with maintenance or extended service agreements is recognized ratably over the contract period. Revenue associated with training and support services is recognized as services are rendered. Certain fees and other reimbursements are recognized as revenue when the related services have been performed or the revenue is otherwise earned.

Leases

The Company may offer customer financing to assist customers in the acquisition of Presstek products. At the time a financing transaction is consummated, which qualifies as a sales-type lease, the Company records equipment revenue equal to the net present value of future lease payments. Any remaining balance is recognized as finance income using the effective interest method over the term of the lease. Leases not qualifying as sales-type leases are accounted for as operating leases. The company recognizes revenue from operating leases on an accrual basis as the rental payments become due.

Multiple element arrangements

In accordance with Staff Accounting Bulletin (“SAB”) No. 104 Revenue Recognition (“SAB 104”) and Emerging Issues Task Force (“EITF”) Issue 00-21 Revenue Arrangements with Multiple Deliverables (“EITF 00-21”), when a sales arrangement contains multiple elements, such as equipment, consumables or services, revenue is allocated to each element based on its relative fair value. The fair value of any undelivered elements, such as warranty, training and services, is deferred until delivery has occurred or services have been rendered.

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PRESSTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(Unaudited)

Rights of return

A general right of return or cancellation does not exist once product is delivered to the customer; however, the Company may elect, in certain circumstances, to accept returns of product. Product revenues are recorded net of estimated returns, which are adjusted periodically, based upon historical rates of return. The estimated cost of post-sale obligations, including product warranties, is accrued at the time revenue is recognized based on historical experience.

Shipping and handling

The Company accounts for shipping and handling fees passed on to customers as revenue. Shipping and handling costs are reported as components of cost of revenue (product) and cost of revenue (service and parts).

Accounting for Income Taxes

The Company’s policy covering accounting for income taxes, which was disclosed in its Annual Report on Form 10-K for the fiscal year ended December 30, 2006, filed with the SEC on April 25, 2007, was expanded in the first

quarter of fiscal 2007 to include the adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

Recent Accounting Pronouncements

In June 2006, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation) (“EITF 06-3”). EITF 06-3 is effective for periods beginning after December 15, 2006, with earlier application permitted. EITF 06-3 requires disclosure of the accounting policy for any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction (i.e., sales, use, value added) on a gross basis (included in revenues and costs) or net basis (excluded from revenues and costs). The Company excludes these amounts from its revenues and costs; accordingly, no additional disclosure will be required.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 was adopted by the Company in the first quarter of fiscal 2007. The adoption of FIN 48 did not have a material impact on the consolidated results of operations and financial condition.

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PRESSTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(Unaudited)

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 provides guidance for using fair value to measure assets and liabilities. It also responds to investors' requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and is required to be adopted by the Company in fiscal 2008. The Company is currently evaluating the effect that the adoption of SFAS 157 will have on its consolidated results of operations and financial condition but does not expect it to have a material impact.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No 115 ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted, provided the entity also elects to apply the provisions of SFAS 157. The Company is currently evaluating the effect that the adoption of SFAS 159 will have on its consolidated results of operations and financial condition but does not expect it to have a material impact.

In June 2007, the FASB also ratified EITF 07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities" ("EITF 07-3"). EITF 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. EITF 07-3 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007 and will be adopted by the Company in the first quarter of fiscal 2008. The Company does not expect the adoption of EITF 07-3 to have a material effect on its consolidated results of operations and financial condition.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations ("SFAS 141R"). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective as of the beginning of an entity's fiscal year that begins after December 15, 2008, and will be adopted by the Company in the first quarter of fiscal 2009. The Company will apply SFAS 141R prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

Also in December 2007, the FASB issued Statement No. 160, “Non-controlling Interests in Consolidated Financial Statements” (FASB No. 160), which is effective for fiscal years beginning after December 15, 2008. This statement requires all entities to report non-controlling (minority) interests in subsidiaries in the same manner– as equity in the consolidated financial statements. This eliminates the diversity that currently exists in accounting for transactions between an entity and non-controlling interests by requiring that they be treated as equity transactions. The Company will be required to adopt the provisions of FASB No. 160 in the first quarter of 2009 and is currently evaluating the impact of such adoption on its Consolidated Financial Statements.

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PRESSTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(Unaudited)

2. DISCONTINUED OPERATIONS

The Company accounts for its discontinued operations under the provisions of SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (“SFAS 144”). Accordingly, results of operations and the related expenses associated with discontinued operations have been classified as “Income (loss) from discontinued operations, net of tax” in the accompanying Consolidated Statements of Operation. Assets and liabilities of discontinued operations have been reclassified and reflected on the accompanying Consolidated Balance Sheets as “Assets of discontinued operations” and “Liabilities of discontinued operations.” For comparative purposes, all prior periods presented have been reclassified on a consistent basis.

Precision Lithograining Corp. (“Precision”) - Analog Newspaper Business

On December 28, 2006, the Company’s production in South Hadley, Massachusetts of Precision-branded analog plates used in newspaper applications was discontinued.

Results of operations of the discontinued analog newspaper business of Precision consist of the following (in thousands, except per-share data):

	Three months ended					Nine months ended
	September 29, 2007		September 30, 2006			September 29, 2007			September 30, 2006
Revenue	$	0	$	3,349		$	196		$	9,937
Income (loss) before income taxes		16		(398	)		(132	)		(456	)
Provision (benefit) for income taxes		6		(15	)		(54	)		14
Income (loss) from discontinued operations	$	10	$	(383	)	$	(78	)	$	(470	)
Earnings (loss) per share	$	0.00	$	(0.01	)	$	0.00		$	(0.01	)

Assets and liabilities of discontinued operations consist of the following (in thousands):

	September 29, 2007		December 30, 2006

Receivables, net	$	74	$	1,875
Inventories		--		1,446
Total current assets	$	74	$	3,321

Accounts payable	$	--	$	2,126
Accrued expenses		722		1,581
Total current liabilities	$	722	$	3,707

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PRESSTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(Unaudited)

3. ACCOUNTS RECEIVABLE, NET

The components of “Accounts receivable, net” in the Consolidated Balance Sheets are as follows (in thousands):

	September 29, 2007			December 30, 2006

Accounts receivable	$	51,443		$	56,152
Less allowances		(2,392	)		(2,994	)
	$	49,051		$	53,158

A rollforward of accounts receivable allowance balances during the periods follows:


Accounts receivable allowances, December 30, 2006	$	2,994
Write-offs in the period		(2,144	)
Increase in allowance for doubtful accounts		1,542
Accounts receivable allowances, September 29, 2007	$	2,392

4. INVENTORIES

Inventories include material, direct labor and related manufacturing overhead, and are stated at the lower of cost (determined on a first-in, first-out basis) or net realizable value. Based upon a consideration of quantities on hand, actual and projected sales volume, slow-moving and obsolete inventory is written down to its net realizable value.

The components of “Inventories” in the Consolidated Balance Sheets are as follows (in thousands):

	September 29, 2007		December 30, 2006

Raw materials	$	3,487	$	3,434
Work in process		7,141		7,102
Finished goods		39,598		35,514
	$	50,226	$	46,050

During the nine months ended September 29, 2007, the Company disposed of $3.5 million of excess and obsolete inventories. Disposed inventories comprised primarily of machine components and repair parts relating to technology that is no longer manufactured, distributed, or serviced by the Company, and had a net realizable value of $0 as of September 29, 2007.

In fiscal 2007 the Company completed an evaluation of the future strategic position of key products in its product portfolio. In the second quarter of fiscal 2007, the Company recorded charges of $2.7 million related to changes to product plans for the Vector TX52 CtP product family. Charges included a $1.1 million write-down of excess and obsolete equipment and parts inventory to net realizable value, warranty-related charges of $0.8 million (Note 9) and accrued liabilities of $0.8 million associated with non-cancelable purchase order obligations. In the third quarter of fiscal 2007, the Company recorded inventory-related charges of $2.8 million, consisting of $2.2 million for the write-off of excess and obsolete inventory, $0.4 million of warranty-related expenses (Note 9) and $0.2 million of accrued liabilities in non-cancelable inventory purchase commitments. Of the $2.2 million of excess and obsolete inventory charges for the third

- 12 -

PRESSTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(Unaudited)

quarter of fiscal 2007, $1.1 million relates to excess associated with specific changes to the future product portfolio, $0.7 million relates to a change in estimate of arising from revised methodology in identifying excess and obsolete inventory and $0.4 million related to other product reviews.

In the second and third quarters of fiscal 2007, the Company recorded charges of $0.8 million and $0.3 million, respectively, related to the write-off of service parts in the U.S. These charges are reflected in Cost of revenue in the accompanying Consolidated Statements of Income.

The Company completed a worldwide physical inventory count in August, 2007 resulting in charges of $0.4 million during the third quarter of fiscal 2007.

5. PROPERTY, PLANT AND EQUIPMENT, NET

The components of “Property, plant and equipment, net”, in the Consolidated Balance Sheets are as follows (in

thousands):

	September 29, 2007			December 30, 2006

Land and improvements	$	2,286		$	2,286
Buildings and leasehold improvements		29,518			29,428
Production and other equipment		57,348			56,462
Office furniture and equipment		7,510			7,263
Construction in process		3,211			1,886
Total property, plant and equipment, at cost		99,873			97,325
Accumulated depreciation and amortization		(60,373	)		(55,131	)
Net property, plant and equipment	$	39,500		$	42,194

Construction in process is generally related to production equipment and information technology systems not yet placed into service. The amount reported at September 29, 2007 includes $2.1 million related to a new service management system, which is in the implementation phase. The Company is capitalizing all applicable costs in accordance with AICPA Statement of Position No. 98-1, Accounting for Costs of Computer Software Developed or Obtained for Internal Use, and estimates that the total cost of implementation will approximate $2.4 million. The Company expects to fully implement its new service management system in fiscal 2008.

The Company recorded depreciation expense of $1.7 million in the third quarter of fiscal 2007 and $1.8 million in the third quarter of fiscal 2006 and $5.2 million in each of the nine months ended September 29, 2007 and September 30, 2006. Under the Company’s financing arrangements (see Note 7), all property, plant and equipment is pledged as security.

6. INTANGIBLE ASSETS AND GOODWILL

Intangible assets consist of patents, intellectual property, license agreements, loan origination fees and certain identifiable intangible assets resulting from business combinations, including trade names, customer relationships, non-compete covenants and software licenses.

- 13 -

PRESSTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(Unaudited)

The Company commences amortization of intangible assets at the time the respective asset has been placed into service. At September 29, 2007 and December 30, 2006, the Company had recorded $0.6 million and $0.7 million, respectively, of costs related to patents and intellectual property not yet in service.

The components of the Company’s “Intangible assets, net” in the Consolidated Balance Sheets are as follows (in thousands):

	September 29, 2007				December 30, 2006
	Cost		Accumulated amortization		Cost		Accumulated amortization

Patents and intellectual property	$	11,125	$	7,783	$	11,277	$	7,206
Trade names		2,360		2,301		2,360		1,776
Customer relationships		4,583		1,891		4,583		1,443
Software licenses		450		437		450		325
License agreements		750		281		750		169
Non-compete covenants		100		63		100		48
Loan origination fees		332		194		332		144
	$	19,700	$	12,950	$	19,852	$	11,111

The Company recorded amortization expense for its identifiable intangible assets of $0.6 million and $0.8 million in the third quarters of fiscal 2007and fiscal 2006, respectively, and $2.0 million and $2.3 million in the nine months ended September 29, 2007 and September 30, 2006, respectively. Estimated future amortization expense for the Company’s intangible assets in service at September 29, 2007, is as follows (in thousands):

Remainder of fiscal 2007	$	434
Fiscal 2008	$	1,383
Fiscal 2009	$	1,243
Fiscal 2010	$	1,080
Fiscal 2011	$	819
Fiscal 2012	$	500
Thereafter	$	697

The carrying amount of goodwill recorded by the Company’s Presstek reporting unit was $19.8 million at September 29, 2007. Goodwill was reduced in the third quarter of fiscal 2007 as a result of excess accrued integration costs related to severance deemed not required.

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is tested annually, as of the first business day of the third quarter, for impairment. The Company’s impairment review is based on a fair value test. The Company uses its judgment in assessing whether goodwill may have become impaired between annual impairment tests. Indicators such as unexpected adverse business conditions, economic factors, unanticipated technological change or competitive activities, loss of key personnel and acts by governments and courts may signal that goodwill has been impaired. Should the fair value of a reporting unit, as determined by the Company at any measurement date, fall below the carrying value of the respective reporting unit’s net assets, an impairment will be recorded in the period. For the third quarter ending September 29, 2007, there was no impairment recorded. There can be no assurance that goodwill will not become impaired in future periods.

- 14 -

PRESSTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(Unaudited)

7. FINANCING ARRANGEMENTS

The components of the Company’s “Long-term debt and capital lease obligations, less current portion” in the Consolidated Balance Sheets at September 29, 2007 and December 30, 2006 are as follows (in thousands):

	September 29, 2007			December 30, 2006

Term loan	$	17,250		$	22,500
Line of credit		21,000			15,000
Capital lease obligation		48			72
		38,298			37,572
Less current portion		(28,039	)		(22,037	)
Long-term debt	$	10,259		$	15,535

The Company’s Senior Secured Credit Facilities (the “Facilities”) include a $35.0 million five-year secured term loan (the “Term Loan”) and a $45.0 million five-year secured revolving line of credit (the “Revolver”). The Company granted a security interest in all of its assets in favor of the lenders under the Facilities. In addition, under the Facilities agreement, the Company is prohibited from declaring or distributing dividends to shareholders.

The Company has the option of selecting an interest rate for the Facilities equal to either: (a) the then applicable London Inter-Bank Offer Rate plus 1.25% to 4.0% per annum, depending on certain results of the Company’s financial performance; or (b) the Prime Rate, as defined in the Facilities agreement, plus up to 1.75% per annum, depending on certain results of the Company’s financial performance.

The Facilities are available to the Company for working capital requirements, capital expenditures, business acquisitions and general corporate purposes.

At September 29, 2007 and December 30, 2006, the Company had outstanding balances on the Revolver of $21.0 million and $15.0 million, respectively, with interest rates of 7.8% and 7.1%, respectively. At September 29, 2007, the Company also had $6.3 million of outstanding letters of credit, thereby reducing the amount available under the Revolver to $17.7 million at that date.

The Term Loan requires quarterly principal payments of $1.75 million, with a final settlement of all remaining principal and unpaid interest on November 4, 2009. At September 29, 2007 and December 30, 2006, outstanding balances under the Term Loan were $17.3 million and $22.5 million, respectively, with interest rates of 7.9% and 7.1%, respectively.

The weighted average interest rate on the Company’s short-term borrowings was 7.8% at September 29, 2007.

Under the terms of the Revolver and the Term Loan, the Company is required to meet various financial and non-financial covenants on a quarterly and annual basis, including maximum funded debt to EBITDA (a non-U.S. GAAP measurement that the Company defines as earnings before interest, taxes, depreciation, amortization, and restructuring and other charges), minimum fixed charge coverage and current ratio covenants. At September 29, 2007, the Company was in compliance with all financial covenants. Due to delays in reporting financial statements for the period ended September 29, 2007 to its lenders, the Company did not meet its non-financial covenant to furnish quarterly financial statements within 45 days of the period end and the Company received a waiver for that

- 15 -

PRESSTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(Unaudited)

requirement from lenders on January 18, 2008.

On November 23, 2005, the Company acquired equipment of $0.1 million qualifying for capital lease treatment. The equipment is reflected in Property, plant and equipment, net and the current and long-term principal amounts of the lease obligation are included in current and long-term debt and capital lease obligations in the Company’s Consolidated Balance Sheets.

The Company’s Term Loan, Revolver, and capital lease principal repayment commitments are as follows (in thousands):

Remainder of fiscal 2007	$	7,007
Fiscal 2008	$	22,789
Fiscal 2009	$	8,502

The amounts above do not reflect interest payments on any outstanding principal balances for the Revolver and Term Loan because the interest rates on these financing arrangements are not fixed.

8. ACCRUED EXPENSES

The components of the Company’s “Accrued expenses” in the Consolidated Balance Sheets at September 29, 2007 and December 30, 2006 are as follows (in thousands):

	September 29, 2007		December 30, 2006

Accrued payroll and employee benefits	$	4,568	$	5,642
Accrued warranty		3,267		1,729
Accrued integration costs		124		511
Accrued restructuring		793		233
Accrued royalties		320		276
Accrued legal		1,830		284
Accrued purchase commitments		980		-
Accrued professional fees		1,223		306
Other		2,983		1,490
	$	16,088	$	10,471

9. ACCRUED WARRANTY

Product warranty activity for the nine months ended September 29, 2007 is as follows (in thousands):

Balance at December 30, 2006	$	1,729
Additional accruals for warranty		2,854
Utilization of accrual for warranty obligations		(1,316	)
Balance at September 29, 2007	$	3,267

As further described in Note 4, the Company increased warranty accruals related to the Vector TX52 product line by $0.8 million and $0.1 million in the second and third quarter of fiscal 2007, respectively. In addition, warranty accruals were increased $0.3 million in the third quarter of fiscal 2007 related to certain refurbished QMDI press

- 16 -

PRESSTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(Unaudited)

units ($0.2 million) and discontinued products identified as a result of the Company’s product portfolio review ($0.1 million). The Company’s warranty obligations are affected by product failure rates and repair or replacement costs incurred in supporting a product failure. Should actual product repair or replacement costs differ from the Company’s estimates, increases or decreases to its warranty accruals would be required.

10. DEFERRED REVENUE

The components of the Company’s “Deferred revenue” in the Consolidated Balance Sheets are as follows (in thousands):

	September 29, 2007		December 30, 2006

Deferred service revenue	$	7,316	$	7,505
Deferred product revenue		216		396
	$	7,532	$	7,901

11. ACCRUED INTEGRATION COSTS

In fiscal 2005 and fiscal 2004, the Company recorded integration cost accruals related to its 2004 ABDick business acquisition. Activity related to these integration cost accruals for the nine months ended September 29, 2007 are as follows (in thousands):

	Balance December 30, 2006		Utilization			Currency translation		Offset to Goodwill			Balance September 29, 2007

Severance and fringe benefits	$	487	$	-		$	12	$	(379	)	$	120
Lease termination and other costs		24		(20	)		-		-			4
	$	511	$	(20	)	$	12	$	(379	)	$	124

In the third and fourth quarters of fiscal 2006, the Company terminated 25 and 22, respectively, of its ABDick service personnel in North America. As part of the allocation of the ABDick purchase price, the Company had previously accrued certain severance costs related to headcount reductions. The accrual will be utilized as payments are made to these terminated employees. The Company anticipates that payments for these actions, as well as the remaining initiatives related to the business acquisition, will be completed in fiscal 2008. In addition, the Company recorded a reduction of approximately $379,000 of excess accrued integration costs against goodwill in the third quarter of 2007. These excess accruals related to severance that was deemed not required.

12. RESTRUCTURING AND OTHER CHARGES

In the third quarter of fiscal 2007, the Company commenced the consolidation of the Canadian back-office operations and certain Des Plaines, Illinois activities into its Hudson, New Hampshire operations as part of its Business Improvement Plan (“BIP”). These projects, as part of the BIP, include restructuring costs relating to severance, operating lease run-out and inventory consolidation. It is estimated that the Company will incur approximately $1.0 million to $2.0 million of restructuring charges related to these projects. All costs relating to these projects are expected to be incurred by the end of fiscal 2008. During the nine months ended September 29,

- 17 -

PRESSTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(Unaudited)

2007, the Company recognized $1.5 million in restructuring and other charges related to severance and separation costs under employment contracts of former executives and restructuring activities in our Canadian, U.S. and European operations. At December 30, 2006, the restructuring accrual of $0.2 million related to severance programs involving 10 manufacturing and administrative positions at the Presstek segment.

The activity for the nine months ended September 29, 2007 related to the Company’s restructuring accruals is as follows (in thousands):

	Balance December 30, 2006		Charged to expense		Utilization			Currency translation		Recoveries			Balance September 29, 2007

Severance and fringe benefits	$	233	$	1,527	$	(956	)	$	-	$	(11	)	$	793

The Company anticipates that payments for these actions will be completed in fiscal 2008.

13. STOCK-BASED COMPENSATION

The Company has equity incentive plans that are administered by the Compensation and Stock Plan Committee of the Board of Directors (the “Committee”). The Committee oversees and approves which employees receive grants, the number of shares or options granted and the exercise prices and other terms of the awards.

2003 Stock Option Plan

The 2003 Stock Option and Incentive Plan (the “2003 Plan”) provides for the award of stock options, stock issuances and other equity interests in the Company to employees, officers, directors (including those directors who are not an employee or officer of the Company, such directors being referred to as non-employee Directors), consultants and advisors of the Company and its subsidiaries. The 2003 Plan provides for an automatic annual grant of 7,500 stock options to all active Non-Employee Directors and an option to purchase 25,000 shares is granted to newly elected non-employee directors, all of which vest over a one year period. Additional grants may be awarded at the discretion of the Board of Directors or Committee, and on April 7, 2005, effective for fiscal 2005 forward, the Company’s Board of Directors approved an additional annual grant of 7,500 options to re-elected non-employee directors. A total of 2,000,000 shares of common stock, subject to anti-dilution adjustments, have been reserved under the 2003 Plan. For the nine months ended September 29, 2007, 688,333 options were issued under the 2003 Plan, of which 185,000 were issued in the third quarter of fiscal 2007. There were 143,333 options issued under the 2003 Plan for the three and nine months ended September 30, 2006.

Employee Stock Purchase Plan

The Company’s Employee Stock Purchase Plan (“ESPP”) is designed to provide eligible employees of the Company and its participating U.S. subsidiaries an opportunity to purchase common stock of the Company through accumulated payroll deductions. The purchase price of the stock is equal to 85% of the fair market value of a share of common stock on the first day or last day of each three-month offering period, whichever is lower. All employees of the Company or participating subsidiaries who customarily work at least 20 hours per week and do not own five percent or more of the Company’s common stock are eligible to participate in the ESPP. A total of 950,000 shares of the Company’s common stock, subject to adjustment, have been reserved for issuance under this plan. The Company issued 49,743 shares of common stock under its ESPP for the nine months ended September 29, 2007, of which 16,792 were issued in the third quarter of fiscal 2007. The Company issued 40,796 shares of

- 18 -

PRESSTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(Unaudited)

common stock under its ESPP for the nine months ended September 30, 2006, of which 20,385 were issued in the third quarter of fiscal 2006.

Restricted Stock and Non-plan Stock Options

In the second quarter of fiscal 2007, the Company granted 300,000 shares of restricted stock and 1,000,000 stock options to its President and Chief Executive Officer (“CEO”) under a non-plan, non-qualified stock option agreement. The award of restricted stock vested on May 10, 2007, the effective date of the CEO’s employment agreement with the Company, but is subject to the holding period provisions as defined in Rule 144 of the U.S. Securities and Exchange Commission (“Rule 144”). The stock options granted under the stock option agreement provide for vesting of 200,000 options on May 10, 2007, 200,000 options to vest over the period May 10, 2007 to January 1, 2008, and the remaining 600,000 options to vest at a rate of 200,000 per annum over the period January 1, 2009 to January 1, 2011, subject to service conditions only.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R, Share-Based Payment (“SFAS 123R”), using the modified prospective method, which requires measurement of compensation cost at fair value on the date of grant and recognition of compensation expense over the service period for awards expected to vest.

Stock-based compensation associated with stock option grants to all officers, directors, and employees is included as a component of “General and administrative expense” in the Company’s Consolidated Statements of Income. Stock based compensation expense for the three and nine months ended September 29, 2007 and September 30, 2006 is as follows (in thousands):

	Three months ended				Nine months ended
Stock option plan	September 29, 2007		September 30, 2006		September 29, 2007		September 30, 2006

2003 Plan	$	420	$	130	$	1,061	$	130
ESPP		16		16		60		77
Restricted Stock		--		--		1,500		--
Non-plan, non-qualified		213		--		826		--

Total	$	649	$	146	$	3,447	$	207

As of September 29, 2007, there was $3.5 million of unrecognized compensation expense related to stock option grants. The weighted average period over which the remaining unrecognized compensation expense will be recognized is 2.46 years.

- 19 -

PRESSTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(Unaudited)

Valuation Assumptions

2003 Plan Options

The fair value of the options to purchase shares of common stock granted in the third quarter and nine months ended September 29, 2007 under the 2003 Plan was estimated on the respective grant dates using the Black-Scholes valuation model with the following assumptions:

	Three months ended						Nine months ended
	September 29, 2007			September 30, 2006			September 29, 2007			September 30, 2006

Risk-free interest rate		4.2	%		5.1	%		4.5	%		5.1	%
Volatility		60.97	%		57.2	%		60.97	%		57.2	%
Expected life (in years)		5.56			4.5			5.56			4.5
Dividend yield		--			--			--			--

Based on the above assumptions, the weighted average fair value of each option to purchase a share of the Company’s common stock granted in the third quarter and nine months ended September 29, 2007 under the 2003 Plan was $4.22 and $3.77, respectively.

ESPP Rights

The fair value of the rights to purchase shares of common stock under the Company’s ESPP was estimated on the commencement date of the offering period using the Black-Scholes valuation model with the following assumptions:

	Three months ended						Nine months ended
	September 29, 2007			September 30, 2006			September 29, 2007			September 30, 2006

Risk-free interest rate		3.8	%		4.8	%		4.4	%		4.7	%
Volatility		57.9	%		53.3	%		50.5	%		53.2	%
Expected life (in years)		.25			.25			.25			.25
Dividend yield		--			--			--			--

Based on the above assumptions, the fair values of each stock purchase right under the Company’s ESPP for the third quarter and nine months ended September 29, 2007 was $1.27 and $1.41, respectively.

Restricted Stock Award

The fair value of the 300,000 restricted shares of common stock granted in the second quarter of fiscal 2007 was derived by obtaining the market value of the stock on the award date and applying a discount to that value due to the sale restrictions imposed by Rule 144 of the U.S. Securities and Exchange Commission. The market value was calculated using the average of the high and low trading prices on the award date multiplied by the number of

- 20 -

PRESSTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(Unaudited)

shares. A discount rate of 17.2% was estimated using a Black-Scholes put option model with the following assumptions:

	Three months ended		Nine months ended
	September 29, 2007		September 29, 2007

Risk-free interest rate		--		4.9	%
Volatility		--		50.0	%
Expected life (in years)		--		1.0
Dividend yield		--		--

Non-Plan Stock Options

The fair value of the options to purchase shares of common stock under the non-plan, non-qualified stock option agreement with the Company’s President and CEO granted in the second quarter of fiscal 2007 was estimated on the grant date using the Black-Scholes valuation model with the following assumptions:

	Three months ended		Nine months ended
	September 29, 2007		September 29, 2007

Risk-free interest rate		--		4.3	%
Volatility		--		48.0	%
Expected life (in years)		--		4.1
Dividend yield		--		--

Based on the above assumptions, for the nine months ended September 29, 2007 the weighted average fair value of each option to purchase a share of the Company’s common stock under the non-plan, non-qualified stock option agreement with the Company’s President and CEO granted in the second quarter of fiscal 2007 was $2.58.

Expected volatilities are based on historical volatilities of Presstek’s common stock. The expected life represents an estimate of the period of time that options granted are expected to be outstanding giving consideration to vesting schedules, contractual life, historical exercise and cancellation rates, and in the case of the ESPP, the purchase period. The risk-free rate is based on the U.S. Government T-Bill rate for the period corresponding to the expected life of the options or ESPP purchase period.

- 21 -

PRESSTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(Unaudited)

Stock Option Activity

Stock option activity for the nine months ended September 29, 2007 is summarized as follows:

	Shares			Weighted average exercise price		Weighted average remaining contractual life (years)		Aggregate intrinsic value

Outstanding at December 30, 2006		2,956,350		$	9.01
Granted		1,688,333		$	6.26
Exercised		(536,950	)	$	5.23
Canceled/expired		(446,333	)	$	8.38
Outstanding at September 29, 2007		3,661,400		$	8.37		6.18	$ 0.5 million

Exercisable at September 29, 2007		2,230,150		$	9.71		5.03	$ 0.3 million

During the three and nine months ended September 29, 2007, the total intrinsic value of stock options exercised was approximately $15,000 and $0.8 million, respectively. The total intrinsic value of stock options exercised during the three and nine months ended September 30, 2006 was $24,000 and $1.0 million, respectively.

14. INTEREST AND OTHER INCOME (EXPENSE)

The components of “Interest and other income (expense), net”, in the Company’s Consolidated Statements of Income are as follows (in thousands):

	Three months ended						Nine months ended
	September 29, 2007			September 30, 2006			September 29, 2007			September 30, 2006

Interest income	$	23		$	30		$	64		$	73
Interest expense		(780	)		(674	)		(2,417	)		(1,704	)
Other income (expense), net		171			548			(123	)		367
	$	(586	)	$	(96	)	$	(2,476	)	$	(1,264	)

The amounts reported as “Other income (expense), net”, include gains on foreign currency transactions of $0.3 million and $0.2 million for each of the three months ended September 29, 2007 and September 30, 2006 and gains of $29,000 and $0.1 million for each of the nine months ended September 29, 2007 and September 30, 2006. Additionally, during the third quarter of fiscal 2006, the Company received certain unclaimed funds from the former ABDick estate and settled various other open items with the ABDick estate, realizing a net gain of $0.3 million after legal costs which is included in “Other income (expense), net”.

15. INCOME TAXES

The Company provides for income taxes at the end of each interim period based on the estimated effective tax rate for the full fiscal year. Cumulative adjustments to the tax provision are recorded in the interim period in which a change in the estimated annual effective rate is determined.

- 22 -

PRESSTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(Unaudited)

The Company’s effective tax rate for continuing operations was 31.3 % for the nine months ended September 29, 2007 and 18.3% for the nine months ended September 30, 2006. The Company’s effective tax rate differs from the U.S. federal statutory rate of 35% due to nondeductible officer compensation and U.S. tax on deemed foreign subsidiaries’ dividends.

Effective December 31, 2006, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. There was no cumulative impact of adopting FIN 48 charged or credited to the opening balance of retained earnings.

The Company conducts business in the United States, the United Kingdom and Canada, and files tax returns in these jurisdictions. In the normal course of business, we are subject to examination by these taxing authorities. As of

September 29, 2007, the years subject to examination by taxing authorities is 1995 through 2006 for the United States, and 2004 through 2006 for the United Kingdom and Canada. While we believe we have adequately provided for all tax positions, amounts asserted by taxing authorities could be greater than our accrued position. Accordingly, additional provisions on U.S. and foreign tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved.

As of December 30, 2006 the total amount of unrecognized tax benefits was $1.8 million of which $1.1 million would affect the effective tax rate if recognized. The amount of unrecognized tax benefits increased by $0.3 million for the nine months ended September 29, 2007. The unrecognized tax benefits are comprised of the aggregate tax effect of differences between tax return positions and the benefits recognized in our financial statements. We recognize interest and penalties on tax deficiencies as a component of tax expense. As of December 30, 2006 and September 29, 2007 there were no accrued interest or penalties associated with unrecognized tax benefits.

16. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is comprised of net income (loss), and all changes in equity of the Company during

the period from non-owner sources. These changes in equity are recorded as adjustments to Accumulated other comprehensive income in the Company’s Consolidated Balance Sheets. The primary component of Accumulated other comprehensive income is unrealized gains or losses on foreign currency translation. The components of comprehensive income (loss) are as follows (in thousands):

	Three months ended						Nine months ended
	September 29, 2007			September 30, 2006			September 29, 2007			September 30, 2006

Net income (loss)	$	(3,616	)	$	(423	)	$	(9,424	)	$	5,047
Changes in accumulated other comprehensive income:
Unrealized foreign currency translation gains		594			47			865			365
Comprehensive income (loss)	$	(3,022	)	$	(376	)	$	(8,559	)	$	5,412

- 23 -

PRESSTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(Unaudited)

17. SEGMENT AND GEOGRAPHIC INFORMATION

The Company is a market-focused high-technology company that designs, manufactures and distributes proprietary and non-proprietary solutions to the graphic arts industries, primarily serving short-run, full-color customers worldwide. The Company’s operations are currently organized into two segments: (i) Presstek and (ii) Lasertel. Segment operating results are based on the current organizational structure reviewed by the Company’s management to evaluate the results of each business. A description of the types of products and services provided by each segment follows.

Presstek is primarily engaged in the development, manufacture, sale and servicing of our patented digital imaging systems and patented printing plate technologies as well as traditional, analog systems and related equipment and supplies for the graphic arts and printing industries, primarily the short-run, full-color market segment.

·	Lasertel manufactures and develops high-powered laser diodes and related laser products for Presstek and for sale to external customers.

Selected operating results for each segment are as follows (in thousands):

	Three months ended						Nine months ended
	September 29, 2007			September 30, 2006			September 29, 2007			September 30, 2006

Revenue
Presstek	$	57,661		$	59,612		$	187,690		$	194,745
Lasertel		2,782			3,187			9,141			8,446
Total revenue, including intersegment		60,443			62,799			196,831			203,191
Intersegment revenue		(831	)		(1,380	)		(3,316	)		(3,562	)
	$	59,612		$	61,419		$	193,515		$	199,629

Revenue from external customers
Presstek	$	57,661		$	59,612		$	187,690		$	194,745
Lasertel		1,951			1,807			5,825			4,884
	$	59,612		$	61,419		$	193,515		$	199,629

Operating income (loss)
Presstek	$	(5,134	)	$	417		$	(10,125	)	$	9,166
Lasertel		(1,230	)		(137	)		(1,012	)		(1,148	)
	$	(6,364	)	$	280		$	(11,137	)	$	8,018

Intersegment revenues and costs are eliminated from each segment prior to review of segment results by the Company’s management. Accordingly, the amounts of intersegment revenues and expenses allocable to each individual segment have been excluded from the table above, except where otherwise indicated.

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PRESSTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(Unaudited)

Asset information for the Company’s segments as of September 29, 2007 and December 30, 2006 is as follows (in thousands):

	September 29, 2007		December 30, 2006

Presstek	$	180,409	$	184,510
Lasertel		13,407		13,504
	$	193,816	$	198,014

The Company’s classification of revenue by geographic area is determined by the location of the Company’s customer. The following table summarizes revenue information by geographic area (in thousands):

	Three months ended				Nine months ended
	September 29, 2007		September 30, 2006		September 29, 2007		September 30, 2006

United States	$	37,973	$	39,656	$	116,710	$	129,131
United Kingdom		4,770		6,762		21,825		23,306
Canada		3,426		3,525		10,988		11,329
Germany		979		1,414		4,638		6,759
Japan		1,122		1,487		4,730		5,001
All other		11,342		8,575		34,624		24,103
	$	59,612	$	61,419	$	193,515	$	199,629

The Company’s long-lived assets by geographic area are as follows (in thousands):

	September 29, 2007		December 30, 2006

United States	$	77,936	$	78,077
United Kingdom		706		894
Canada		257		303
	$	78,899	$	79,274

18. MAJOR CUSTOMERS

The Company did not have any customer that accounted for more than 10% of revenues in the third quarter and nine months ended September 29, 2007 or September 30, 2006, or any customer that accounted for more than 10% of outstanding accounts receivable at September 29, 2007 or December 30, 2006.

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PRESSTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(Unaudited)

19. RELATED PARTIES

The Company engages the services of Amster, Rothstein & Ebenstein, a law firm of which a member of the Company’s Board of Directors is a partner. Expenses incurred for services from this law firm were $0.2 million and $0.7 million for the third quarter and nine months ended September 29, 2007, respectively, and $1.0 million and $2.4 million for the third quarter and nine months ended September 30, 2006, respectively.

20. COMMITMENTS AND CONTINGENCIES

Commitments & Contingencies

On October 30, 2006, a chemical was released from a mixing tank into a holding pool at our manufacturing plant in South Hadley, Massachusetts, which caused the Company to temporarily cease digital and analog aluminum plate manufacturing operations at this location. The chemical release was contained on-site, there were no reported injuries, neighboring properties were not damaged and there were no requirements for soil or groundwater remediation. Digital plate manufacturing was restarted on November 6, 2006. On December 28, 2006, the Company’s production in South Hadley, Massachusetts of Precision-branded analog plates used in newspaper applications was discontinued. In April and May of fiscal 2007, the Company executed consent orders and settlement arrangements with the U.S. Department of Labor - Occupational Safety and Health Administration (OSHA) and the Massachusetts Department of Environmental Protection, respectively. Under these arrangements, the Company agreed to corrective action to ensure compliance with all applicable environmental regulations in the future. Expenses associated with and amounts accrued for this incident as of September 29, 2007 are reflected in the financial results of discontinued operations (Note 2). It is possible that costs in excess of amounts accrued may be incurred.

The Company has change of control agreements with certain of its senior management employees that provide them with benefits should their employment with the Company be terminated other than for cause, as a result of disability or death, or if they resign for good reason, as defined in these agreements, within a certain period of time from the date of any change of control of the Company.

From time to time the Company has engaged in sales of equipment that is leased by or intended to be leased by a third party purchaser to another party. In certain situations, the Company may retain recourse obligations to a financing institution involved in providing financing to the ultimate lessee in the event the lessee of the equipment defaults on its lease obligations. In such instances, the Company may refurbish and remarket the equipment on behalf of the financing company, should the ultimate lessee default on payment of the lease. In certain circumstances, should the resale price of such equipment fall below certain predetermined levels, the Company

would, under these arrangements, reimburse the financing company for any such shortfall in sale price (a “shortfall payment”). Generally, the Company’s liability for these recourse agreements is limited to 9.9% or less of the amount outstanding. The maximum amount for which the Company may be liable to the financial institution for the shortfall payment was approximately $1.1 million at September 29, 2007.

Litigation

In October 2006 the Company, together with two of its former executive officers, were named as defendants in a purported securities class action suit filed in the United States District Court for the District of New Hampshire in October 2006. The suit claims to be brought on behalf of purchasers of the Company’s common stock during the period from July 27, 2006 through September 29, 2006. The complaint alleges, among other things, that the Company and the other defendants violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The Company and the individual defendants filed a motion to dismiss the complaint, and this motion has been denied. The case is in its preliminary pre-trial stage.

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PRESSTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 29, 2007

(Unaudited)

In August 2007 an Arbitrator from the International Centre for Dispute Resolution issued a partial award against the Company and in favor of Reda National Company (“Reda”), a former Company distributor operating in the Middle East. Reda claims that the Company breached an exclusive distributor agreement by entering into a distribution agreement with another party covering the same territory assigned to Reda. Reda has claimed damages totaling approximately $9.7 million. In the partial award the Arbitrator found that the Company had breached its agreement with Reda and found the Company liable to Reda for arbitration costs, attorneys’ fees, and incidental expenses incurred by Reda in connection with the arbitration. The Arbitrator also ordered that a further hearing to determine additional damages, if any, would be scheduled. The damages hearing was held in December 2007 and the parties are awaiting the finding of the Arbitrator. The Company believes that it has meritorious defenses to Reda’s damages claim and has vigorously contested the claim.

The Company is party to other claims and litigation that it considers routine and incidental to its business. The Company does not expect the results of any of these actions to have a material adverse effect on its business, results of operations, or financial condition.

Regulatory Matters

On February 4, 2008, the Company received from the U.S. Securities and Exchange Commission (the "SEC") a formal order of investigation relating to the previously disclosed SEC inquiry regarding the Company's announcement of preliminary financial results for the third quarter of 2006. The Company is cooperating fully with the SEC's investigation.

In January 2008 the Company was served with an Administrative Complaint filed by the U.S. Environmental Protection Agency (“EPA”). The EPA seeks to assess penalties against the Company for alleged violations of certain provisions of the Clean Air Act and the Comprehensive Environmental Response, Compensation and Liability Act arising from an incident occurring at a facility of the Company located in South Hadley, Massachusetts on October 30, 2006. The Company has recorded its best estimate of any losses associated with this matter.

On November 16, 2007, the Company received a NASDAQ Staff Determination notifying the Company that, as a result of its delayed filing of its Quarterly Report on Form 10-Q for the quarter ended September 29, 2007, the Company was not in compliance with the filing requirements for continued listing as set forth under Marketplace Rule 4310(c)(14) and therefore subject to delisting from the NASDAQ Global Select Market. The Company requested and subsequently attended a hearing before the NASDAQ Listing Qualification Panel (the “Panel”), which was held on January 10, 2008, to appeal the Staff Determination and present a plan to regain compliance. The Panel has yet to render its decision, however, with the filing of this Quarterly Report on Form 10-Q, the Company believes that it has remedied its non-compliance with Marketplace Rule 4310(c)(14) and is no longer subject to delisting.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks described below under the heading “Information Concerning Forward Looking Statements” and in “Part I, Item 1A, Risk Factors” of our Annual Report on Form 10-K for the year ended December 30, 2006, as filed with the SEC on April 25, 2007.

Overview

The Company is a provider of high-technology, digital-based printing solutions to the commercial print segment of the graphics communications industry. The Company designs, manufactures and distributes proprietary and non-proprietary solutions aimed at serving the needs of a wide range of print service providers. Our proprietary digital imaging and advanced technology consumables offer business solutions for commercial printing focusing on short-run, high quality color applications.

Presstek’s business model is a capital equipment and consumables model. In this model, over fifty percent of our revenue is recurring revenue. Our model is designed so that each placement of either a direct-to-press or a computer-to-plate (“CtP”) system generally results in recurring aftermarket revenue for consumables and service.

Through our various operations, we:

·	provide digital print solutions through the development and manufacture of digital laser imaging equipment and chemistry-free printing plates, which we call consumables, for commercial and in-plant print providers targeting the market for high quality, fast turnaround short-run color printing;

·	deliver Presstek digital solutions and solutions from other manufacturing partners through our direct sales and service force and through distribution partners;

·	manufacture semiconductor solid state laser diodes for Presstek imaging applications and for use in external applications; and

·	manufacture and distribute printing plates for conventional print applications.

In addition to marketing, selling and servicing our proprietary digital products, we also market, sell and service traditional or analog products for the commercial print market. This analog equipment is manufactured by third party strategic partners and the analog consumables are manufactured by either us or our strategic partners.

Our operations are currently organized into two segments: (i) Presstek and (ii) Lasertel. Segment operating results are based on the current organizational structure reviewed by our management to evaluate the results of each business. A description of the types of products and services provided by each business segment follows.

Presstek is primarily engaged in the development, manufacture, sale and servicing of our business solutions using patented digital imaging systems and patented printing plate technologies. We also provide traditional, analog systems and related equipment and supplies for the graphic arts and printing industries.

·	Lasertel manufactures and develops high-powered laser diodes and related laser products for Presstek and for sale to external customers.

We generate revenue through four main sources: (i) the sale of our equipment, including DI® presses and CtP devices, and to a lesser extent imaging kits complete with optical assemblies and software, and spare parts, which are incorporated by leading press manufacturers into direct imaging presses for the graphic arts industry;

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(ii) the sale of high-powered laser diodes for the graphic arts, defense and industrial sectors; (iii) the sale of our proprietary and non-proprietary consumables and supplies; and (iv) the servicing of offset printing systems and analog and CtP systems and related equipment.

We operate and report on a 52- or 53-week, fiscal year ending on the Saturday closest to December 31. Accordingly, the consolidated financial statements include the financial reports for the 13-week and 39-week periods ended September 29, 2007, which we refer to as the third quarter and nine months ended September 29, 2007 or the three and nine months ended September 29, 2007, and the 13-week and 39-week periods ended September 30, 2006, which we refer to as the third quarter and nine months ended September 30, 2006 or the three and nine months ended September 30, 2006.

We intend the discussion of our financial condition and results of operations that follows to provide information that will assist in understanding our consolidated financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that caused those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements.

The discussion of results of operations at the consolidated level is presented together with results of operations by business segment.

Information Concerning Forward Looking Statements

Certain of the statements contained in this report (other than the historical financial data and other statements of historical fact), including, without limitation, statements as to management’s expectations and beliefs, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are made based upon management’s good faith expectations and beliefs concerning future developments and their potential effect upon the Company. There can be no assurance that future developments will be in accordance with such expectations or that the effect of future developments on the Company will be those anticipated by management. Forward-looking statements can be identified by the use of words such as “believe,” “expect,” “plans,” “strategy,” “prospects,” “estimate,” “project,” “anticipate,” “intends” and other words of similar meaning in connection with a discussion of future operating or financial performance. Many important factors could cause actual results to differ materially from management’s expectations, including:

	•		market acceptance of and demand for our products and resulting revenues;

	•		our ability to meet our stated financial objectives;

	•		our dependency on our strategic partners, both on manufacturing and distribution;

	•		the introduction of competitive products into the marketplace;

	•		shortages of critical or sole-source component supplies;

	•		the availability and quality of Lasertel’s laser diodes;

	•		the performance and market acceptance of our recently-introduced products, and our ability to invest in new product development;

	•		manufacturing constraints or difficulties (as well as manufacturing difficulties experienced by our sub-manufacturing partners and their capacity constraints);

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•	restructuring and related charges might exceed our expectations due to, among other reasons, greater than anticipated headcount reductions, inventory consolidation, or contract terminations or greater than anticipated implementation costs;

•	the impact of recent accounting pronouncement promulgated by the FASB might vary from our expectations, or the FASB or other accounting standard setting agencies may adopt new accounting pronouncements;

•	the outcome of legal proceedings and other contingencies might vary from our expectations;

•	Transactions or other events may affect the need for, timing and extent of the Company’s capital expenditures; and

•		the impact of general market factors in the print industry generally and the economy as a whole, including the potential effects of inflation.

The Company undertakes no obligation not required by applicable law or regulation to update any forward-looking statements contained in this Quarterly Report on Form 10-Q.

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RESULTS OF OPERATIONS

Results of operations in dollars and as a percentage of revenue were as follows (in thousands of dollars):

	Three months ended				Nine months ended
	September 29, 2007		September 30, 2006		September 29, 2007		September 30, 2006
		% of revenue		% of revenue		% of revenue		% of revenue
Revenue
Product	$ 50,124	84.1	$50,578	82.3	$164,239	84.9	$164,924	82.6
Service and parts	9,488	15.9	10,841	17.7	29,276	15.1	34,705	17.4
Total revenue	59,612	100.0	61,419	100.0	193,515	100.0	199,629	100.0

Cost of revenue
Product	36,759	61.7	35,280	57.4	117,086	60.5	114,962	57.6
Service and parts	8,097	13.5	8,095	13.2	24,568	12.7	25,074	12.6
Total cost of revenue	44,856	75.2	43,375	70.6	141,654	73.2	140,036	70.2

Gross profit	14,756	24.8	18,044	29.4	51,861	26.8	59,593	29.8

Operating expenses
Research and development	1,492	2.5	1,660	2.7	4,746	2.4	4,885	2.4
Sales, marketing and customer support	9,503	15.9	9,920	16.2	30,319	15.7	29,824	14.9
General and administrative	9,150	15.3	5,585	9.0	24,407	12.6	14,738	7.4
Amortization of intangible assets	577	1.0	807	1.3	1,999	1.0	2,336	1.2
Restructuring and other charges	398	0.7	(208)	(0.3)	1,527	0.8	(208)	(0.1)
Total operating expenses	21,120	35.4	17,764	28.9	62,998	32.5	51,575	25.8