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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K

|   |  |                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 or
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 28,
    2002                                                 
|  
|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 No. 0-17541

Presstek, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 02-0415170                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

55 Executive Drive, Hudson, New Hampshire
03051-4903

(Address of principal executive offices
including zip code)


Registrants telephone number, including
area code:

(603) 595-7000


Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, $.01 par value


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 if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.     o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).     Yes þ          No o

The aggregate market value of the
registrants common stock held by non-affiliates of the
registrant as of June 28, 2002 was approximately
$125,000,000.

As of March 21, 2003, there were 34,142,624
shares of the registrants common stock outstanding.

Documents Incorporated by Reference:

Parts of the definitive Proxy Statement (which is
expected to be filed within 120 days after the
Companys fiscal year end) for the registrants Annual
Meeting of Stockholders to be held on June 17, 2003 are
incorporated by reference into Part II and Part III of
this Form 10-K.



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TABLE OF CONTENTS



|                                                             |                                                                                               |  |                                               |  |  |  |  | 
|------------------------------------------------------------ | --------------------------------------------------------------------------------------------- |  | --------------------------------------------- |  |  |  |  | 
|PART I                                                      
|                                                             | Item 1. Business                                                                             
|                                                             | Item 2. Properties                                                                           
|                                                             | Item 3. Legal Proceedings                                                                    
|                                                             | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                                     
|                                                             | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                                                             | Item 6. Selected Financial Data                                                              
|                                                             | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                             | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                                                             | Item 8. Financial Statements and Supplementary Data                                          
|                                                             | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                                                    
|                                                             | Item 10. Directors and Executive Officers of the Registrant                                  
|                                                             | Item 11. Executive Compensation                                                              
|                                                             | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                                             | Item 13. Certain Relationships and Related Transactions                                      
|                                                             | Item 14. Controls and Procedures.                                                            
|PART IV                                                     
|                                                             | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES                                                  
|CERTIFICATIONS                                              
|INDEX TO FINANCIAL STATEMENTS                               
|REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS          
|PRESSTEK, INC. BALANCE SHEETS                               
|PRESSTEK, INC. STATEMENTS OF OPERATIONS                     
|PRESSTEK, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
|PRESSTEK, INC. STATEMENTS OF CASH FLOWS                     
|                                                             |                                                                                               |  | Selected Quarterly Financial Data (unaudited)
|                                                             | SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES                                   
|Ex-10.(hh) Non Employee Director Compensation...            
|Ex-10.(ii) Security Agreement                               
|Ex-10.(jj) Amendment to Loan Agreement                      
|Ex-10.(kk) Replacement Revolving Line of Credit             
|Ex-10.(ll) Retirement Agreement                             
|Ex-21 Subsidiaries                                          
|Ex-23.(a) Consent of BDO Seidman  LLP                       
|Ex-99.1 Certification of Edward J. Marino                   
|Ex-99.2 Certification of Moosa E. Moosa                     



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PART I






|        |         
|------- | --------
|Item 1. | Business

General

Presstek, Inc. (Presstek®,
we or us), incorporated in Delaware in
1987, is a manufacturer, developer and marketer of digital laser
imaging and chemistry-free plate technologies for the printing
and graphic arts industries. Pressteks products and
applications incorporate its patented Direct Imaging
(DI®) technologies and consumables for
computer-to-plate (CTP) and direct-to-press
applications. Pressteks DI technology enables direct
to press imaging, whereby the printing plates are imaged
on the press directly from digital files, bypassing numerous
prepress procedures and chemical processes in preparing jobs for
presswork. Our computer-to-plate or off-press imaging allows
operators of conventional printing presses the ability to image
plates directly from digital files to the CTP device. The
printer then uses these plates as they would a traditional
plate, but without the chemical processes required for
conventional plates.

Our patented DI thermal laser diode product
family enables customers to produce high quality, full-color
lithographic printed materials more quickly and cost effectively
than conventional methods. Pressteks DI technology
eliminates photographic darkrooms, film, and chemical
processing, which results in reduced turn-around time and lowers
the effective cost of production for commercial printers. We
lead our industry with an environmentally friendly process that
avoids the chemicals associated with plate development. Using
digital information and high-powered semiconductor laser diodes
to create images on our patented printing plate materials, our
DI technologies are marketed to leading press manufacturers and
used in our Dimension® series of CTP systems.
Pressteks Dimension CTP systems incorporate our patented
ProFire® laser imaging technology and use our chemistry
free printing plate, Anthem®.

Pressteks CTP workflow and automated DI
printing technology not only complement digital publishing
technology, they also help printers meet the short-run quick
turn-around, color demands of the marketplace. By significantly
increasing the efficiency with which jobs are prepared for
print, Pressteks technology makes shorter printing runs
more feasible at lower costs. Our technology utilizes the offset
lithographic method of applying ink to paper that is universally
accepted by printers and consumers, and produces the versatile,
high-quality characteristics they require.

Lasertel, Inc. (Lasertel), a
subsidiary of Presstek, is primarily engaged in the manufacture
and development of high-powered laser diodes. Lasertels
products include semiconductor lasers and active components for
the graphics and defense industries. Lasertel offers
high-powered laser diodes in both standard and customized
configurations, including chip on sub-mount, un-mounted bars,
and fiber-coupled devices, to support various applications.

Business Overview

Beginning in the late 1980s, we developed a
direct imaging system that allows digitally formatted file data
to be used to image a plate directly on the printing press.
Pressteks technology and products use thermal energy
generated by lasers to reproduce digital files directly onto
printing plates, without the daylight sensitive, photomechanical
and chemical processes associated with other imaging methods.
Our direct imaging technology is currently being used in a
variety of both on-press and off-press applications. This
capability has provided a number of new applications for direct
imaging systems and patented thermal-based digital media and
consumable printing plates.

In 2000 we established Lasertel for the purpose
of securing our supply of laser diodes, which are components of
our imaging technology. Lasertel is located in Tucson, Arizona,
and is primarily engaged in the manufacture and development of
high-powered laser diodes. In addition to focusing its efforts
on supplying laser diodes to Presstek, Lasertel has also
developed laser products for the defense industry, and continues
to develop prototypes for qualification in the defense,
industrial and medical industries. There

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can be no assurance, however, that any of these
prototypes, if and when marketed, will be commercially
successful or produce significant revenue for Presstek or
Lasertel.


Presstek operates in two reportable segments, the
Digital Imaging Products segment and the Lasertel segment. The
Digital Imaging Products segment is primarily engaged in the
development, manufacture and sale of our patented digital
imaging systems and printing plate technologies for CTP and
direct-to-press applications. The Lasertel segment is primarily
engaged in the manufacture and development of high-powered laser
diodes for Presstek and other customers.

Information about our business segments, major
customers and geographic information are included in
Note 11 of notes to the financial statements.

Pressteks headquarters are located at 55
Executive Drive, Hudson, New Hampshire, 03051. Our general
telephone number is 603-595-7000, and our web site can be found
at www.presstek.com.

The DI Digital Imaging Systems

Pressteks DI products use thermal energy
generated by lasers to image thermal printing plates. This
thermal imaging process utilizes the heat from lasers to remove
the top surface of the plate, creating an ink receptive surface,
or a water receptive surface in the case of a positive writing
plate. Because it is daylight-safe, thermal imaging eliminates
the need for safelights and darkrooms, which are required in
systems that employ visible light lasers and photosensitive
plates. Because DI relies on a physical reaction of the laser
and plate materials, rather than a chemical reaction, our
thermal technology also eliminates post-imaging chemical
processing. Freedom from the constraints of other imaging
methods allows the application of our technology within the
limited confines of a printing press, and accommodates the
highly automated features of todays DI presses. It is the
interaction of the essential components of lasers, plate
materials, and press design, working in concert, which results
in the improved efficiencies and performance of our proprietary
products.

The DI digital imaging system is composed of a
series of solid state semiconductor laser diodes held in a fixed
array that can range in size, depending on the application, from
as few as 8 diodes to as many as 64 diodes. Each diode is under
computer control and can be turned off and on at high speeds,
usually measured in microseconds. When the diode is turned on,
it creates a miniature, precise, beam of high-power, infrared
laser light. The beam is focused on a specific area on the
surface of the thermal printing plate causing this area of the
plate to instantaneously heat up, creating an image by ablation.
This ablation effect creates an ink-receptive surface, or a
water receptive surface in the case of positive writing plates.
This laser-based imaging concept is used on both direct-to-press
and CTP systems. While many companies have experience using
lasers in CTP applications, Pressteks multiple laser diode
arrays have been working more reliably and at lower operating
costs in the harsh environments of on-press imaging.

Our next-generation DI technology, the ProFire
integrated imaging system, introduced in May 2000, integrates
the lasers, laser drivers, digital electronics, and motion
control into one modular package design that can be adapted to
many CTP devices or direct imaging presses. The ProFire system
has three major components: the FirePower laser diode
system, made up of unique four-beam laser diodes and laser
drivers, the integrated motion system that controls the
placement of the laser diodes, and the FireStation digital
controller and data server. This modular system allows us to
expand the number of diodes mounted on a fixed array, increasing
image size, speed and overall imaging performance. FirePower
lasers are incorporated in Pressteks ProFire imaging
modules, which combine lasers, electronics and motion control in
a compact package for efficient manufacturing and ease of
incorporation into DI press designs and CTP systems. The compact
ProFire unit fits within the side rails of most printing
presses, and is more easily incorporated into CTP products for
off-press imaging. The current generation of semiconductor
lasers has quadrupled the output of preceding lasers for faster
imaging times and improved accuracy. Our Lasertel subsidiary
provides Presstek with a steady supply of lasers and the
scientific expertise to advance its technology.

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We continue to develop and commercialize our DI
digital imaging systems for on-press applications. There can be
no assurance, however, that we will be able to successfully
commercialize additional products that incorporate this
technology.

The Dimension CTP Product Line

The Dimension platesetter is a CTP imaging device
that can image our Anthem and PEARLdry® Plus thermal plates
in an A3 (2-page), A2 (4-page) or A1 (8-page) format size. The
Dimension utilizes Pressteks ProFire direct imaging
technology, and can produce completely imaged printing plates,
ready to be mounted on a printing press, within 3 to 5 minutes
depending on the plate size. This simplified workflow results
not only in higher levels of automation and repeatability, but
also in lower cost per finished plate and smaller overall work
space requirements for platemaking operation. For the broad base
of installed conventional printing presses, the Dimension series
of CTP systems is designed to allow printers to realize many of
the benefits of DI before investing in a new digital press.

We continue to develop and commercialize our CTP
systems. There can be no assurance, however, that we will be
able to successfully commercialize these or other products, or
enter into any additional arrangements that will result in the
broader distribution of our Dimension product line.

DI and CTP Printing Plates

Our DI and CTP printing plates are available in
waterless form, such as PEARLdry Plus for DI presses, or
Anthem, our wet offset thermal plate for CTP imaging. These
plates are based on our patented thermal ablation imaging
technology, where the plates respond to heat and not to light.
Our plates are imaged by the ablation of a special layer that is
heated by the laser light source. The plate materials have a
wide infrared spectral sensitivity range (800 to 1200
nanometers) and can be used with a variety of semiconductor
diode laser imaging systems with sufficient power to ablate the
surface layers. These plates also utilize unique chemical-free
processing methods.

The current PEARLdry Plus plate is a
second-generation product based on our patented PEARLdry
technology. The plate uses a specially formulated silicone
material that is coated over the metalized infrared absorbing
layer. Environmentally friendly, thin-film deposition processes
produce the ultra-thin film coatings that facilitate ablative
imaging without excessive residue and are the foundation of
PEARLdry Plus plates for waterless printing. The silicone layer
is ink resistant, and when the imaging laser causes the ablation
process to occur, the resulting hole created by the laser in the
metal layer becomes ink receptive. Our PEARLdry Plus spooled
plates are used in a number of highly automated DI presses.
The Dimension CTP platesetter and other direct-to-plate systems
also are able to image the PEARLdry Plus plate.

The Anthem plate is the first in what we believe
will be a family of plates for wet offset lithography. Anthem
plates for CTP feature Pressteks patented polymer-ceramic
technology and combine ablative imaging and chemical-free
cleaning with run lengths of up to 100,000 impressions. The
Anthem plate runs with a wide range of fountain chemistry and
inks and can be imaged on other thermal CTP systems. The product
durability is built in as part of the manufacturing process,
providing consistent performance and wide latitude.
Anthems market includes a broad base of installed
conventional wet offset presses, currently the largest segment
of the printing industry. We believe this wet offset plate
product has broad market potential due to the compatibility with
a wide variety of print conditions that Anthem enjoys. There can
be no assurance, however, that printers currently equipped with
conventional wet offset presses will purchase CTP systems that
use Anthem plates.

In 2003 we began the beta testing phase for
ApplauseTM, a new process-free plate product. This
plate is expected to be available for both on-press and
off-press applications, with run lengths up to 100,000
impressions. We believe Applause is unique in that it is a truly
no-process plate. Unlike other digital plate products, Applause
requires no intermediate steps between imaging and printing.
Other benefits of Applause include excellent ink/water latitude,
high resolution, and compatibility with the existing press

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chemistries. As this product is currently in beta
testing, there can be no assurance that we will successfully
commercialize this product.


Presstek continues to develop thermal consumable
plate products that can be imaged by both its own DI systems as
well as high-energy laser-based CTP and direct-to-press systems
offered by companies such as Creo Inc. and others. There can be
no assurance, however, that we will be able to successfully
commercialize products that incorporate this technology.

The Semiconductor Laser Diode
Products

Our high-powered semiconductor laser diode
products are designed to achieve greater imaging speed and
resolution, without adding to the size and cost of the diode
array. The graphic arts industry requires lasers with a high
degree of power, uniformity, and reliability at a low unit cost.
Presstek believes its FirePower semiconductor laser diode not
only changes the standards in the graphic arts markets, but is a
new innovation to the semiconductor laser industry as well. Each
FirePower diode quadruples laser power by sending the output of
four optical fibers through a single lens assembly. Writing
speed and accuracy are increased without additional space and
costs. These four-channel lasers, manufactured at our Lasertel
subsidiary, also incorporate a number of packaging innovations
that reduce the size of the device and facilitate incorporation
into the ProFire imaging module.

Lasertel also manufactures and develops laser
products for the defense industry. These semiconductor devices
can be integrated into equipment for range finding,
illumination, and solid state laser weapons for defense
applications.

Lasertel continues to develop prototypes for
qualification in the defense, industrial and medical industries.
There can be no assurance, however, that any of these
prototypes, if and when marketed, will be commercially
successful or produce significant revenue for Presstek or
Lasertel.

Manufacturing

We operate manufacturing sites in Hudson, New
Hampshire and Tucson, Arizona.

Pressteks DI and CTP systems are
manufactured at our facility located at 55 Executive Drive in
Hudson, New Hampshire. We use a number of outside vendors who
supply components and sub-assemblies, which are integrated into
completed systems  either computer-to-press, direct
imaging systems used in the DI presses such as the Ryobi 3404DI,
and the Heidelberg Quickmaster DI, or CTP imaging systems, such
as the Dimension. These systems use semiconductor laser diode
devices built to our specifications and currently supplied by
Lasertel. We believe there are other sources available to
manufacture the laser diodes to specification, if required in
the future.

Our PEARLdry Plus plate products are also
manufactured at our Executive Drive facility, using equipment
which includes a thin film vacuum deposition coater, plate
converting and finishing equipment, and an atmospheric coater.
Our Anthem thermal plate is currently manufactured by one source
under an existing supply agreement. We may enter into
manufacturing agreements with third parties as we vertically
integrate the manufacturing of our digital plate products. We
believe there currently are other sources available to
manufacture these consumable products.

Lasertel operates a 75,000 square-foot facility
located in Tucson, Arizona. The facility includes
10,000 square feet of clean room space and complete process
equipment for semiconductor laser manufacturing. Lasertels
manufacturing process begins with molecular beam epitaxy
reactors to grow semiconductor laser wafers, and extends through
the final polishing techniques for the optical fiber.

Our press products are manufactured under an
agreement with a press manufacturer located in Japan. We believe
there are other sources available to manufacture these products;
however, if the supply of these presses were to be delayed, or
import restrictions be imposed, our ability to ship products in
a timely manner could be adversely affected, which could have a
material adverse effect on our business, results of operations
and financial condition.

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Prior to 2002, we purchased certain presses from
a manufacturer located in the Czech Republic, who joined in a
bankruptcy petition filed by its creditors in February 2002,
which adversely affected Presstek. Under our supply agreement
with the Czech manufacturer, we were required to make advance
payments at the time orders for products were placed. As a
result of these prepayments, we had advances in the amount of
$2.1 million when the bankruptcy petition was filed. We
recorded a $2.1 million write-off in the fourth quarter of
fiscal 2001 related to the prepayments. Although the Czech
manufacturer has subsequently reorganized under new ownership,
we do not expect to be able to successfully recover the
prepayments. We currently have no orders for the presses
previously supplied to us by this manufacturer. As a result,
there is no certainty that we will enter into any future supply
agreements with the Czech manufacturer.

Marketing, Distribution and Customer
Support

Our sales strategy is designed to distribute
Presstek DI and CTP products and the related consumables to
customers through direct distribution channels via independent
distributors, or by way of indirect distribution channels using
strategic partnerships with original equipment manufacturers
(OEM).

To meet our direct distribution strategy, we have
established a worldwide distribution network through which we
market and sell CTP equipment and PEARLdry Plus and Anthem
thermal plate products. The network currently includes
approximately 32 independent graphic arts dealers in 18
countries, including two national distributors, the Pitman
Company and xpedx Graphic Systems, and several regional dealers
in the United States.

To supplement our direct distribution partners we
also market and sell DI consumable products through our
Presstek.com web site.

We have also entered into OEM arrangements or
reseller relationships with respect to the Ryobi 3404DI, the
46 Karat, the KPG DI, and related consumables with
companies such as Ryobi Limited (Ryobi), Koenig
& Bauer, AG (KBA) and Kodak Polychrome Graphics
(KPG). These agreements permit these OEM resellers
and their dealers to sell PEARL® and DI-based equipment and
consumable products under their own labels. In March 2003, we
agreed with Xerox Corporation (Xerox) to terminate
our distribution agreement with respect to DocuColor DI presses
and related consumables. We will continue to provide consumables
and make service available through our distribution channel for
the current installed base of Xerox DocuColor DI presses.

By using this direct and indirect approach to
distribution, we have attempted to maximize the number of
systems using Presstek technology, which require Presstek
consumables. Additionally, we have developed, using our own
resources and those of third-party service providers, a global
service team, dedicated to servicing the products delivered
through our distribution network.

Market acceptance for any products incorporating
our various technologies and proprietary know-how will require
substantial marketing efforts and the expenditure of significant
sums, either by us, and/or our strategic and OEM partners. There
can be no assurance that any existing or new products will
achieve market acceptance or become commercially viable.

Strategy, Background and Strategic
Relationships

Pressteks business strategy is based in
part on strategic alliances and relationships with companies in
the printing and graphic arts industry. This strategy includes
licensing intellectual property; specialized product development
based on our proprietary technologies; the manufacturing of
imaging systems for inclusion in other manufacturers
products; the sale, distribution and marketing of our own
consumables; and the manufacturing of our patented thermal plate
materials for use in Pressteks and other
manufacturers imaging hardware and printing presses.

This strategy led to the development of an
important long-term relationship with Heidelberger
Druckmaschinen AG (Heidelberg), one of the
worlds largest manufacturers of printing presses and

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printing equipment, based in Germany. This
relationship was formalized with the signing of a Master
Agreement, Supply Agreement, and a Technology License (the
Heidelberg Agreements) in January 1991, which
covered the integration of the DI technology into various
presses manufactured by Heidelberg. The manufacture of
components, at specified rates, for these presses and the
commercialization of such presses are also covered by the
Heidelberg Agreements.


Under the Heidelberg Agreements, Heidelberg is
required to pay royalties to Presstek based on the net sales
prices of various specified types of Heidelberg presses on which
our DI technology is used. Heidelberg has been provided with
certain rights for use of the DI technology for the Quickmaster
DI format size press. The Heidelberg Agreements expire in
December 2011, subject to certain early termination and
extension provisions.

While our alliance with Heidelberg has been an
important one, there are substantial risks associated with this
relationship. Unlike our distribution relationships with
companies such as Ryobi, we have no distribution rights to the
Quickmaster DI, and must rely on Heidelberg to sell this press.
We currently have orders from Heidelberg for direct imaging kits
used in the Quickmaster DI for delivery through April 2003.
Heidelberg has recently indicated, as a result of the global
economic slowdown, that it has an inventory of direct imaging
kits on hand to support its production requirements for six
months. We believe that orders for direct imaging kits will
resume sometime in the second half of fiscal 2003, however,
there can be no assurance that any orders will be received. We
have also relied on Heidelbergs distribution channel for
sale of our Quickmaster DI consumables in Europe and other
countries. We understand that Heidelberg plans to introduce a
competitive plate product as an alternative to our PEARLdry for
the Quickmaster DI beginning in the second quarter of fiscal
2003. While it is too early to estimate the impact this plate
may have on Pressteks business, the introduction of a
competitive plate could reduce the revenue generated by Presstek
under its relationship with Heidelberg. This could have a
material adverse effect on our business, results of operations
and financial condition.

Sales to Heidelberg and its distributors
represented approximately 36%, 42%, and 57% of revenue for
fiscal 2002, 2001 and 2000 respectively. As a result of our
expanded strategic partnerships and distribution channels, our
sales to Heidelberg comprise a less significant share of total
sales for fiscal 2002. The loss of Heidelberg as a customer, or
a significant reduction in the level of our sales of direct
imaging kits or consumable products to Heidelberg, however,
would have a material adverse effect on our business, results of
operations and financial condition.

Other Strategic Relationships: Ryobi, Xerox,
Koenig & Bauer, Kodak-Polychrome Graphics and
Adast

In addition to its association with Heidelberg,
Presstek has also developed and expanded business relationships
with other companies in the industry. Certain of these
relationships involve new products that became available late in
fiscal 2000 and in fiscal 2001.

Presstek and Ryobi developed an A3 format size
four-color sheet-fed press, which is marketed by Ryobi as the
3404DI. Incorporating Pressteks dual plate cylinder
concept, this press also features our internal automated plate
cylinder design, ProFire technology and PEARLdry spooled plates.
The small format of this press is designed to appeal to quick
printers, in-plant printers, and copy centers looking to expand
their services with offset color printing.

Presstek and KBA, an international supplier of
printing presses of Wurzburg, Germany, have an agreement under
which KBA markets and sells the 46 Karat press, an A3 format
size four-color sheet-fed DI press, in certain geographic
markets. Similar to the Heidelberg and Ryobi presses that use
PEARLdry spooled plates, the 46 Karat delivers fully
automated plate advancing, imaging, ink presetting, and
printing. KBA also manufactures and markets a digital offset
press, the 74 Karat, which uses Pressteks direct
imaging and PEARLdry plates, and related intellectual property
under license. Regulations regarding chemical waste and
disposal, the new European economy, the suitability of DI for
printing variable quantities in different languages, and
increasing investment in the Eastern European countries are all
anticipated to have a positive effect on the sales of DI presses
in Europe. PEARLdry Plus plates for the 46 Karat will be
marketed directly by KBA and through Pressteks European
distributor network.

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We also entered into an agreement with
Kodak-Polychrome Graphics (KPG), a leading supplier
of digital, conventional and business solutions for the graphic
arts industry, in March 2003, granting KPG certain rights to
market, sell and service a direct digital imaging press and
related consumables in the United States and Canada. The new KPG
DI solution is a two-page, four-color Ryobi platform DI press
which is enabled by Pressteks ProFire imaging and thermal
plate technology. This new highly automated DI solution will be
manufactured to KPG specifications and is designed to provide
high quality offset printing.

Presstek and Xerox entered into a supply and
distribution agreement in 2000, to supply a series of three
Presstek enabled DI presses and related consumables. Under this
agreement, as amended in May 2001 through February 2002, Xerox
marketed, distributed and serviced these presses and consumables
in certain geographic markets on a co-branded basis. The Xerox
agreement covered four and five color versions of a B3 format
sheet-fed press, and an A3 format size four-color sheet-fed
press marketed by Xerox as the DocuColor DI presses. The
agreement also covered the distribution of PEARLdry spooled
printing plates.

In March 2003, Presstek and Xerox terminated
their supply and distribution agreement for DocuColor DI
presses. Xerox will no longer sell the DocuColor 233 DI-4,
the DocuColor 400 DI-4 or the DocuColor 400 DI-5
presses and related consumables. Presstek will continue to
provide consumables and make service available for the current
installed base of Xerox DocuColor DI presses. The revenue
generated from the sale of these presses was not material in
fiscal 2002, and as a result, the termination of this agreement
is not expected to have a material adverse effect on our
business, results of operations and financial condition.

In April 2001, we entered into an agreement with
Adamovské Strojírny a.s. (Adast) whereby
Adast agreed to manufacture both the four color and five color
B3 size sheet-fed presses for sale by Presstek. In late February
2002, Adast announced it had joined in a bankruptcy petition
filed by its creditors. In February 2003 the company reorganized
under new ownership, who plan to stabilize and rejuvenate Adast.
We currently have no orders for the presses previously supplied
to us by Adast. As a result, there is no certainty that we will
enter into any future supply agreements with Adast.

We are pursuing other business relationships that
we believe may result in broader use of our digital imaging and
printing plate technologies, in existing as well as new
applications. There can be no assurance, however, that, any
Presstek product, or any products incorporating our technology,
will be able to compete successfully in these markets.

Patents, Trademarks and Proprietary
Rights

As of March 21, 2003, Presstek and its
subsidiaries have in force 115 U.S. patents, (including 4 design
patents), 152 foreign patents (including 20 design patents), and
had received notices of allowance for 21 additional patents
(consisting of 1 U.S. and 20 foreign patents). These patents,
which expire from 2008 through 2023, are all believed to be
material to our business. We have applied for and are pursuing
applications for 10 additional U.S. patents and 86 foreign
patents. We also hold seven registered trademarks; Presstek, DI,
Dimension, ProFire, Anthem, PEARLdry, and PEARL. We anticipate
that we will apply for additional patents, trademarks, and
copyrights, as deemed appropriate. There can be no assurance as
to the issuance of any such patents or trademarks or the breadth
or degree of protection that our patents, trademarks or
copyrights may afford us.

There is rapid technological development in the
electronic image reproduction industries, resulting in extensive
patent filings and a rapid rate of issuance of new patents.
Although we believe that our technology has been independently
developed, and that the products we market and propose to market
will not infringe on the patents, or violate other proprietary
rights of others, it is possible that such infringement of
existing or future patents, or violation of proprietary rights
may occur. In such event we may be required to modify our design
or obtain a license. No assurance can be given that we will be
able to do so in a timely manner, upon acceptable terms and
conditions, or at all. The failure to do any of the foregoing
could have a material adverse effect on our business.
Furthermore, there can be no assurance

7



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that we will have the financial or other
resources necessary to successfully defend a patent infringement
or proprietary rights violation action. Moreover, we may be
unable, for financial or other reasons, to enforce our rights
under any of our patents. We have agreements with several of our
strategic partners which require us to indemnify the strategic
partner from claims made by third parties against
Pressteks intellectual property, and to defend the
validity of the patents or otherwise ensure the
technologys availability to the strategic partner. An
indemnification claim under any such agreement could have a
material adverse effect on our business, results of operations
and financial condition.


Presstek intends to rely on proprietary know-how
and to employ various methods to protect its source code,
concepts, trade secrets, ideas and documentation of its
proprietary software and laser diode technology. However, such
methods may not afford complete protection and there can be no
assurance that others will not independently develop such
know-how or obtain access to our know-how, software codes,
concepts, trade secrets, ideas, and documentation. Although we
have and expect to have confidentiality agreements with our
employees and appropriate vendors, there can be no assurance,
however, that such arrangements will adequately protect our
trade secrets and proprietary know-how.

Competition

Presstek believes that its imaging, thermal plate
and other intellectual property, its patented technologies, its
thermal plate manufacturing facilities, along with its strategic
alliances and worldwide distribution network provide it with a
competitive advantage. However, we are also aware of a number of
other companies that address markets in which Presstek products
are used and are competitive to our patented direct imaging
thermal plate technologies and related capabilities.

In the area of direct imaging and the short-run,
on-demand market, potentially competitive companies use
electrophotographic technology, sometimes referred to as
xerography, as the basis of their product lines. These companies
include, among others, Canon Inc., Hewlett Packard Company,
Heidelberg, and Xerox. IBM and Agfa Gevaert N.V. are also
marketing product versions manufactured by these companies.
These electrophotographic imaging systems use either wet or dry
toners to create one to four color images on paper and typically
offer resolutions of between 400 and 1200 dots per inch.

We are aware that most of the major companies in
the graphic arts industry have developed and/or are developing
and marketing, off-press CTP imaging systems. To date, these
devices, for the most part, utilize printing plates that require
a post imaging photochemical developing step and/or other post
processing steps such as heat treatment. Potential competitors
in this area include, among others, Agfa-Gevaert N.V., Creo
Inc., DaiNippon Screen Mfg., Ltd., Heidelberg, combinations of
these companies, and other smaller or lesser-known companies.
Our Dimension CTP, off-press plate imaging system is, in our
opinion, a further technological advancement because it
eliminates the need for post chemical processing. We believe
however, that some of the graphic arts companies mentioned above
are working on or have developed other plate concepts that would
eliminate the need for post image chemical processing.

We anticipate competition from printing plate
companies that manufacture, or have the potential to manufacture
digital thermal plates. Such companies include, among others,
Agfa-Gevaert N.V., KPG, and Fuji Photo Film Co., Ltd. We
recently became aware that Heidelberg will market a competitive
plate product as an alternative to Pressteks PEARLdry for
the Quickmaster DI, which is expected to be available beginning
in the second quarter of fiscal 2003. While we believe our
PEARLdry plate to be superior in performance and quality, it is
too early to estimate the impact this plate may have on
Pressteks business. The introduction of a competitive
plate could reduce the revenue generated by Presstek under its
relationship with Heidelberg, and could lead to downward pricing
pressure for our full line of spooled consumable products, which
could have a material adverse effect on our business, results of
operations and financial condition.

Products incorporating our technologies can also
be expected to face competition from products using conventional
methods of creating and printing plates. While these methods are
considered to be more costly, less efficient and not as
environmentally conscious as those being implemented by us, they
do offer their users the ability to continue to employ their
existing means of print and plate production. Companies

8



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offering these more traditional means and methods
are also refining these technologies to make them more
acceptable to the market.


Lasertels products can also be expected to
face competition from a number of companies marketing
competitive high-powered laser diode products such as Coherent
Inc. and JDS Uniphase Corporation.

Most of the companies marketing competitive
products or with the potential to do so are well established,
have substantially greater financial, marketing and distribution
resources than Presstek or Lasertel, and have established
records in the development, sale and service of products. There
can be no assurance that Presstek or Lasertel, any of our
products, or any products incorporating our technology will be
able to compete successfully in the future.

While we believe we have strong intellectual
property protection covering many of our technologies, there is
no assurance that the breadth or degree of such protection will
be sufficient to prohibit or otherwise delay the introduction of
competitive products or technologies. The introduction of
competitive products and technologies may have a material
adverse effect on our business, results of operations and
financial condition.

Research and Development

Research and product development expenses,
related to our continued development of products incorporating
DI technologies, including our semiconductor laser diodes, were
$9.3 million, $11.7 million and $15.9 million in
fiscal 2002, 2001 and 2000 respectively. These research and
development expenditures are primarily related to the Digital
Imaging Products segment.

Backlog

As of March 21, 2003, Presstek and Lasertel
had a backlog of products and royalties under contract
aggregating approximately $11.3 million compared to a
backlog of approximately $22.4 million as of March 15,
2002. Substantially all backlog of products as of March 21,
2003 is expected to ship in 2003.

Employees

As of March 21, 2003, Presstek and its
Lasertel subsidiary had 262 employees. Of these 262
employees, 45 are engaged primarily in engineering, research and
development; 53 are engaged in sales, marketing and customer
support; 121 are engaged primarily in manufacturing,
manufacturing engineering and quality control; and 43 are
engaged primarily in corporate management, administration and
finance. None of our employees is represented by a labor union.
We consider the relationship with our employees to be good.

We announced a series of repositioning activities
in fiscal 2002, as a result of re-focusing our business on the
marketing and commercialization of our DI technology. As a
result of these actions, we reduced our workforce by
approximately 50 positions, or 20% of our employees.

Investor Information

Financial and other information about Presstek is
available on our website (www.presstek.com). We make
available, free of charge on our website, our annual report on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
SEC.

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Glossary

Set forth below is a glossary of certain terms
used in this report:



|                         |  |                                                                                                                                                                           
|------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A1 (8-page)              |  | a printing term referring to a standard paper
    size capable of printing eight 8.5 x 11 pages on a
    sheet of paper                                                 
|                        
|A2 (4-page)              |  | a printing term referring to a standard paper
    size capable of printing four 8.5 x 11 pages on a
    sheet of paper                                                  
|                        
|A3/ B3 (2-page)          |  | a printing term referring to a standard paper
    size capable of printing two 8.5 x 11 pages on a
    sheet of paper                                                   
|                        
|Ablation                 |  | a controlled detachment/vaporization caused by a
    thermal event, this process is used during the imaging of
    Pressteks PEARL and Anthem consumables                
|                        
|Anthem®                  |  | Pressteks line of wet offset digital plates
    with a unique polymer-ceramic construction                                                                               
|                        
|Computer-to-plate (CTP)  |  | a general term referring to the exposure of
    lithographic plate material from a digital database, off-press                                                            
|                        
|Direct Imaging (DI®)     |  | Pressteks registered trademark for digital
    imaging systems that allow image carriers (film and plates) to
    be imaged from a digital database, on and off-press    
|                        
|Dots per inch (dpi)      |  | a measurement of the resolving power or the
    addressability of an imaging device                                                                                       
|                        
|Heidelberg               |  | Heidelberger Druckmaschinen AG, one of the
    worlds largest printing press manufacturers, headquartered
    in Heidelberg, Germany                                     
|                        
|Infrared                 |  | light lying outside of the visible spectrum
    beyond its red-end, characterized by longer wavelengths; used in
    our thermal imaging process                          
|                        
|KBA                      |  | Koenig & Bauer, AG, one of the worlds
    largest printing press manufacturers, headquartered in Wurzburg,
    Germany                                                   
|                        
|KPG                      |  | Kodak Polychrome Graphics, a leading supplier of
    digital, conventional and business solutions for the graphic
    arts industry, headquartered in Norwalk, Connecticut
|                        
|Lithography              |  | printing from a single plane surface under the
    principle that the image area carries ink and the non-image area
    does not, and that ink and water do not mix       
|                        
|Off-press                |  | making a printing plate from either an analog or
    digital source independent of the press on which it will be used                                                     
|                        
|On-press                 |  | the use of Pressteks direct imaging
    technologies to make a plate directly from a digital file on the
    press                                                       
|                        
|PEARL®                   |  | the name associated with Pressteks first
    generation laser imaging technologies and related products and
    consumables                                              
|                        
|ProFire® imaging systems |  | the Presstek components required to convert a
    conventional printing press into a direct imaging press,
    including laser diode arrays, computers, electronics       

10



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|                           |  |                                                                                                                                                                                                                                                             
|-------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Dimension®                 |  | Pressteks product line of CTP off-press
    platemaking equipment                                                                                                                                                                                          
|                          
|Platemaking                |  | the process of applying a printable image to a
    printing plate                                                                                                                                                                                           
|                          
|Prepress                   |  | graphic arts operations and methodologies that
    occur prior to the printing process; typically these include
    photography, scanning, image assembly, color correction,
    exposure of image carriers (film and/or plate), proofing and
    processing
|                          
|Quickmaster DI             |  | the second generation of direct imaging,
    waterless presses, highly automated with roll-fed PEARLdry Plus
    plate material, a joint development effort between Heidelberg
    and Presstek                                                             
|                          
|Ryobi                      |  | Ryobi Limited of Japan, a printing press
    manufacturer headquartered in Japan.                                                                                                                                                                           
|                          
|Ryobi 3404DI               |  | an A3 format size four-color sheet-fed press,
    incorporating Pressteks dual plate cylinder concept and
    PEARLdry Plus spooled plates, a joint development effort between
    Ryobi and Presstek                                                      
|                          
|Semiconductor laser diode  |  | a high-powered, infrared imaging technology
    employed in the DI imaging systems                                                                                                                                                                          
|                          
|Short-run markets/printing |  | a graphic arts classification used to denote an
    emerging trend for lower print quantities                                                                                                                                                               
|                          
|Thermal                    |  | a method of digitally exposing a material via the
    heat generated from a laser beam                                                                                                                                                                      
|                          
|Vacuum deposition process  |  | a technology to accurately, uniformly coat
    substrates in a controlled environment                                                                                                                                                                       
|                          
|Waterless                  |  | a lithographic printing method that uses dry
    offset printing plates and inks and does not require a dampening
    system                                                                                                                                




Item 2.     Properties

Pressteks operations are conducted
primarily in two locations.

Our building located at 55 Executive Drive in
Hudson, New Hampshire is a 165,000 square foot facility, which
we own. This building contains the corporate headquarters for
both our operating segments, as well as manufacturing
operations, research and development activities, marketing and
demonstration facilities, and various administrative and
customer support activities for the Digital Imaging Products
segment.

We also own a 75,000 square foot facility in
Tucson, Arizona, which is leased by Lasertel. This building
contains the manufacturing operations, research and development
activities, as well as the various administrative activities of
the Lasertel segment.

These properties are secured by two ten-year
mortgage term loans in the principal amount of $6.9 million
and $4.0 million, respectively. These properties were
acquired for an aggregate cost of approximately
$25.6 million.

We currently utilize approximately 70% of the
capacity of our facilities. We believe that our existing
facilities are well maintained, in good operating condition, and
are adequate for our current and expected future operations.

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Item 3.     Legal
Proceedings

In August 1999, Creo Inc. (Creo),
filed an action in the United States District Court for the
District of Delaware (the District Court) against
Presstek asserting that Creo has a reasonable apprehension
that it will be sued by Presstek for infringement of two
of our patents and seeking a declaration that Creos
products do not and will not infringe any valid and
enforceable claims of the patents in question. In
September 1999, we filed a counterclaim against Creo for patent
infringement. Presstek claimed that Creo infringed two direct
imaging patents owned by Presstek which had recently been the
subject of re-examination by the U.S. Patent and Trademark
Office. This action went to trial before the District Court
without a jury during the week of June 25, 2001. The
District Court issued a decision on September 11, 2001, in
which it affirmed the validity and enforceability of our
on-press imaging patents, but held that the current Creo DOP
System did not infringe the patents. Creo appealed the District
Courts decision that the patents are valid and
enforceable, and we cross-appealed the finding of
non-infringement by the current Creo DOP System. On
September 17, 2002, the United States Court of Appeals for
the Federal Circuit affirmed the District Courts decision
that our patents are valid and enforceable, but that they are
not infringed by the current Creo DOP System. Neither party
appealed this decision.

In December of 1999, PPG, Inc. (PPG)
brought suit against Delta V Technologies, Inc.
(Delta V) , a subsidiary of the Company, and
Presstek. The suit, which is pending in the United States
District Court for the Middle District of Pennsylvania, alleges
that Delta V sold to PPG certain vacuum coating equipment
that did not meet certain product specifications. PPG seeks
damages in excess of $7.0 million. PPG sought to hold
Presstek liable for the alleged breach of contract by its
subsidiary, Delta V, on a theory of indirect liability.
Presstek and Delta V have answered PPGs complaint.
Delta V asserted a counterclaim against PPG for PPGs
failure to make the final installment payment in excess of
$400,000 for Delta Vs work, and also asserted a
cross-claim against Circonix, a Delta V subcontractor for
the vacuum coater project. Circonix filed cross-claims against
Presstek and Delta V. On February 1, 2002, Circonix
filed a voluntary petition of bankruptcy in the United States
Bankruptcy Court, staying the litigation of the claims against,
and asserted by, Circonix. In November 2002, the
U.S. District Court granted summary judgment in favor of
Presstek, because, as a matter of law, PPG was unable to
demonstrate any grounds upon which to hold Presstek liable for
any alleged breach of contract by Delta V. The Company
continues to vigorously defend PPGs claim against
Delta V, and vigorously pursue Delta Vs
counterclaim against PPG. The Company believes it has adequate
reserves available to defend these claims.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

Not Applicable




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Pressteks common stock is quoted on the
Nasdaq National Market under the symbol PRST. The
following table sets forth the high and low sale prices per
share of common stock for each full quarterly period within the
two most recently completed fiscal years as reported by the
NASDAQ National Market.

|                                    |  |      |      |     |  |   |      | 
|----------------------------------- |  | ---- | ---- | --- |  | - | ---- | 
|Fiscal Year Ended December 28, 2002 |  | High |      | Low
|                                    |  |      |      |    
|First quarter                       |  | $    | 9.36 |     |  | $ | 5.35 | 
|Second quarter                      |  |      | 8.04 |     |  |   | 3.18 | 
|Third quarter                       |  |      | 4.99 |     |  |   | 2.50 | 
|Fourth quarter                      |  |      | 5.75 |     |  |   | 2.11 | 

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|                                    |  |      |       |     |  |   |      | 
|----------------------------------- |  | ---- | ----- | --- |  | - | ---- | 
|Fiscal Year Ended December 29, 2001 |  | High |       | Low
|                                    |  |      |       |    
|First quarter                       |  | $    | 14.44 |     |  | $ | 8.75 | 
|Second quarter                      |  |      | 15.21 |     |  |   | 8.88 | 
|Third quarter                       |  |      | 12.50 |     |  |   | 3.51 | 
|Fourth quarter                      |  |      | 9.94  |     |  |   | 4.67 | 

On March 21, 2003 there were 3,077 holders
of record of our common stock. The closing price of our common
stock was $5.04 per share on March 21, 2003.

Dividend Policy

To date, we have not paid any cash dividends on
our common stock. The payment of cash dividends in the future is
within the discretion of our Board of Directors, and will depend
upon our earnings, capital requirements, financial condition and
other relevant factors. The Board of Directors does not intend
to declare any cash dividends in the foreseeable future, but
instead intends to retain all earnings, if any, for use in our
business operations.

Securities Authorized for Issuance Under
Equity Compensation Plans

We also have securities authorized for issuance
under equity compensation plans. Information concerning
securities authorized for issuance under our equity compensation
plans will be set forth under the caption Equity
Compensation Plan Information in our definitive proxy that
we expect to file with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended
December 28, 2002, and such information is incorporated
herein by reference.

13



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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following selected financial data of the
Company has been derived from the financial statements of the
Company, appearing elsewhere herein (except for the statements
of operations data for the fiscal years ended January 1,
2000 and January 2, 1999 and the balance sheet data at
December 30, 2000, January 1, 2000 and January 2,
1999, which is not included in such financial statements).

SELECTED FINANCIAL DATA

Statements of Operations


|                                               |                                                           |                                       |        |        |   |        |         |        |   |       |        |        |   |   |         |        |   |   |        |        |  
|---------------------------------------------- | --------------------------------------------------------- | ------------------------------------- | ------ | ------ | - | ------ | ------- | ------ | - | ----- | ------ | ------ | - | - | ------- | ------ | - | - | ------ | ------ | -
|                                               |                                                           |                                      
|                                               |                                                           | For the Fiscal Years Ended           
|                                               |                                                           |                                      
|                                               |                                                           | Dec 28                                |        | Dec 29 |   | Dec 30 |         | Jan 1  |   | Jan 2
|                                               |                                                           | 2002                                  |        | 2001   |   | 2000   |         | 2000   |   | 1999 
|                                               |                                                           |                                       |        |        |   |        |         |        |   |      
|                                               |                                                           |                                      
|                                               |                                                           | (In thousands, except per share data)
|Revenue:                                       |                                                           | $                                     | 83,453 |        |   | $      | 102,303 |        |   | $     | 87,294 |        |   | $ | 54,964  |        |   | $ | 74,165 |       
|                                               |                                                           |                                       |        |        |   |        |         |        |   |       |        |        |   |   |         |        |   |   |        |       
|Costs and Expenses:                            |                                                           |                                       |        |        |   |        |         |        |   |       |        |        |   |   |         |        |   |   |        |       
|                                               | Cost of products sold(2)                                  |                                       |        | 54,639 |   |        |         | 64,395 |   |       |        | 46,747 |   |   |         | 33,326 |   |   |        | 46,606 |  
|                                               | Research and product development                          |                                       |        | 9,303  |   |        |         | 11,719 |   |       |        | 15,897 |   |   |         | 17,190 |   |   |        | 14,994 |  
|                                               | Sales, marketing and customer support                     |                                       |        | 10,425 |   |        |         | 13,004 |   |       |        | 9,613  |   |   |         | 5,934  |   |   |        | 5,620  |  
|                                               | General and administrative(1)                             |                                       |        | 10,554 |   |        |         | 15,802 |   |       |        | 9,635  |   |   |         | 6,487  |   |   |        | 9,264  |  
|                                               | Special charges(2)                                        |                                       |        | 5,961  |   |        |         |       |   |       |        |       |   |   |         |       |   |   |        |       |  
|                                               | Provision for settlement of shareholder
    litigation(3) |                                       |        |       |   |        |         |       |   |       |        |       |   |   |         | 23,200 |   |   |        |       |  
|                                               |                                                           |                                       |        |        |   |        |         |        |   |       |        |        |   |   |         |        |   |   |        |       
|Total costs and expenses                       |                                                           |                                       | 90,882 |        |   |        | 104,920 |        |   |       | 81,892 |        |   |   | 86,137  |        |   |   | 76,484 |       
|                                               |                                                           |                                       |        |        |   |        |         |        |   |       |        |        |   |   |         |        |   |   |        |       
|Income (loss) from operations                  |                                                           |                                       | (7,429 | )      |   |        | (2,617  | )      |   |       | 5,402  |        |   |   | (31,173 | )      |   |   | (2,319 | )     
|                                               |                                                           |                                       |        |        |   |        |         |        |   |       |        |        |   |   |         |        |   |   |        |       
|Other Income (Expense):                        |                                                           |                                       |        |        |   |        |         |        |   |       |        |        |   |   |         |        |   |   |        |       
|                                               | Interest, net                                             |                                       |        | (872   | ) |        |         | (1,136 | ) |       |        | (99    | ) |   |         | 501    |   |   |        | 623    |  
|                                               | Other, net                                                |                                       |        | 21     |   |        |         | (63    | ) |       |        | 147    |   |   |         | 38     |   |   |        | 109    |  
|                                               |                                                           |                                       |        |        |   |        |         |        |   |       |        |        |   |   |         |        |   |   |        |       
|Other income (expense), net                    |                                                           |                                       | (851   | )      |   |        | (1,199  | )      |   |       | 48     |        |   |   | 539     |        |   |   | 732    |       
|                                               |                                                           |                                       |        |        |   |        |         |        |   |       |        |        |   |   |         |        |   |   |        |       
|Income (Loss) From Continuing
    Operations   |                                                           |                                       |        |        |   |        |         |        |   |       |        |        |   |   |         |        |   |   |        |       
|Before Income Taxes                            |                                                           |                                       | (8,280 | )      |   |        | (3,816  | )      |   |       | 5,450  |        |   |   | (30,634 | )      |   |   | (1,587 | )     
|Provision for Income Taxes                     |                                                           |                                       |       |        |   |        |        |        |   |       | 150    |        |   |   |        |        |   |   |       |       
|                                               |                                                           |                                       |        |        |   |        |         |        |   |       |        |        |   |   |         |        |   |   |        |       
|Income (Loss) From Continuing
    Operations   |                                                           |                                       | (8,280 | )      |   |        | (3,816  | )      |   |       | 5,300  |        |   |   | (30,634 | )      |   |   | (1,587 | )     
|Discontinued Operations:(4)                    |                                                           |                                       |        |        |   |        |         |        |   |       |        |        |   |   |         |        |   |   |        |       
|                                               | Income (loss) from discontinued operations                |                                       |        |       |   |        |         |       |   |       |        | 600    |   |   |         | (448   | ) |   |        | (1,094 | )
|                                               | Loss on disposal of discontinued operations               |                                       |        |       |   |        |         |       |   |       |        |       |   |   |         | (8,534 | ) |   |        |       |  
|                                               |                                                           |                                       |        |        |   |        |         |        |   |       |        |        |   |   |         |        |   |   |        |       
|Income (Loss) From Discontinued
    Operations |                                                           |                                       |       |        |   |        |        |        |   |       | 600    |        |   |   | (8,982  | )      |   |   | (1,094 | )     
|                                               |                                                           |                                       |        |        |   |        |         |        |   |       |        |        |   |   |         |        |   |   |        |       
|Net Income (Loss)                              |                                                           | $                                     | (8,280 | )      |   | $      | (3,816  | )      |   | $     | 5,900  |        |   | $ | (39,616 | )      |   | $ | (2,681 | )     
|                                               |                                                           |                                       |        |        |   |        |         |        |   |       |        |        |   |   |         |        |   |   |        |       
|Earnings (Loss) Per Share 
    Basic:         |                                                           |                                       |        |        |   |        |         |        |   |       |        |        |   |   |         |        |   |   |        |       
|                                               | From continuing operations                                |                                       | $      | (0.24  | ) |        | $       | (0.11  | ) |       | $      | 0.16   |   |   | $       | (0.95  | ) |   | $      | (0.05  | )
|                                               | From discontinued operations                              |                                       | $      | 0.00   |   |        | $       | 0.00   |   |       | $      | 0.02   |   |   | $       | (0.28  | ) |   | $      | (0.03  | )
|                                               |                                                           |                                       |        |        |   |        |         |        |   |       |        |        |   |   |         |        |   |   |        |       
|Earnings (Loss) Per Share 
    Basic          |                                                           | $                                     | (0.24  | )      |   | $      | (0.11   | )      |   | $     | 0.18   |        |   | $ | (1.23   | )      |   | $ | (0.08  | )     
|                                               |                                                           |                                       |        |        |   |        |         |        |   |       |        |        |   |   |         |        |   |   |        |       
|Earnings (Loss) Per Share 
    Diluted:       |                                                           |                                       |        |        |   |        |         |        |   |       |        |        |   |   |         |        |   |   |        |       
|                                               | From continuing operations                                |                                       | $      | (0.24  | ) |        | $       | (0.11  | ) |       | $      | 0.15   |   |   | $       | (0.95  | ) |   | $      | (0.05  | )
|                                               | From discontinued operations                              |                                       | $      | 0.00   |   |        | $       | 0.00   |   |       | $      | 0.02   |   |   | $       | (0.28  | ) |   | $      | (0.03  | )
|                                               |                                                           |                                       |        |        |   |        |         |        |   |       |        |        |   |   |         |        |   |   |        |       
|Earnings (Loss) Per Share 
    Diluted        |                                                           | $                                     | (0.24  | )      |   | $      | (0.11   | )      |   | $     | 0.17   |        |   | $ | (1.23   | )      |   | $ | (0.08  | )     
|                                               |                                                           |                                       |        |        |   |        |         |        |   |       |        |        |   |   |         |        |   |   |        |       

14



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##### Table of Contents



|                                                         |  |                                       |        |        |  |        |        |       |  |       |        |  |  |  |        |  |  |  |        | 
|-------------------------------------------------------- |  | ------------------------------------- | ------ | ------ |  | ------ | ------ | ----- |  | ----- | ------ |  |  |  | ------ |  |  |  | ------ | 
|                                                         |  |                                      
|                                                         |  | For the Fiscal Years Ended           
|                                                         |  |                                      
|                                                         |  | Dec 28                                |        | Dec 29 |  | Dec 30 |        | Jan 1 |  | Jan 2
|                                                         |  | 2002                                  |        | 2001   |  | 2000   |        | 2000  |  | 1999 
|                                                         |  |                                       |        |        |  |        |        |       |  |      
|                                                         |  |                                      
|                                                         |  | (In thousands, except per share data)
|Weighted Average Common Shares
    Outstanding  Basic   |  |                                       | 34,124 |        |  |        | 34,096 |       |  |       | 32,826 |  |  |  | 32,336 |  |  |  | 31,986 | 
|                                                         |  |                                       |        |        |  |        |        |       |  |       |        |  |  |  |        |  |  |  |        | 
|Weighted Average Common Shares
    Outstanding  Diluted |  |                                       | 34,124 |        |  |        | 34,096 |       |  |       | 35,320 |  |  |  | 32,336 |  |  |  | 31,986 | 
|                                                         |  |                                       |        |        |  |        |        |       |  |       |        |  |  |  |        |  |  |  |        | 

|                                             |  |                |         |        |  |        |         |       |  |       |         |  |  |   |        |  |  |   |         | 
|-------------------------------------------- |  | -------------- | ------- | ------ |  | ------ | ------- | ----- |  | ----- | ------- |  |  | - | ------ |  |  | - | ------- | 
|Balance Sheet Data as of                     |  | Dec 28         |         | Dec 29 |  | Dec 30 |         | Jan 1 |  | Jan 2
|                                             |  | 2002           |         | 2001   |  | 2000   |         | 2000  |  | 1999 
|                                             |  |                |         |        |  |        |         |       |  |      
|                                             |  |               
|                                             |  | (in thousands)
|Working capital                              |  | $              | 28,572  |        |  | $      | 26,741  |       |  | $     | 32,287  |  |  | $ | 25,373 |  |  | $ | 37,080  | 
|Total assets                                 |  |                | 101,796 |        |  |        | 106,844 |       |  |       | 115,902 |  |  |   | 94,633 |  |  |   | 106,670 | 
|Long-term debt, including short-term portion |  |                | 16,707  |        |  |        | 16,398  |       |  |       | 18,470  |  |  |   | 9,854  |  |  |   | 6,444   | 
|Other long-term liabilities(3)               |  |                |        |        |  |        |        |       |  |       |        |  |  |   | 22,950 |  |  |   |        | 
|Stockholders equity                         |  |                | 71,766  |        |  |        | 79,985  |       |  |       | 83,143  |  |  |   | 49,855 |  |  |   | 87,453  | 



---



|    |                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes a $2.1 million write-off recorded
    in fiscal 2001 for pre-payments made as a result of a
    suppliers bankruptcy petition in 2002.                                                                    
|   
|(2) | Relates to repositioning activities and workforce
    reductions recorded in June 2002. Includes $3.7 million in
    cost of sales for inventory write-downs and other charges
    related to discontinued programs.
|   
|(3) | Provision for the settlements with the plaintiffs
    in the class actions and related derivative suits filed in 1996.
    See Note 15.                                                                             
|   
|(4) | Relates to the operations of Delta V
    Technologies, Inc., which were shut-down in fiscal 1999. See
    Note 2.                                                                                                   






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following Managements Discussion and
Analysis should be read in connection with Item 1.
Business, Item 6. Selected Financial
Data, Item 7A. Quantitative and Qualitative
Disclosures about Market Risks, the Companys
Consolidated Financial Statements and Notes thereto and the
information described under the caption Risk Factors
below.

Background

Presstek is a manufacturer, developer and
marketer of digital laser imaging and chemistry-free plate
technologies for the printing and graphic arts industries.
Pressteks products and applications incorporate its
patented Direct Imaging (DI) technologies and consumables for
computer-to-plate (CTP) and direct-to-press
applications. Our patented DI thermal laser diode product family
enables customers to produce high quality, full-color
lithographic printed materials more quickly and cost effectively
than conventional methods. Pressteks DI technology
eliminates photographic darkrooms, film, and chemical
processing, which results in reduced turnaround time and lowers
the cost of production for commercial printers. Using digital
information and high-powered semiconductor laser diodes to
create images in our patented printing plate materials, DI
technologies are marketed to leading press manufacturers and
used in the Dimension series of CTP systems. Pressteks
Dimension CTP systems incorporate our patented ProFire laser
imaging technology and use our complimentary chemistry-free
thermal printing plate, Anthem.

We are also engaged in the development of
additional DI products that incorporate our patented,
proprietary, digital imaging system and process-free thermal
ablation printing plate technologies for CTP and direct-to-press
applications.

15



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Lasertel, Inc. (Lasertel), a
subsidiary of Presstek, is primarily engaged in the manufacture
and development of high-powered laser diodes. Lasertels
products include semiconductor lasers and active components for
the graphics and defense industries. Lasertel offers
high-powered laser diodes in both standard and customized
configurations, including chip on sub-mount, un-mounted bars,
and fiber-coupled devices, to support various applications.

We operate and report on a 52 or 53 week
fiscal year, ending on the Saturday closest to December 31.
Accordingly, the financial statements include the 52 week
fiscal years ended December 28, 2002 (fiscal
2002), December 29, 2001 (fiscal 2001)
and December 30, 2000 (fiscal 2000).

We operate in two reportable segments, the
Digital Imaging Products segment and the Lasertel segment. The
Digital Imaging Products segment is primarily engaged in the
development, manufacture and sale of patented digital imaging
systems and printing plate technologies for CTP and
direct-to-press applications. The Lasertel segment is primarily
engaged in the manufacture and development of high-powered laser
diodes for use by Presstek and for sale to external customers.

Critical Accounting Policies and
Estimates



| |        
| | -------
| | General

Pressteks Managements Discussion and
Analysis of its Financial Condition and Results of Operations
are based upon our consolidated financial statements, which have
been prepared in accordance with generally accepted accounting
principles as adopted in the United States. The preparation of
these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis,
Presstek evaluates its estimates, including those related to
product returns, allowances for doubtful accounts, inventories,
long-lived assets, warranty obligations, and litigation.
Presstek bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.

We believe the following critical accounting
policies affect our more significant judgments and estimates
used in the preparation of our consolidated financial
statements. For a complete discussion of our accounting
policies, see Note 1 to our financial statements.



| |                    
| | -------------------
| | Revenue Recognition

Presstek recognizes revenue in accordance with
Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements (SAB No. 101).
Under SAB No. 101, revenue is recognized when persuasive
evidence of an agreement exists, delivery has occurred or
services have been rendered, the price to the customer is fixed
or determinable, and collection is reasonably assured.

We record revenue for product sales net of
estimated returns, which are adjusted periodically based upon
historical rates of return. Revenue and related royalties for
products sold where installation is not required is recorded at
the time of shipment. Revenue for products that require
installation, for which the installation is not deemed
inconsequential, is recognized upon completion of installation
and customer acceptance. Revenue related to service maintenance
agreements is recognized ratably over the duration of the
particular contract. Certain fees and other reimbursements are
recognized as revenue when the related services have been
performed or the revenue otherwise earned. Deferred revenue
includes certain customer advances received as a result of our
distribution agreements. This revenue is recognized as product
is shipped or services are performed.



| |                                    
| | -----------------------------------
| | Allowance for Doubtful
    Accounts

Presstek evaluates its accounts receivable on an
ongoing basis and establishes an allowance for doubtful accounts
based on specific customer circumstances and on its historical
rate of write-offs. We

16



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##### Table of Contents



include any accounts receivable balances that are
determined to be uncollectible, along with a general reserve, in
an overall allowance for doubtful accounts. After all attempts
to collect a receivable have failed, the receivable is written
off against the allowance. We believe the allowance for doubtful
accounts as of December 28, 2002 is adequate, however,
actual write-offs might exceed the recorded allowance.




| |                   
| | ------------------
| | Product Warranties

Presstek warrants its products against defects in
material and workmanship for various periods, determined by the
product, generally from a period of ninety days to a period of
one year from the date of installation. We provide for the
estimated cost of product warranties at the time revenue is
recognized. While we engage in product quality programs and
processes, our warranty obligation is affected by product
failure rates, material usage and service costs incurred in
correcting a product failure. Should actual product failure
rates, material usage or service costs differ from our
estimates, revisions to the estimated warranty liability would
be required.



| |                    
| | -------------------
| | Inventory Valuation

Inventories are valued at the lower of cost or
net realizable value, with cost determined using the first-in,
first-out method. We assess the recoverability of inventory to
determine whether adjustments for impairment are required.
Inventory that is in excess of future requirements is written
down to its estimated value based upon forecasted demand for its
products. If actual demand is less favorable than what has been
forecasted by management, additional inventory write-downs may
be required.



| |                  
| | -----------------
| | Long Lived Assets

Long-lived assets, such as intangible assets and
property and equipment, are evaluated for impairment when events
or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets.
When any such impairment exists, the related assets will be
written down to fair value.

RESULTS OF OPERATIONS



| |                                   
| | ----------------------------------
| | Fiscal 2002 versus Fiscal
    2001

Revenue

Our revenue for fiscal 2002 was negatively
impacted by the global economic slowdown, which continued in
fiscal 2002, and specifically by the weakness in the graphic
arts industry. This economic slowdown has led to a reduction in
spending for capital equipment, such as our CTP equipment and
DI presses.

Revenue for fiscal 2002 of $83.5 million
consisted of product sales, customer support revenue, royalties
and license fees. Revenue for fiscal 2002 decreased
$18.8 million or 18% as compared to $102.3 million for
fiscal 2001. Revenue generated for fiscal 2002 relates primarily
to the Digital Imaging Products segment, as the external revenue
generated by the Lasertel segment was not material. In fiscal
2001 the Lasertel segment recorded a $1.5 million revenue
reversal, which related to a sale recorded in fiscal 2000. The
sale was reversed as a result of a customer return related to
product quality. Other external revenue generated by the
Lasertel segment in fiscal 2001 was not material.

Product sales, including equipment and
consumables, were $79.0 million for fiscal 2002, a decrease
of $15.1 million or 16%, as compared to $94.1 million
for fiscal 2001. This decrease in product sales was due
primarily to volume decreases of DocuColor 400 DI press
shipments to Xerox. Product sales also decreased due to volume
and price decreases of direct imaging kits sold to Heidelberg
for use in the Quickmaster DI and to Ryobi for use in the Ryobi
3404DI. These decreases were partially offset by volume
increases of 46 Karat press shipments to KBA, as well as
volume increases in our consumable products.

17



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The revenue generated from the sale of consumable
products was $53.2 million for fiscal 2002, an increase of
$6.3 million or 14%, as compared to $46.9 million for
fiscal 2001. This increase in consumable revenue is primarily
the result of an increase in the installed base of equipment
using our proprietary consumable products. Consumable product
revenue includes sales under the Companys agreements with
Heidelberg and its distributors of $21.8 million and
$20.9 million for fiscal 2002 and 2001, respectively.

In March 2003, we expanded the product offerings
to select dealers in our distribution channel in Europe to
include the sale of Quickmaster DI consumables. In connection
with this offering, we reduced pricing on our full line of
spooled consumables distributed through this dealer channel up
to 20%. This new pricing may reduce the revenue generated by
Presstek from its spooled consumable products up to
$3.0 million in fiscal 2003. While the expected lost
revenues resulting from the price reduction may be offset by
increased revenues from spooled consumables sales derived from
additional presses installed and increased usage of spooled
consumables, there can be no assurance that this expected lost
revenue will be offset. In addition, market conditions may
require us to expand the regions in which we offer reduced
prices, or to further reduce our spooled consumable prices,
which could further reduce our revenues in 2003 and beyond. This
could have a material adverse effect on our business, results of
operations and financial condition.

Revenue generated from services related to
customer support, including installation and service contract
revenue, was $1.6 million or 2% of revenue for fiscal 2002,
an increase of $1.1 million, as compared to $547,000 for
fiscal 2001.

Royalties and license fees for fiscal 2002 were
$4.5 million, a decrease of $3.7 million or 45%, as
compared to royalties and license fees of $8.2 million for
fiscal 2001. Royalties decreased $3.0 million or 52% for
fiscal 2002, compared to fiscal 2001, primarily as a result of
decreased shipments to Heidelberg of direct imaging kits used in
the Quickmaster DI. Licenses and fees decreased $750,000
comparing fiscal 2002 to fiscal 2001 primarily as a result of
the one-time settlement fee received in fiscal 2001 in
connection with the settlement of our outstanding arbitration
proceedings with Heidelberg, while no such fees were received in
2002.

In connection with the settlement of our
outstanding arbitration proceedings with Heidelberg, we agreed
to reduce the royalty payable by Heidelberg for imaging kits
delivered in connection with the Heidelberg Quickmaster DI by
approximately $9,000 per kit. This reduced royalty rate is
effective for imaging kits ordered and delivered after
May 1, 2002.

Revenue generated under the Companys
agreements with Heidelberg and its distributors was
$30.2 million for fiscal 2002, a decrease of
$12.4 million or 29%, as compared to $42.6 million for
fiscal 2001. Revenue from Heidelberg represented 36% and 42% of
total revenue for fiscal 2002 and 2001, respectively.

We currently have orders from Heidelberg for
direct imaging kits used in the Quickmaster DI for delivery
through April 2003. Heidelberg has indicated, as a result of the
global economic slowdown, that it has an inventory of direct
imaging kits on hand to support its production requirements for
six months. We believe that orders for direct imaging kits will
resume sometime in the second half of fiscal 2003, however,
there can be no assurance that any orders will be received.

We have recently learned that Heidelberg plans to
introduce a competitive plate product as an alternative to our
PEARLdry for the Quickmaster DI beginning in the second quarter
of fiscal 2003. While it is too early to estimate the impact
this plate may have on Pressteks business, the
introduction of a competitive plate could reduce the revenue
generated by Presstek under its relationship with Heidelberg.
This could also lead to downward pricing pressure for our full
line of spooled consumable products, which could have a material
adverse effect on our business, results of operations and
financial condition.

In March 2003, we terminated our supply and
distribution agreement with Xerox for DocuColor DI presses.
Xerox will no longer sell the DocuColor 233 DI-4, the
DocuColor 400 DI-4 and the DocuColor 400 DI-5 presses and
related consumables. We recorded an adjustment in the fourth
quarter of fiscal 2002 as a result of this termination, see Cost
of Products Sold below. The revenue generated from

18



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the sale of these presses was not material in
fiscal 2002, and as a result, the termination of this agreement
is not expected to have a material adverse effect on our
business, results of operations and financial condition.




| |                      
| | ---------------------
| | Cost of Products Sold

Cost of products sold consists of the costs of
material, labor and overhead, shipping and handling costs and
warranty expenses. Cost of products sold for the Digital Imaging
Products segment was $48.9 million or 59% of revenue for
fiscal 2002, a decrease of $8.7 million or 15% as compared
to $57.6 million or 56% of revenue for fiscal 2001.
Included in cost of products sold for the Digital Imaging
Products segment for fiscal 2002 is a charge of
$3.0 million (adjusted from $4.0 million to
$3.0 million in the fourth quarter of fiscal 2002, as a
result of the termination of the supply and distribution
agreement with Xerox). The charge included $2.0 million for
inventory write-downs and $1.0 million (adjusted from
$2.0 million to $1.0 million in the fourth quarter of
fiscal 2002) for other charges associated with discontinued
programs recorded in the second quarter of fiscal 2002 as part
of the June 2002 restructuring.

Gross margin as a percentage of total revenue for
the Digital Imaging Products segment was 41% for fiscal 2002, as
compared to 44% for fiscal 2001. Excluding the inventory
write-downs and other charges for discontinued programs of
$3.0 million discussed above, the cost of products sold
would have been $45.9 million as opposed to $48.9 million.
As a result, gross margin for the Digital Imaging Products
segment would have been 45% as opposed to 41% for fiscal 2002,
as compared to 44% for fiscal 2001.

The gross margin increase for fiscal 2002,
excluding the write-downs of $3.0 million discussed above,
was primarily the result of yield improvements related to the
manufacturing of our consumable products, and a favorable
product mix. In fiscal 2002 and 2001, we recorded net warranty
costs of $1.9 million and $2.1 million, respectively,
primarily related to the Dimension platesetter product. We
believe these warranty costs will be reduced in fiscal 2003 as
savings related to product quality programs initiated in 2002
are realized. There can be no assurance, however, that these
programs will result in reduced warranty costs.

Cost of products sold for the Lasertel segment
was $5.8 million for fiscal 2002, a decrease of
$1.0 million or 15%, as compared to $6.8 million for
fiscal 2001. Included in cost of products sold for the Lasertel
segment for fiscal 2002 is a charge of $688,000 related to
inventory write-downs associated with the discontinued programs
undertaken as part of the June 2002 restructuring. The decrease
in manufacturing costs was primarily the result of reduced
salaries and benefits related to head-count reductions in the
first six months of fiscal 2002.



| |                                 
| | --------------------------------
| | Research and Product Development

Research and product development expenses consist
primarily of payroll and related expenses for personnel, parts
and supplies, and contracted services required to conduct our
equipment, consumables and high-powered laser diode product
development efforts.

Research and product development expenses for the
Digital Imaging Products segment were $9.1 million or 11%
of revenue, a decrease of $2.6 million, as compared to
$11.7 million or 11% of revenue for fiscal 2001. This
decrease relates primarily to a reduction in the number of
development programs in fiscal 2002, and resulted in reduced
salaries as a result of head count reductions in the first six
months of fiscal 2002, as well as reduced professional and
contracted services. Pressteks product development cycle
centers around major industry trade shows, and as a result, our
research and product development expenses vary in accordance
with our product development cycle.

Research and product development expenses for the
Lasertel segment were $210,000 for fiscal 2002. Research and
product development expenses for the Lasertel segment were not
material in fiscal 2001.

19



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##### Table of Contents





| |                                          
| | -----------------------------------------
| | Sales, Marketing and Customer
    Support

Sales, marketing and customer support expenses
consist primarily of payroll and related expenses for personnel,
advertising, trade shows and other promotional expenses, and
travel costs related to our sales, marketing and customer
support activities.

Sales, marketing and customer support expenses
for the Digital Imaging Products segment were $10.2 million
or 12% of revenue for fiscal 2002, a decrease of
$2.1 million, as compared to $12.3 million, or 12% of
fiscal 2001 revenue. This decrease is primarily the result of
focusing our business on the marketing and commercialization of
our DI technology, and resulted in reduced salaries and benefits
and related travel costs, as a result of headcount reductions in
the first six months of fiscal 2002.

Sales and marketing expenses for the Lasertel
segment were $209,000 for fiscal 2002, a decrease of $538,000 as
compared to $747,000 for fiscal 2001. This decrease relates
primarily to reduced salaries and benefits and related travel
expenses, as a result of head count reductions in the first six
moths of fiscal 2002.



| |                           
| | --------------------------
| | General and Administrative

General and administrative expenses consist
primarily of payroll and related expenses for personnel, and
contracted professional services necessary to conduct our
finance, information systems, human resources, and
administrative activities.

General and administrative expenses for the
Digital Imaging Products segment were $9.2 million or 11%
of revenue, a decrease of $4.2 million, as compared to
$13.4 million or 13% of revenue for fiscal 2001. This
decrease relates primarily to decreases in legal fees as a
result of settlement of our arbitration proceedings with
Heidelberg in July 2001, and the courts rendering a
decision in our patent litigation with Creo in September 2002.
Also in 2001, we recorded a $2.1 million write-off for
prepayments made to Adast, a supplier of B3 size sheet-fed
presses. Adast joined in a bankruptcy petition filed by its
creditors in February 2002 and in February 2003, the company
reorganized under new ownership. Although the company has
subsequently reorganized, we do not expect to be able to
successfully recover any of these pre-payments.

General and administrative expenses for the
Lasertel segment were $1.4 million for fiscal 2002, a
decrease of $1.0 million, as compared to $2.4 million
for fiscal 2001. This decrease relates primarily to reduced
salaries and benefits and related travel expenses, as a result
of head count reductions in the first six months of fiscal 2002.



| |                                              
| | ---------------------------------------------
| | Special Charges and Discontinued
    Programs

In the second quarter of fiscal 2002, Presstek
initiated a process to evaluate its resources and strategically
re-focus the business. During this process, we evaluated all
aspects of the business, and concluded to reposition and rescale
our resources. As part of this exercise, we initiated various
repositioning actions during the second quarter of fiscal 2002.
These actions included the following: (i) creation of
market-focused Direct Imaging (DI) and
Computer-to-Plate (CTP) product lines;
(ii) creation of a new senior management organization;
(iii) discontinuance of certain programs; and (iv) the
consolidation of our Hampshire Drive research and development
facility into the main Executive Drive facility in Hudson, NH.

As a result of these actions, we recorded a
charge of $4.7 million to cost of products sold in the
second quarter of fiscal 2002, which included $2.7 million
for inventory write-downs and $2.0 million for other
charges related to discontinued programs, $4.0 million of
which was recorded by the Digital Imaging Products segment, and
$688,000 by the Lasertel segment.

In addition, the Digital Imaging Products segment
recorded special charges of $6.0 million in the second
quarter of fiscal 2002. The special charges included
$1.0 million related to severance and fringe benefit costs
associated with the reduction of approximately
50 employees, primarily in manufacturing and

20



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##### Table of Contents



research and development, $2.0 million
related to the write-down of equipment and lease termination
costs as a result of the Hampshire Drive consolidation,
$1.8 million related primarily to other asset write-downs
and costs associated with the repositioning, and
$1.2 million related to executive contractual obligations,
as a result of a separation agreement with Robert W.
Hallman, former President and Chief Executive Officer of
Presstek. Under the terms of the separation agreement, effective
April 30, 2002, Presstek agreed to pay Mr. Hallman a
separation payment equal to three times his current then annual
salary, payable bi-weekly over 36 months, until May 2005.


In the fourth quarter of fiscal 2002, we adjusted
the discontinued programs and special charge recorded in the
second quarter of fiscal 2002. The $2.0 million in charges
related to discontinued programs was reduced by
$1.0 million, as a result of a favorable contract
negotiation with Xerox. The $1.0 million charge related to
severance and fringe benefit costs was reduced by $150,000, as a
result of the finalization of severance payments related to the
workforce reduction. The write-down of equipment and lease
termination costs of $2.0 million was reduced by $116,000
as a result of a delay in vacating the Hampshire Drive research
and development facility. The $1.8 million in other costs
associated with the repositioning was reduced by $230,000 as a
result of favorable settlements. In addition to these
adjustments, an increase of $311,000 to the $1.2 million in
executive contractual settlements was recorded as a result of a
resignation agreement with Richard A. Williams, former
Chief Scientific Officer of Presstek. Under the terms of the
agreement, effective January 8, 2003, Presstek agreed to
pay Mr. Williams a severance payment equal to $200,000 in
2003 and $100,000 in 2004, payable bi-weekly, until December
2004.

The repositioning activity and workforce
reduction, which was initiated in June 2002, was substantially
complete at the end of the second quarter of fiscal 2002. The
consolidation of the Hampshire Drive facility was completed in
the third quarter of fiscal 2002. We paid $1.7 million
through December 28, 2002 as a result of the forgoing
repositioning actions, and anticipate the remaining payments
related to the discontinued programs and special charges will be
completed by May 2005. For more detail, see Note 12 of
notes to the financial statements.



| |                            
| | ---------------------------
| | Other Income (Expense), net

Other income and expense consists primarily of
net interest expense and other miscellaneous expense.

Interest expense, net was $872,000 for fiscal
2002, a decrease of $264,000 as compared to $1.1 million
for fiscal 2001. Interest income was $186,000 for fiscal 2002, a
decrease of $45,000 as compared to $231,000 for fiscal 2001,
primarily as a result of lower interest rates on increased cash
balances. Interest expense was $1.1 million, for fiscal
2002, a decrease of $300,000 as compared to $1.4 million
for fiscal 2001, primarily as a result of lower average debt
balances and lower interest rates on borrowings.



| |                           
| | --------------------------
| | Provision for Income Taxes

We did not record a provision for federal or
state income taxes in fiscal 2002 or 2001, due to net operating
losses incurred in these periods.



| |                  
| | -----------------
| | Net Income (Loss)

As a result of the foregoing, we had a net loss
of $8.3 million for fiscal 2002, as compared to a net loss
of $3.8 million for fiscal 2001.

Fiscal 2001 versus Fiscal
2000



| |        
| | -------
| | Revenue

Revenue of $102.3 million and
$87.3 million for fiscal 2001 and 2000 respectively, was
primarily related to the Digital Imaging Products segment, and
consisted of product sales, royalties, and license fees. Revenue
for fiscal 2001 increased $15.0 million or 17% as compared
to fiscal 2000.

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Product sales for fiscal 2001 were
$94.1 million as compared to $78.1 million for fiscal
2000, an increase of $16.0 million or 20%. This increase in
product sales was due primarily to volume increases of presses
shipped to Xerox and marketed as the DocuColor 400 DI and the
DocuColor 233 DI, volume increases in shipments of direct
imaging systems used in the Ryobi 3404DI, as well as volume
increases in sales of our Dimension computer-to-plate imaging
products. These increases were offset in part by volume and
price decreases of imaging kits sold to Heidelberg and used in
the Quickmaster DI. Prices of kits sold to Heidelberg decreased
by approximately 10%, with minimal gross margin impact,
commencing in the third quarter of fiscal 2001, as Heidelberg
began manufacturing certain non-strategic components of the
direct imaging kit.

Revenue generated from the sale of our consumable
products was $46.9 million for fiscal 2001, an increase of
$2.0 million or 4%, as compared to $44.9 million for
fiscal 2000. This increase is primarily a result of the increase
in the installed base of equipment using our proprietary
consumable products. This consumable product revenue included
$20.9 million and $18.7 million for fiscal 2001 and
2000, respectively, sold under our agreements with Heidelberg
and its distributors.

The Lasertel segments third party revenue
was not material in fiscal 2001. In addition, the Lasertel
segment booked a $1.5 million revenue reversal in the
fourth quarter of fiscal 2001 related to a sale recorded in
fiscal 2000, which was reversed as a result of a customer return
related to product quality.

Royalties and license fees decreased
$1.0 million or 11% for fiscal 2001, to $8.2 million
as compared to royalties and license fees of $9.2 million
for fiscal 2000. Royalties decreased $2.1 million or 27%
comparing fiscal 2001 to fiscal 2000, as a result of decreased
shipments to Heidelberg of direct imaging systems used in the
Quickmaster DI. This decrease was offset by an increase of
$1.1 million in fees from licensees primarily as a result
of distribution fees received from Xerox and settlement fees
received from Heidelberg in connection with the settlement of
outstanding arbitration proceedings with Heidelberg.

Revenue generated under our agreements with
Heidelberg and our distributors decreased $6.8 million or
14% to $42.6 million, or 42% of total revenue for fiscal
2001, as compared to $49.4 million, or 57% of total revenue
for fiscal 2000.

In connection with the settlement of our
outstanding arbitration proceedings with Heidelberg, we agreed
to reduce the royalty payable by Heidelberg for imaging kits
delivered in connection with the Heidelberg Quickmaster 46DI by
approximately $9,000 per kit. This reduced royalty rate became
effective for imaging kits ordered and delivered after
May 1, 2002.

Cost of Products
Sold

Cost of products sold consists of the costs of
material, labor and overhead, shipping and handling costs and
warranty expenses. Cost of products sold for the Digital Imaging
Products segment for fiscal 2001 was $57.6 million, an
increase of $13.5 million or 31% as compared to
$44.1 million for fiscal 2000. The gross margin on product
sales for the Digital Imaging Products segment decreased to 39%
for fiscal 2001 from 42% for fiscal 2000, primarily as a result
of the lower margins on press and Dimension CTP products, and
increased warranty expenses associated with a new product
introduction. Cost of products sold for the Lasertel segment was
$6.8 million for fiscal 2001 as compared to
$2.6 million for fiscal 2000. The increase of
$4.2 million for fiscal 2001 reflects a full year of costs
incurred by the Lasertel segment and includes increases in
salaries as a result of headcount additions, depreciation, and
other costs associated with the increased manufacturing volume
of laser diodes.

Research and
Product Development

Research and product development expenses consist
primarily of payroll and related expenses for personnel, parts
and supplies, and contracted services required to conduct our
equipment and consumable product development efforts. Research
and product development expenses, all of which were incurred by
the Digital Imaging Products segment, decreased
$4.2 million to $11.7 million or 11% of the
segments revenue for fiscal 2001, as compared to
$15.9 million or 18% of the Digital Imaging Products
segments

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fiscal 2000 revenue. The decrease is primarily
the result of reduced expenditures for parts and components, as
well as a reduction of professional services contracted
externally for the development of prototypes of the products
previously introduced in fiscal 2000 at the industrys
major trade show, Drupa. Our product development cycle centers
on major industry trade shows, such as Drupa held every four or
five years. As a result research and product development
expenses vary in accordance with our product development cycle.


Sales, Marketing
and Customer Support

Sales, marketing and customer support expenses
consist primarily of payroll and related expenses for personnel,
advertising, trade shows and other promotional expenses, and
travel costs related to our sales, marketing and customer
support activities. Sales, marketing and customer support
expenses for the Digital Imaging Products segment increased
$2.7 million to $12.3 million, or 12% of the
segments fiscal 2001 revenue, compared to
$9.6 million or 11% of the segments fiscal 2000
revenue. The increase related primarily to increases in salaries
and related expenses as a result of headcount growth required
for the expansion of our customer support organization, and
increased expenditures for promotional activities related to
digital imaging press products. Sales and marketing expenses for
the Lasertel segment increased to $747,000 for fiscal 2001 as
compared to $23,000 for fiscal 2000. The increase for fiscal
2001 reflects a full year of costs incurred for the Lasertel
segment, and relates primarily to increases in salaries as a
result of headcount growth and increases in promotional
activities and advertising expenses to support Lasertels
expanded marketing activities in the defense, industrial and
medical industries.

General and
Administrative

General and administrative expenses consist
primarily of payroll and related expenses for personnel, and
contracted professional services to conduct our finance,
information systems, human resources, and executive activities.
General and administrative expenses also include outside legal
and accounting fees and the provision for bad debts. General and
administrative expenses for the Digital Imaging Products segment
increased $4.8 million to $13.4 million or 13% of
fiscal 2001 revenue compared to $8.6 million or 10% of
fiscal 2000 revenue. The increase relates primarily to increases
in legal fees as a result of conducting the trial phase of the
patent litigation with Creo Inc., as well as a $2.1 million
write-off for prepayments made to Adast, a supplier of
B3 size sheet-fed presses. Adast joined in a bankruptcy
petition filed by its creditors in February 2002. The general
and administrative expenses for the Lasertel segment increased
$1.4 million, to $2.4 million for fiscal 2001 as
compared to $1.0 million for fiscal 2000. The increase for
fiscal 2001 reflects a full year of costs for the Lasertel
segment, and resulted primarily from increases in salaries and
benefits as a result of headcount growth, and to support
Lasertels expanded information systems, administration and
finance requirements.

Other Income
(Expense), net

Other income (expense), net includes primarily
interest income and expense. Other expense, net increased
$1.2 million, to $1.2 million or 1% of revenue for
fiscal 2001 compared to other income, net, of $48,000 or 1% of
revenue for fiscal 2000. Interest income decreased $639,000, to
$231,000 for fiscal 2001 as compared to $870,000 for fiscal
2000. The decrease is primarily attributed to the decrease in
average cash balances available for investment and the decrease
in interest rates for the period. Interest expense increased
$400,000, to $1.4 million as compared to $1.0 million for
the comparable period in fiscal 2000. The increase is primarily
attributed to the increased borrowings related to our lease line
of credit facility with Keybank National Association, and our
mortgage loan and line of credit facility with Citizens Bank,
offset by lower interest rates.

Provision for
Income Taxes

We did not record a provision for federal or
state income taxes in fiscal 2001, due to net operating losses.
We did not record a provision for federal income taxes in fiscal
2000 as a result of utilization of net operating loss
carryforwards. We recorded a provision of $150,000 for state
income taxes for fiscal 2000.

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Income (Loss)
from Continuing Operations

As a result of the foregoing, we had a loss from
continuing operations, of $3.8 million for fiscal 2001, as
compared to income from continuing operations of
$5.3 million for fiscal 2000.

Income (Loss)
from Discontinued Operations

We shutdown the operations of our subsidiary,
Delta V Technologies, Inc. (Delta V) as of the
end of fiscal 1999. Located in Tucson, Arizona, Delta V was
engaged in the development, manufacture, and sale of vacuum
deposition coating equipment for vacuum coating applications.
Delta V is reported separately as a discontinued operation,
and prior periods have been restated in our financial
statements, related footnotes and the managements
discussion and analysis to conform to this presentation.

Income from Delta Vs discontinued
operations was $600,000 for fiscal 2000, as a result of payments
received for the licensing of Delta Vs intellectual
property relating to vacuum-deposited polymer multi-layer
technology. There was no income or loss from discontinued
operations in fiscal 2001.

Liquidity and Capital Resources

We finance our operating and capital investment
requirements primarily through cash flows from operations and
borrowings. At December 28, 2002, we had cash and cash
equivalents of $17.6 million and working capital of
$28.6 million as compared to cash and cash equivalents of
$2.5 million and working capital of $26.7 million at
December 29, 2001. The increase in cash and cash
equivalents of $15.1 million for fiscal 2002 was primarily
due to net cash provided by operating activities, offset by cash
of $1.3 million used to purchase capital equipment.

Net cash provided by operating activities was
$17.0 million for the fiscal year ended December 28,
2002. The primary sources of cash from operating activities were
net losses of $8.3 million adjusted by special charges and
discontinued programs of $9.6 million, non-cash charges of
depreciation, amortization, and other charges of
$12.5 million, and an increase in working capital of
$1.9 million. Working capital changes primarily included
decreases in inventories and accounts receivable of
$3.4 million and $2.1 million, respectively, offset by
decreases in accrued expenses of $3.2 million. The decrease
in accounts receivable is attributable to improved cash
collections and the decrease in revenue. The decrease in
inventories is primarily as a result of inventory management
programs initiated in fiscal 2002.

Net cash used in investing activities of
$1.3 million for the fiscal year ended December 28,
2002 consisted primarily of additions to property, plant and
equipment, net of proceeds from the sale of equipment.

Net cash used in financing activities for the
fiscal year ended December 28, 2002 totaled $597,000, and
consisted primarily of proceeds of $3.0 million from
borrowings under our lease line of credit facility, offset by
payments on the mortgage term loans and the equipment lease line
of credit facility of $2.7 million, as well as payments on
the revolving line of credit facility of $1.0 million.

Our long-term debt consists of two mortgage term
loans from Citizens Bank New Hampshire (Citizens),
and a lease line of credit facility from Keybank National
Association (Keybank).

The first mortgage term loan is a 1998 ten-year
mortgage term loan from Citizens in the amount of
$6.9 million and bears a fixed rate of interest of 7.12%
per year during the first five years, and a variable rate of
interest at the LIBOR rate plus 2%, (3.4% at December 28,
2002) for the remaining five years. Principal and interest
payments during the first five years of the loan will be made in
60 monthly installments of $80,500. During the remaining
five years, principal and interest payments will be made on a
monthly basis in the amount of one-sixtieth of the outstanding
principal amount as of the first day of the second five year
period, plus accrued interest through the monthly payment date.
All outstanding principal and accrued interest is due and
payable on February 6, 2008.

The second mortgage term loan is a 2000 ten-year
mortgage term loan in the amount of $4.0 million and bears
a fixed rate of interest equal to 7.95% per year during the
first five years, a fixed rate of interest

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equal to United States Treasury Notes or Bills
with a maturity date closest to the end of the second five years
plus 225 basis points for the remaining five years. During the
first five years, principal and interest payments will be made
in 60 monthly installments including principal of $34,993 plus
interest. During the remaining five years, principal and
interest payments will be made on a monthly basis in the amount
of one-sixtieth of the outstanding principal amount as of the
first day of the second five year period, plus accrued interest
through the monthly payment date. All outstanding principal and
accrued and unpaid interest is due and payable on
October 30, 2010.


Land and buildings with a cost and net book value
of approximately $25.6 million and $22.3 million,
respectively, secure the two mortgage term loans.

We also borrowed $13.0 million against a
$15.0 million lease line of credit facility, which expired
in April 2002, from Keybank pursuant to a 1999 loan agreement.
The $13.0 million in borrowings is secured by equipment
with a book value at December 28, 2002 of
$18.4 million. The loan bears a variable rate of interest
based upon the LIBOR rate plus 4.25% (5.65% at December 28,
2002) or the prime rate (4.25% at December 28, 2002), with
a future fixed rate conversion provision. Principal and interest
under the lease line are payable in 84 monthly installments.

In addition to the mortgage term loans and the
borrowings under the lease line of credit, we have a revolving
line of credit loan with Citizens, which expires in October 2003
under which we may borrow from Citizens a maximum of
$16.0 million. The revolving line of credit is subject to a
borrowing base formula based on eligible accounts receivable and
inventories, as defined by the loan agreement, and reduced by
the amount of all letters of credit outstanding. The revolving
line of credit loan is secured by substantially all of the
Companys assets, with interest payable at the LIBOR rate
plus 1.50% (2.9% at December 28, 2002). As of
December 28, 2002, we had $10.2 million available
under the revolving line of credit loan, reduced by
$6.3 million outstanding under standby letters of credit.

Under the terms of the mortgage term loans, the
lease line of credit and the revolving line of credit
agreements, we are required to meet various restrictive
covenants on a quarterly and annual basis, including maximum
funded debt to EBITDA and minimum fixed charge coverage
covenants. At December 28, 2002 we were in compliance with
all financial covenants.

We have future contractual payments primarily
related to debt, royalty obligations, executive contractual
obligations and operating leases, from 2002 through 2010. The
following table represents our future commitments at
December 28, 2002:

|                                  |                               |                |       |       |  |      |       |       |  |      |       |            |  |   |       |       |  |   |       |       |  |   |       |       | 
|--------------------------------- | ----------------------------- | -------------- | ----- | ----- |  | ---- | ----- | ----- |  | ---- | ----- | ---------- |  | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                                  |                               | 2003           |       | 2004  |  | 2005 |       | 2006  |  | 2007 |       | Thereafter
|                                  |                               |                |       |       |  |      |       |       |  |      |       |           
|                                  |                               |               
|                                  |                               | (In thousands)
|Credit facilities                 |                               | $              | 3,045 |       |  | $    | 3,221 |       |  | $    | 3,472 |            |  | $ | 3,478 |       |  | $ | 2,090 |       |  | $ | 1,401 |      
|Royalty obligation                |                               |                | 1,200 |       |  |      | 1,200 |       |  |      | 1,200 |            |  |   | 1,200 |       |  |   | 1,200 |       |  |   | 5,900 |      
|Executive contractual obligations |                               |                | 617   |       |  |      | 517   |       |  |      | 123   |            |  |   |      |       |  |   |      |       |  |   |      |      
|Lease agreements                  |                               |                | 113   |       |  |      | 8     |       |  |      |      |            |  |   |      |       |  |   |      |       |  |   |      |      
|                                  |                               |                |       |       |  |      |       |       |  |      |       |            |  |   |       |       |  |   |       |       |  |   |       |      
|                                  | Total contractual obligations |                | $     | 4,975 |  |      | $     | 4,946 |  |      | $     | 4,795      |  |   | $     | 4,678 |  |   | $     | 3,290 |  |   | $     | 7,301 | 
|                                  |                               |                |       |       |  |      |       |       |  |      |       |            |  |   |       |       |  |   |       |       |  |   |       |      

Our anticipated capital expenditures for fiscal
2003 are approximately $2.0 million, and primarily relate
to the purchase of capital equipment to be used in the
production of our DI and CTP equipment and consumable products.

We have recently learned that Heidelberg will
market a competitive plate product as an alternative to
Pressteks PEARLdry for the Quickmaster DI, which is
expected to be available beginning in the second quarter of
fiscal 2003. While it is too early to estimate the impact this
plate may have on Pressteks business, the introduction of
a competitive plate could reduce the revenue generated by
Presstek under its relationship with Heidelberg, and could lead
to downward pricing pressure for our full line of spooled
consumable products, which could have a material adverse effect
on our liquidity.

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We believe that existing funds, cash flows from
operations, and cash available under our revolving line of
credit and lease line of credit should be sufficient to satisfy
working capital requirements and capital expenditures through
the term of our current loan agreement, which expires in October
2003. There can be no assurance, however, that we will be able
to renew our current loan agreement, will not require additional
financing, or that such additional financing, if needed, will be
available on acceptable terms.

Effect of
Inflation

Inflation has not had, and is not expected to
have, a material impact on our operations.

Net Operating
Loss Carryforwards

As of December 28, 2002, we had net
operating loss carryforwards totaling approximately
$90.7 million, of which $55.8 million resulted from
stock option compensation deductions for tax purposes and
$34.9 million resulted from operating losses. To the extent
net operating losses resulting from stock option compensation
deductions become realizable, the benefit will be credited
directly to additional paid in capital. The amount of the net
operating loss carryforwards that may be utilized in any future
period may be subject to certain limitations, based upon changes
in the ownership of our common stock.

Recently
Issued Accounting Standards

In June 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards No. 143, Accounting for Asset
Retirement Obligations (SFAS 143). This
statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible
long-lived assets and the associated Retirement costs.
SFAS 143 is effective for fiscal years beginning after
June 15, 2002. We do not anticipate that the adoption of
SFAS 143 will have a material effect on our results of
operations or financial position.

In July 2002, the FASB issued Statement of
Financial Accounting Standards No. 146, Accounting
for Restructuring Costs (SFAS 146).
SFAS 146 applies to costs associated with an exit activity
(including restructuring) or with a disposal of long-lived
assets. Under SFAS 146, a company will record a liability
for a cost associated with an exit or disposal activity when
that liability is incurred and can be measured at fair value.
SFAS 146 is effective prospectively for exit or disposal
activities initiated after December 31, 2002. Under
SFAS 146, a company may not restate its previously issued
financial statements and the new statement grandfathers the
accounting for liabilities that a company had previously
recorded under Emerging Issues Task Force Issue 94-3. We do
not anticipate that the adoption of SFAS 146 will have a
material effect on our results of operations or financial
position.

In November 2002, the FASB issued Interpretation
No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45
requires that a liability be recorded in the guarantors
balance sheet upon issuance of a guarantee. FIN 45 also
requires additional disclosures about the guarantees an entity
has issued, including a roll forward of the entitys
product warranty liabilities. Presstek will apply the
recognition provisions of FIN 45 prospectively to
guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for the Companys
financial statements for the year ending December 28, 2002.
We do not anticipate the adoption of this statement will have a
material impact on our results of operations or financial
condition.

In November 2002, the Emerging Issues Task Force
(EITF) issued EITF Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables. EITF Issue No. 00-21 addresses how to
determine whether a revenue arrangement involving multiple
deliverables contains more than one unit of accounting for the
purposes of revenue recognition and how the revenue arrangement
consideration should be measured and allocated to the separate
units of accounting. EITF Issue No. 00-21 applies to all
revenue arrangements that the Company enters into after
June 29, 2003. We do not anticipate the adoption of this
statement will have a material impact on our results of
operations or financial condition.

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In December 2002, the FASB issued Statement of
Financial Accounting Standards No. 148, Accounting
for Stock-Based Compensation  Transition and
Disclosure (SFAS 148). This statement
amends SFAS 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition
for a voluntary change to the fair value based method of
accounting for stock-based compensation. It also amends the
disclosure provisions of SFAS 123 in annual financial
statements and requires disclosures in interim financial
statements. Those disclosures are required regardless of the
method being used to account for stock-based employee
compensation. The amended and new disclosure requirements are
effective for the fiscal year ending December 28, 2002. The
adoption of the disclosure requirements of SFAS 148 will
not have a material affect on our financial statements. We plan
to continue to use the intrinsic value method of accounting for
the stock options issued to employees.

RISK FACTORS

Safe Harbor Statement under the
Private Securities Litigation Reform Act of 1995:

Certain statements contained in this Annual
Report on Form 10-K constitute forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including statements regarding
our expectations for our financial and operating performance in
2003 and beyond, the adequacy of internal cash and working
capital for our operations, our ability to supply sufficient
product for anticipated demand, production delays associated
with this demand, availability of component materials,
managements plans and goals with regard to our shipping
and production capabilities, including the adequacy of our
facilities for present and expected future operations, the
availability of alternative suppliers and manufacturers,
managements plans and goals for our Lasertel subsidiary,
the ability of Lasertel to generate positive cash flows in the
near term, the strength of our various strategic partnerships
both on manufacturing and distribution, our ability to secure
other strategic alliances and relationships, our expectations
regarding Pressteks strategy for growth, our expectations
and plans regarding market penetration, including the strength
and scope of our distribution channels and our expectations
regarding sales of DI presses in Europe, the expansion of our
products and technology, our expectations regarding the sale of
our products and use of our technology, our current plans for
product development and the expected market acceptance of
recently introduced products and the likely acceptance of
planned future products, our expectations regarding performance
of existing, planned and recently introduced products, the
effects, market acceptance, or pricing of competitive products,
including the possibility of a competitive plate product being
introduced by a strategic partner, the placement of orders for
direct imaging kits, our expectations regarding reductions in
warranty costs, the adequacy of our intellectual property
protections and our ability to protect and enforce our
intellectual property rights, and the expected effect of
adopting recently issued accounting standards, among others.
Such forward-looking statements involve a number of known and
unknown risks, uncertainties and other factors which may cause
our actual results, performance or achievements to be materially
different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such
factors that could cause or contribute to such differences
include those discussed below, as well as those discussed
elsewhere in this report. The words looking forward,
looking ahead, believe(s),
should, plan, expect(s),
project(s), anticipate(s),
may, likely, potential,
opportunity and similar expressions identify
forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak
only as of the date the statements were made and readers are
advised to consider such forward-looking statements in light of
the risks set forth below. Presstek undertakes no obligation to
update any forward-looking statements contained in this Annual
Report on Form 10-K.

References to we, us,
our, or ours refer to Presstek and its
subsidiaries.

We have a history of losses, could incur
substantial losses in the future, and may not achieve or
maintain profitability.We have
incurred substantial net losses from continuing operations in
four of the past five fiscal years. We incurred net losses from
continuing operations of approximately $8.3 million for
fiscal 2002, $3.8 million for fiscal 2001,
$30.6 million for fiscal 1999, and $1.6 million for
fiscal 1998. As of December 28, 2002 we had an accumulated
deficit of approximately $26 million. We may need to

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generate significant increases in revenues to
achieve and maintain profitability, and we may not be able to do
so. If our revenues grow more slowly than we anticipate, due to
potential competitive pricing pressures, or if our operating
expenses increase more than we expect or cannot be reduced in
the event of lower revenues, our business will be materially
adversely affected. Even if we achieve profitability in the
future on a quarterly or annual basis, we may not be able to
sustain or increase profitability. Failure to become profitable
within the time frame expected by investors or to sustain
profitability may adversely affect the market price of our
common stock.


We are substantially dependent on
Heidelberg for a material portion of our revenue and the loss of
Heidelberg as a customer or a significant reduction in revenue
from sales to Heidelberg would adversely affect our
business.We have had an important
long-term relationship with Heidelberg. Since entering into our
strategic alliance with Heidelberg, our sales of products to
Heidelberg have constituted a material portion of our total
revenue. For the fiscal year ended December 28, 2002, our
sales to Heidelberg accounted for approximately 36% of our total
revenue. There can be no assurance that our relationship with
Heidelberg will continue. The loss of Heidelberg as a customer,
or a material decrease in the revenue we receive from direct
imaging kit sales or consumable sales to Heidelberg would have a
material adverse affect on our business, results of operations
and financial condition. We have recently learned that
Heidelberg has plans to offer a competitive plate product as an
alternative to our PEARLdry for the Quickmaster DI. We
understand this product is expected to be available beginning in
the second quarter of fiscal 2003. While it is too early to
estimate the impact this plate may have on Pressteks
business, the introduction of a competitive plate could reduce
the revenue generated by Presstek under its relationship with
Heidelberg, and could have a material adverse impact on our
business, results of operations and financial condition.

We currently have orders from Heidelberg for
direct imaging kits used in the Quickmaster DI for delivery
through April 2003. Heidelberg has recently indicated, as a
result of the global economic slowdown, that it has an inventory
of direct imaging kits on hand to support its production
requirements for six months. We believe that orders for direct
imaging kits will resume sometime in the second half of fiscal
2003, however, there can be no assurance that any orders will be
received.

In July 2001, we settled our outstanding
arbitration proceedings with Heidelberg. Pursuant to the terms
of the settlement, Presstek and Heidelberg agreed that the
licensing arrangements for the Heidelberg Quickmaster 46DI shall
be non-exclusive. As a result of the recognition of the
non-exclusivity of the license, we agreed to reduce the royalty
payable by Heidelberg for imaging kits delivered in connection
with the Heidelberg Quickmaster 46DI by approximately $9,000 per
kit. This reduced royalty rate is effective for kits ordered and
delivered after May 1, 2002. There can be no assurance that
we will not have similar disputes with Heidelberg in the future
including any potential patent litigation, and likewise, there
can be no assurance that any disputes that do arise will be
resolved in our favor.

We are substantially dependent on our
strategic alliances and manufacturing and distribution
relationships to develop and grow our business and the loss or
failure of one or more of our strategic partners could
significantly harm our business.Our strategy to date has been, in
part, to enter into strategic alliances with major companies in
the graphic arts industry and other markets. This strategy has
included, among other things, licensing our intellectual
property, developing specialized products based on our
proprietary technologies and manufacturing imaging systems for
inclusion in other manufacturers products. Our strategy
has also involved identifying strategic manufacturing and
distribution partners to aid in developing new market channels
for our products. This strategy led to the development of our
relationship with Heidelberg. It also led to the development of
relationships with other strategic partners, including KBA,
Ryobi and KPG. We are dependent on many of these partners for
future sales of both existing and planned products. This
dependency means that the timetable for finalizing development,
commercialization and distribution of both existing and planned
products is dependent upon the needs and circumstances of our
strategic partners. We have experienced and will continue to
experience technical difficulties from time to time, which may
prevent us from meeting certain production and distribution
targets. Any delay in meeting production and distribution
targets with our strategic partners may harm our relationship
with them and may cause them to terminate their relationship
with us. Our strategic partners

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may not develop markets for our products at the
pace or in the manner we expect, which may have an adverse
effect on our business. They may also terminate their
relationship with us for circumstances beyond our control,
including factors unique to their business or their business
decisions. In addition, we may mutually agree with one of our
partners to terminate our relationship with them for a variety
of reasons. For example, in March 2003, we agreed with Xerox to
terminate our supply and distribution agreement with them for
DocuColor DI presses. As a result, Xerox will no longer
sell the DocuColor 233 DI-4, the DocuColor 400 DI-4
and the DocuColor DI-5 presses and related consumables.
While we do not believe the termination of our relationship with
Xerox will have a material adverse impact on our business, we
cannot assure you that the termination of any of our other
relationships with our strategic partners will not have an
adverse impact on our business.


We are also unable to control factors related to
the business of our strategic partners. As an example, in
February 2002, Adast, a manufacturing partner of ours, announced
that it had joined a bankruptcy petition filed by its creditors.
As a result of this development, we adjusted our fiscal 2001
fourth quarter net income and balance sheet to include an
additional write-off of approximately $2.1 million to cover
prepayments made to Adast for work-in progress. There can be no
assurance that similar events will not occur with our other
strategic partners.

As a result of the uncertainties surrounding many
of our strategic partners, there can be no assurance that our
existing strategic relationships will prove successful. There
can be no assurance that our existing relationships with
Heidelberg, KBA, Ryobi, or KPG or any of our other strategic,
manufacturing and distribution partners will be successful. The
loss of, Heidelberg, KBA, Ryobi, KPG or other principal
customers or strategic partners could have a materially adverse
effect our business, results of operations or financial
condition.

While we continue to explore possibilities for
additional strategic relationships and alliances, there can be
no assurance we will be successful in this regard. Our failure
to develop new relationships and alliances could have a
significant adverse effect on our business.

Our quarterly revenues and operating
results are likely to fluctuate.Our quarterly revenues and operating results are sometimes
difficult to predict, have varied in the past, and are likely to
fluctuate significantly in the future. We typically realize a
significant percentage of our revenues for a fiscal quarter in
the third month of the quarter. Accordingly, our quarterly
results may be difficult to predict prior to the end of the
quarter. Any inability to obtain sufficient orders or to fulfill
shipments in the period immediately preceding the end of any
particular quarter may cause the results for that quarter to
fall short of our revenues targets. In addition, we base our
current and future expense levels in part on our estimates of
future revenues. Our expenses are largely fixed in the short
term. We may not be able to adjust our spending quickly if our
revenues fall short of our expectations. Accordingly, a revenues
shortfall in a particular quarter would have an adverse effect
on our operating results for that quarter. In addition, our
quarterly operating results may fluctuate for many reasons,
including, without limitation:



| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | changes in demand for our products and
    consumables, including seasonal differences; and
|
| |  | changes in the mix of our products and
    consumables.                                    

Our lengthy and variable sales cycle makes
it difficult for us to predict when or if sales will occur and
therefore we may experience an unplanned shortfall in
revenues.Our products have a
lengthy and unpredictable sales cycle that contributes to the
uncertainty of our operating results. Customers view the
purchase of our products as a significant and strategic
decision. As a result, customers generally evaluate our products
and determine their impact on existing infrastructure over a
lengthy period of time. Our sales cycle has historically ranged
from approximately one to six months based on the
customers need to rapidly implement a solution and whether
the customer is new or is extending an existing implementation.
The sale of our products may be subject to delays if the
customer has lengthy internal budgeting, approval and evaluation
processes. We may incur significant selling and marketing
expenses during a customers evaluation period. Larger
customers may purchase our products as part of multiple
simultaneous purchasing decisions, which may result in
additional unplanned administrative processing and other delays

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in the recognition of our revenues. If revenues
forecasted from a specific customer for a particular quarter are
not realized or are delayed to another quarter, we may
experience an unplanned shortfall in revenues, which could have
a material adverse effect on our business, results of operation
and financial condition.


We may not be able to increase revenues if
we do not expand our sales and distribution
channels.We will need to expand
our indirect global sales operations in order to increase market
awareness and acceptance of our line of products and generate
increased revenues. We market and distribute our products
indirectly through our global partner and distributor network.
We believe that our future success is dependent upon expansion
of indirect global distribution channels, which will consist of
relationships with a variety of dealers and distributors. We
cannot be certain that we will be able to maintain our current
relationship or establish relationships with additional
distribution partners on a timely basis, or at all. Our
distribution partners may not devote adequate resources to
promoting or selling our line of products and may not be
successful. Any failure to expand our indirect global
distribution channel or increase the productivity of this
distribution channel could result in lower than anticipated
revenues, which could have a material adverse effect on our
business, results of operation and financial condition.

In March 2003, we expanded the product offerings
to select dealers in our distribution channel in Europe to
include the sale of Quickmaster DI consumables. In connection
with this offering, we reduced pricing on our full line of
spooled consumables distributed through this dealer channel up
to 20%. This new pricing may reduce the revenue generated from
sales of our spooled consumable products up to $3.0 million
in fiscal 2003. While the expected lost revenues resulting from
the price reduction may be offset by increased revenues from
spooled consumables sales derived from additional presses
installed and increased usage of spooled consumables, there can
be no assurance that this expected lost revenue will be offset.
In addition, market conditions may require us to expand the
regions in which we offer reduced prices, or to further reduce
our spooled consumable prices, which could further reduce our
revenues in 2003 and beyond. This could have a material adverse
effect on our business, results of operations and financial
condition.

We face risks associated with international
sales.We intend to expand our
indirect global sales operations and enter additional
international markets, which will require significant management
attention and financial resources. International sales are
subject to a variety of risks, including difficulties in
establishing and managing international distribution channels,
in serving and supporting products sold outside the United
States and in translating products and related materials into
foreign languages. International operations are also subject to
difficulties in collecting accounts receivable, staffing and
managing personnel and enforcing intellectual property rights.
Other factors that can adversely affect international operations
include fluctuations in the value of foreign currencies and
currency exchange rates, changes in import/export duties and
quotas, introduction of tariff or non-tariff barriers and
economic or political changes in international markets. If our
international sales increase, our revenues may also be affected
to a greater extent by seasonal fluctuations resulting from
lower levels of sales which typically occur during the summer
months in Europe and other parts of the world. There can be no
assurance that these factors will not have a material adverse
effect on our future international sales and, consequently, on
our business, results of operations and financial condition.

We are dependent on third party suppliers
for critical components and our inability to maintain an
adequate supply of advanced laser diodes and other critical
components could adversely affect
us.We are dependent on third
party suppliers for critical components and our increased demand
for these components may put strain on the ability of our
third-party suppliers to deliver critical components in a timely
manner. For example, our requirements for advanced technology
laser diodes for use in products incorporating our
DI technology has increased and is expected to increase in
the future. Although we have established Lasertel to help us
meet our demand for laser diodes, we are still dependent on
other third party manufacturers for our supply of other
necessary components. If we are unable for any reason to secure
an uninterrupted source of other critical components at prices
acceptable to us, our operations could be materially adversely
affected. We cannot assure you that Lasertel will be able to
manufacture advanced laser diodes in quantities that will
fulfill our future needs, or with manufacturing volumes or
yields that will make our operation cost effective. Likewise, we
cannot assure you that we will be able to obtain

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alternative suppliers for our laser diodes or
other critical components should our current supply channels
prove ineffective.


Recently introduced products that
incorporate our technology may not be commercially successful
and may not gain market
acceptance.Achieving market
acceptance for any products incorporating our technology
requires substantial marketing and distribution efforts and
expenditure of significant sums of money and allocation of
significant resources, either by us, our strategic partners or
both. We may not have sufficient resources to do so.
Additionally, there can be no assurance that products introduced
by our strategic partners, such as the 46 Karat
DI presses, and the KPG DI presses, or our product
offerings such as our Anthem plates, Dimension 400 and
Dimension 800 platesetters, will achieve widespread market
acceptance or that any of our other current products or any
future products that we may develop or any future products
produced by others that incorporate our technologies will
achieve market acceptance or become commercially successful. We
recently announced beta testing of our new Applause plate. There
can be no assurance that the beta testing of this plate will be
successful, that the final product will be introduced in the
time frame expected, or that it will achieve market acceptance
or become commercially successful. If our new product offerings
do not achieve anticipated market acceptance, we may not achieve
anticipated revenue.

Recently introduced products that
incorporate our technology may result in substantial support
costs and warranty expenditures.Introducing new products carries substantial risk. While we do
substantial testing on our new products before introducing them
to our customers, no amount of testing can replace or
approximate actual field conditions at our customer locations.
As a result, when we introduce new products we can incur
increased expenditures in ensuring that the new product meets
and performs in accordance with its specifications. We cannot,
however, always estimate precisely the expected costs that may
arise out of new product installations. As an example of this,
we incurred increased warranty and support costs in fiscal 2002
and 2001 due to unanticipated product performance issues
associated with our new Dimension product line. There can be no
assurance that we will not incur increased warranty, support and
other costs associated with new product introductions in the
future. In addition, the occurrence of these expenditures may
have a material adverse effect on our business, results of
operations and financial condition.

Our manufacturing capabilities may be
insufficient to meet the demand for our
products.If demand for our
products grows, our current manufacturing capabilities may be
insufficient to meet this demand resulting in production delays
and a failure to deliver products in a timely fashion. We may be
forced to seek alternative manufacturers for our products. There
can be no assurance that we will successfully be able to do so.
As we introduce new products, we may face production and
manufacturing delays due to technical and other unforeseen
problems. Any manufacturing delay could have an adverse effect
on our business and our revenue and may harm our relationships
with our strategic partners.

If the United States and global economies
continue to slow down, the demand for our products could
decrease and our revenues might be
hurt.The demand for our products
is affected by various factors, many of which are beyond our
control. For example, general economic conditions have recently
deteriorated, and may further deteriorate due to events relating
to the conflict between Iraq and the United States, and may
affect or delay the overall capital spending by businesses and
consumers, particularly for capital equipment such as presses
and consumables. We believe that, concurrently with the economic
slowdown in the U.S. and abroad, and the decrease in capital
equipment spending over the past three years, there has been a
decrease in spending and spending projections on capital
equipment which could impact the demand for our products. If, as
a result of general economic uncertainty or otherwise, companies
reduce their product spending levels, such a decrease in
spending could substantially reduce demand for our products,
substantially harm our business, and have a material adverse
effect on our business, results of operations and financial
condition.

The expansion of Lasertel into areas other
than the production of laser diodes for our printing business
may be unsuccessful.Lasertel,
which was formed for the purpose of supplying us with laser
diodes, has also explored other markets for its laser
technology. These efforts to develop other markets were scaled
back, in part, in June 2001, as we announced a repositioning of
Lasertel in order to reduce its

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costs and focus its efforts on supplying us with
high quality laser diodes. While the plans to market its laser
products to the telecommunications industry were delayed,
Lasertel has developed laser products for the defense industry
and has continued its plans to develop laser prototypes for
qualification in the defense, industrial and medical industries.
There can be no assurance that these products or prototypes will
gain acceptance in these industries and likewise, there can be
no assurance that these products will be commercially
successful. Our executive team has limited experience in the
telecommunications, defense, industrial and medical industries
and there can be no assurance that Lasertel will be able to
successfully exploit any opportunities that may arise.


Lasertel may require additional working
capital infusions from us, which may have a material adverse
effect on our business.Our
subsidiary, Lasertel, was established to help us meet our demand
for laser diodes. Lasertel has required and may continue to
require a significant amount of capital investment by Presstek
in order to fund its operations. For the fiscal year ended
December 28, 2002, Lasertel recorded a net loss of
$7.9 million. Lasertel continues to require us to advance
cash and resources in order to ensure its continued operation.
Lasertels capital and working capital needs may exceed our
ability to provide such funds, requiring us to borrow against
our credit facilities or seek to obtain outside financing for
Lasertels operations. This could have a material adverse
effect on our business, results of operations and financial
condition.

Our success is dependent on our ability to
maintain and protect our proprietary
rights.Our future success will
depend, in large part, upon our intellectual property rights,
including patents, trademarks, trade secrets, proprietary
know-how, source codes and continuing technological innovation.
We have been issued a number of U.S. and foreign patents and we
intend to register for additional patents where we deem
appropriate. We also hold seven registered trademarks and we may
register additional trademarks where we deem appropriate. There
can be no assurance, however, as to the issuance of any
additional patents or trademarks or the breadth or degree of
protection that our patents, trademarks or copyrights may afford
us. The steps we have taken to protect our intellectual property
may not adequately prevent misappropriation or ensure that
others will not develop competitive technologies or products.
Further, the laws of certain territories in which our products
are or may be developed, manufactured or sold, may not protect
our products and intellectual property rights to the same extent
as the laws of the United States.

There is rapid technological development in the
electronic image reproduction industries, resulting in extensive
patent filings and a rapid rate of issuance of new patents.
Although we believe that our technology has been independently
developed and that the products we market do not infringe the
patents or violate other proprietary rights of others, it is
possible that such infringement of existing or future patents or
violation of proprietary rights may occur. In this regard, third
parties may in the future assert claims against us concerning
our existing products or with respect to future products under
development by us. In such event, we may be required to modify
our product designs or obtain a license. No assurance can be
given that we would be able to do so in a timely manner, upon
acceptable terms and conditions or even at all. The failure to
do any of the foregoing could have a material adverse effect on
our business, results of operation and financial condition.
Furthermore, we have agreements with several of our strategic
partners which require us to indemnify the strategic partner
from claims made by third parties against our intellectual
property, and to defend the validity of the patents or otherwise
ensure the technologys availability to the strategic
partner. An indemnification claim under any such agreement could
have a material adverse effect on our business.

We may take legal action to determine the
validity and scope of third party rights or to defend against
any allegations of infringement. In the course of pursuing or
defending any of these actions we could incur significant costs
and diversion of our resources. Due to the competitive nature of
our industry, it is unlikely that we could increase our product
prices to cover such costs. There can be no assurance that we
will have the financial or other resources necessary to
successfully defend a patent infringement or proprietary rights
violation action. Moreover, we may be unable, for financial or
other reasons, to enforce our rights under any patents we may
own. As an example of the cost and uncertainty of patent
litigation, in August 1999 Creo filed an action in the United
States District Court for the District of Delaware against us
seeking a declaration that Creos products do not and will
not infringe any valid and enforceable claims of any of our

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patents in question. We counter-claimed against
Creo for patent infringement of certain of our patents. The
matter went to trial in June 2001 and in September 2001, the
court affirmed the validity and enforceability of our on-press
imaging patents, but held that the current Creo DOP System did
not infringe on our patents. Creo appealed the courts
decision that our patents were valid and enforceable, and we
cross-appealed the finding of non-infringement by the current
Creo DOP System. On September 17, 2002, the United
States Court of Appeals for the Federal Circuit affirmed the
lower courts decision that our patents are valid and
enforceable, but that they are not infringed by the current Creo
DOP System. We incurred higher than expected legal expenses
in fiscal 2002 and fiscal 2001 due to this litigation. Any
similar litigation in the future is expected to be costly, yield
uncertain results and could have an adverse impact on our
business, result of operations or financial condition.


We also rely on proprietary know-how and employ
various methods to protect the source codes, concepts, trade
secrets, ideas and documentation relating to our proprietary
software and laser diode technology. However, such methods may
not afford complete protection and there can be no assurance
that others will not independently develop such know-how or
obtain access to our know-how or software codes, concepts, trade
secrets, ideas and documentation. Although we have and expect to
have confidentiality agreements with our employees and
appropriate vendors, there can be no assurance, however, that
such arrangements will adequately protect our trade secrets and
proprietary know-how.

We face substantial competition in the sale
of our products.We compete with
manufacturers of conventional presses and products utilizing
existing plate-making technology, as well as presses and other
products utilizing new technologies, including other types of
direct-to-plate solutions such as companies that employ
electrophotography as their imaging technology. Canon Inc.,
Hewlett Packard Company, Heidelberg and Xerox Corporation are
companies that have introduced color electrophotographic copier
products. Various companies are marketing product versions
manufactured by these companies.

We are also aware that there is a direction in
the graphic arts industry to create stand-alone
computer-to-plate imaging devices for single and multi-color
applications. Most of the major corporations in the graphic arts
industry have developed and/or are developing and marketing off
press computer-to-plate imaging systems. To date, devices
manufactured by our competitors, for the most part, utilize
printing plates that require a post imaging photochemical
developing step, and in some cases, also require a heating
process. Potential competitors in this area include, among
others, Agfa Gevaert N.V., Dai Nippon Screen Manufacturing Ltd.,
Heidelberg and Creo.

We also anticipate competition from printing
plate manufacturing companies that manufacture, or have the
potential to manufacture digital thermal plates. These companies
include Agfa Gevaert N.V., KPG and Fuji Photo Film Co., Ltd.

We also learned recently that Heidelberg intends
to market a competitive plate product as an alternative to
Pressteks PEARLdry for the Quickmaster DI. We
understand this new plate is expected to be available in the
second quarter of fiscal 2003. While it is too early to estimate
the impact this plate may have on Pressteks business, the
introduction of a competitive plate could reduce the revenue
generated by Presstek under its relationship with Heidelberg,
and could have a material adverse effect on our business,
results of operations and financial condition.

Products incorporating our technologies can also
be expected to face competition from conventional methods of
printing and creating printing plates. Most of the companies
marketing competitive products or with the potential to do so
are well established, have substantially greater financial,
marketing and distribution resources than us and have
established reputations for success in the development, sale and
service of products. There can be no assurance that we will be
able to compete successfully in the future.

While we believe we have strong intellectual
property protection covering many of our technologies, there is
no assurance that the breadth or degree of such protection will
be sufficient to prohibit or otherwise delay the introduction of
competitive products or technologies. The introduction of
competitive products and technologies may have a material
adverse effect on our business, results of operations and
financial condition.

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We may not be able to adequately respond to
changes in technology affecting the printing
industry.Our continuing product
development efforts have focused on refining and improving the
performance of our PEARL and DI technology and our consumables
and we anticipate that we will continue to do so. The printing
and publishing industry has been characterized in recent years
by rapid and significant technological changes and frequent new
product introductions. Current competitors or new market
entrants could introduce new or enhanced products with features,
which render our technologies, or products incorporating our
technologies, obsolete or less marketable. Our future success
will depend, in part, on our ability to:



| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | use leading technologies effectively;                                                                                                                                  
|
| |  | continue to develop our technical expertise and
    patented position;                                                                                                 
|
| |  | enhance our current products and develop new
    products that meet changing customer needs;                                                                           
|
| |  | time new product introductions in a way that
    minimizes the impact of customers delaying purchases of existing
    products in anticipation of new product releases;
|
| |  | adjust the prices of our existing products to
    increase customer demand;                                                                                            
|
| |  | successfully advertise and market our products;
    and                                                                                                                
|
| |  | influence and respond to emerging industry
    standards and other technological changes.                                                                              

We must respond to changing technology and
industry standards in a timely and cost-effective manner. We may
not be successful in effectively using new technologies,
developing new products or enhancing our existing products and
technology on a timely basis. Our new technologies or
enhancements may not achieve market acceptance. Our pursuit of
new technology may require substantial time and expense. We may
need to license new technologies to respond to technological
change. These licenses may not be available to us on terms that
we can accept. Finally, we may not succeed in adapting our
products to new technologies as they emerge.

Ongoing litigation could have an adverse
impact on our business.From time
to time in the ordinary course of our business we may be subject
to certain lawsuits. Our discontinued subsidiary, Delta V, is
currently a defendant in a lawsuit commenced by PPG, Inc.
claiming that equipment sold by Delta V did not meet certain
product specifications. Although we intend to continue to
vigorously defend this action, we could be adversely affected if
the plaintiff were to prevail on its damage claim, which is in
excess of $7.0 million. There can be no assurance that we
will be successful in this action, or any other litigation of
which we may become a party from time to time. Any adverse
result in this litigation or any other litigation of which we
may become a party from time to time may, have a material
adverse impact on our business, results of operations and
financial condition.

The loss or unavailability of our key
personnel would have a material adverse effect on our
business.The success of Presstek
is largely dependent on the personal efforts of our senior
management team. We have entered into an employment agreement
with Ed Marino, our President and Chief Executive Officer, and
Moosa E. Moosa, our Chief Financial Officer. The loss or
interruption of the services of Mr. Marino or
Mr. Moosa could have an adverse effect on our business and
prospects. In January 2003, Richard A. Williams, one of our
founders, announced his retirement as Chief Scientific Officer.
While he will continue to serve as Chairman of the Board, the
loss of Mr. Williams may have an adverse impact on our
business.

Our success may also be dependent on our ability
to hire and retain additional qualified engineering, technical,
sales, marketing and other personnel. Competition for qualified
personnel in our industry can be intense, and there can be no
assurance that we will be able to hire or retain additional
qualified personnel.

Our stock price has been and could continue
to be extremely volatile.The
market price of our common stock has been subject to significant
fluctuations. The securities markets have experienced, and are
likely to experience in the future, significant price and volume
fluctuations that could adversely affect

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the market price of our common stock without
regard to our operating performance. In addition, the trading
price of our common stock could be subject to significant
fluctuations in response to:




| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | actual or anticipated variations in our quarterly
    operating results;                                                                    
|
| |  | announcements by us or other industry
    participants;                                                                                     
|
| |  | changes in national or regional economic
    conditions;                                                                                    
|
| |  | changes in securities analysts estimates
    for us, our competitors or our industry or our failure to meet
    analysts expectations; and
|
| |  | general market conditions.                                                                                                                  

In addition, in recent years the stock market in
general, and the Nasdaq National Market in particular, have
experienced large price and volume fluctuations. These market
factors may materially and adversely affect our stock price,
regardless of our operating performance.

Certain factors may have a depressive
effect on the market price for our common
stock.As of March 21, 2003,
we had 34,142,624 shares of our common stock outstanding.
Approximately 31,317,490 of our shares are currently freely
tradable without restriction under the Securities Act of 1933.
All of the remaining shares are eligible for sale, subject, in
some cases, to affiliate and other restrictions under
Rule 144 of the Securities Act of 1933. The sale of a
significant number of these shares of common stock could
adversely affect the market price of our common stock.

There are currently outstanding options to
purchase approximately 3.6 million shares of our common
stock at prices ranging from $2.85 - $26.94 per share.
Substantially all of these shares have been registered for
resale and may be sold, subject, in some cases, to volume and
other limitations under Rule 144 of the Securities Act of
1933. To the extent they are exercised or converted, the
percentage ownership of existing stockholders will be diluted
and our stock price could be adversely affected. This could also
adversely affect the terms upon which we may be able to obtain
additional equity capital in the future, since the holders of
outstanding options can be expected to exercise them at a time
when we would, in all likelihood, be able to obtain any needed
capital on terms more favorable to us than those provided in the
outstanding options.




Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk

We are exposed to market risk from changes in
interest rates primarily as a result of our borrowing
activities, and to a lesser extent, our investing activities.
The majority of our long-term borrowings are in fixed rate
instruments, or variable rate instruments with fixed rate
conversion provisions. We do not enter into interest rate swap
agreements or other speculative or leveraged transactions. We
currently have no material exposure to interest rate
fluctuations on our short-term investments.

We have limited exposure to foreign currency
exchange rate risk as substantially all of our transactions are
denominated in U.S. dollars. Some of our customers and strategic
partners are not located in the United States, however. As a
result, these customers and strategic partners are themselves
subject to fluctuations in foreign exchange rates. If their home
country currency were to decrease in value relative to the
United States dollar, their ability to purchase and market our
products could be adversely affected and our products may become
less competitive to them. This may have an adverse impact on our
business. Likewise, some of our suppliers are not located in the
United States and thus, such suppliers are subject to foreign
exchange rate risks in transactions with us. Decreases in the
value of their home country currency versus that of the United
States dollar could cause fluctuations in supply pricing which
could have an adverse effect on our business.




Item 8.     Financial
Statements and Supplementary Data

The financial statements required by Item 8
of Form 10-K are incorporated herein by reference to
Item 15 of this report.

35



---



##### Table of Contents






Item 9.     Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure

Not applicable




PART III




Item 10.     Directors
and Executive Officers of the Registrant

The information required by this item will be set
forth under the captions Election of Directors,
Executive Officers and Section 16(a)
Beneficial Ownership Reporting Compliance in the
definitive proxy statement that the Company expects to file with
the Securities Exchange Commission within 120 days of the
fiscal year ended December 28, 2002 for the Annual Meeting
of Stockholders to be held on June 17, 2003 (the
Proxy Statement) and such information is
incorporated herein by reference.




Item 11.     Executive
Compensation

The information required by this item will be set
forth under the captions Executive Compensation,
Employment Agreements and Termination of Employment
Agreements, Options and Stock Plans,
Compensation of Directors, Compensation
Committee Interlocks and Insider Participation,
Report on Executive Compensation and Stock
Performance Graph, in the Proxy Statement and is
incorporated herein by reference.




Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The information required by this item will be set
forth under the caption Voting Security Ownership of
Certain Beneficial Owners and Management in the Proxy
Statement, and is incorporated herein by reference.




Item 13.     Certain Relationships and Related Transactions

The information required by this item will be set
forth under the caption Certain Relationships and Related
Transactions in the Proxy Statement, and is incorporated
herein by reference.




Item 14.     Controls
and Procedures.

(a)     Evaluation of
Disclosure Controls and Procedures

As of a date (the Evaluation Date)
within ninety days prior to the filing date of this Annual
Report on Form 10-K, we have, under the supervision and
with the participation of management, including the Chief
Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of Pressteks
disclosure controls and procedures pursuant to Rule 13a-15
promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act). Based upon that
evaluation, Pressteks Chief Executive Officer and the
Chief Financial Officer concluded that, as of the Evaluation
Date, Pressteks disclosure controls and procedures are
effective in ensuring that material information relating to
Presstek (including its consolidated subsidiaries) required to
be disclosed by Presstek in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commissions rules and forms, including ensuring
that such material information is accumulated and communicated
to Pressteks management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.

(b)     Changes in
Internal Controls

There were no significant changes in
Pressteks internal controls or in other factors that could
significantly affect Pressteks controls subsequent to the
date that Presstek last evaluated its internal controls.

36



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##### Table of Contents






PART IV




Item 15.     Exhibits,
Financial Statement Schedules, and Reports on
Form 8-K

|       |  |                                                                                                                                                            |  |      |      | 
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|       |  |                                                                                                                                                            |  | Page
|(a)(1) |  | Financial Statements                                                                                                                                       |  |      |      | 
|       |  | Report of Independent Certified
    Public Accountants                                                                                                     |  |      | F-2  | 
|       |  | Balance Sheets as of
    December 28, 2002 and December 29, 2001                                                                                           |  |      | F-3  | 
|       |  | Statements of Operations for the
    fiscal years ended December 28, 2002,
    December 29, 2001, and December 30, 2000                                    |  |      | F-4  | 
|       |  | Statements of Changes in
    Stockholders Equity for the fiscal years ended
    December 28, 2002, December 29, 2001, and
    December 30, 2000           |  |      | F-5  | 
|       |  | Statements of Cash Flows for the
    fiscal years ended December 28, 2002,
    December 29, 2001, and December 30, 2000                                    |  |      | F-6  | 
|       |  | Notes to Financial Statements                                                                                                                              |  |      | F-7  | 
|(a)(2) |  | Financial Statement Schedule                                                                                                                               |  |      |      | 
|       |  | Schedule II 
    Valuation and Qualifying Accounts                                                                                                        |  |      | FS-1 | 
|       |  | All other schedules are omitted because they are
    not applicable or the required information is shown in the
    financial statements or notes thereto. |  |      |      | 
|(a)(3) |  | Exhibits                                                                                                                                                   |  |      |      | 

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|3(a)    |  | Amended and Restated Certificate of Incorporation
    of Presstek, Inc., as amended. (Previously filed as
    Exhibit 3 to Pressteks Quarterly Report on
    Form 10-Q for the Quarter ended June 29, 1996, hereby
    incorporated by reference.)                                                                                                                                                
|3(b)    |  | By-laws of Presstek, Inc. (Previously filed as an
    exhibit with Pressteks Form 10-K for the fiscal year
    ended December 30, 1995, filed March 29, 1996, hereby
    incorporated by reference.)                                                                                                                                                                                              
|10(a)   |  | Confidentiality Agreement between Presstek, Inc.
    and Heidelberger Druckmaschinen A.G., effective December 7,
    1989 as amended. (Previously filed as Exhibit 10(i) of
    Pressteks Annual Report on Form 10-K for the fiscal
    year ended December 31, 1989, hereby incorporated by
    reference.)                                                                                      
|10(b)   |  | Master Agreement effective January 1, 1991,
    by and between Heidelberger Druckmaschinen Aktiengesellschaft
    and Presstek, Inc. (Previously filed as an exhibit to
    Pressteks Form 8-K, dated January 1, 1991,
    hereby incorporated by reference.)                                                                                                                                     
|10(c)   |  | Technology License effective January 1,
    1991, by and between Heidelberger Druckmaschinen
    Aktiengesellschaft and Presstek, Inc. (Previously filed as an
    exhibit to Pressteks Form 8-K, dated January 1,
    1991, hereby incorporated by reference.)                                                                                                                                   
|10(d)   |  | Memorandum of Performance No. 3 dated
    April 27, 1993, to the Master Agreement, Technology
    License, and Supply Agreement between Presstek, Inc. and
    Heidelberger Druckmaschinen Aktiengesellschaft. (Previously
    filed as an exhibit to Pressteks Quarterly Report on
    Form 10-Q for the quarter ended June 30, 1993, hereby
    incorporated by reference.)                     
|10(e)   |  | Modification to Memorandum of Performance
    No. 3 dated April 27, 1993, to the Master Agreement,
    Technology License, and Supply Agreement between Presstek, Inc.
    and Heidelberger Druckmaschinen Aktiengesellschaft. (Previously
    filed as an exhibit to Pressteks Annual report on
    Form 10-K for the fiscal year ended December 31, 1994,
    hereby incorporated by reference.)
|10(f)*  |  | Memorandum of Understanding No. 4 dated
    November 9, 1995, to the Master Agreement and Technology
    License and Supply Agreement between Presstek, Inc. and
    Heidelberger Druckmaschinen Aktiengesellschaft. (Previously
    filed as Exhibit 10.k to Pressteks Form 10-K for
    the fiscal year ended December 30, 1995, filed
    March 29, 1996, hereby incorporated by reference.)   

37



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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                                                                                 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                 
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                                 
|10(g)** |  | 1991 Stock Option Plan. (Previously filed as an
    exhibit to Pressteks Annual report on Form 10-K for
    the fiscal year ended December 31, 1991, hereby
    incorporated by reference.)                                                                                                                                                                                    
|10(h)** |  | 1994 Stock Option Plan. (Previously filed as an
    exhibit to Pressteks Annual report on Form 10-K for
    the fiscal year ended December 31, 1994, hereby
    incorporated by reference.)                                                                                                                                                                                    
|10(i)** |  | Non-Employee Director Stock Option Plan.
    (Previously filed as Exhibit 10.0 to Pressteks
    Form 10-K for the fiscal year ended January 2, 1999,
    filed March 2, 1999, hereby incorporated by reference.)                                                                                                                                                               
|10(j)** |  | 1997 Interim Stock Option Plan. (Previously filed
    as Exhibit 10.1 to Pressteks Quarterly report on
    Form 10-Q for the quarter ended September 27, 1997,
    filed November 7, 1997, hereby incorporated by reference.)                                                                                                                                                  
|10(k)** |  | 1998 Stock Incentive Plan. (Previously filed as
    Exhibit A to Pressteks April 23, 1998 Proxy
    Statement, filed April 24, 1998, hereby incorporated by
    reference.)                                                                                                                                                                                                    
|10(l)*  |  | Memorandum of Understanding No. 5 dated
    March 7, 1997 between Presstek, Inc. and Heidelberger
    Druckmaschinen Aktiengesellschaft. (Previously filed as
    Exhibit 10 (T) to Pressteks Annual Report on
    Form 10-K for the fiscal year ended December 28, 1996
    filed March 31, 1997, hereby incorporated by reference.)                                          
|10(m)** |  | Employment Agreement by and between Presstek,
    Inc. and Edward J. Marino dated April 3, 2002.
    (Previously filed as Exhibit 10.2 to Pressteks
    Quarterly report on Form 10-Q for the quarter ended
    June 29, 2002, filed August 13, 2002, hereby
    incorporated by reference.)                                                                                   
|10(n)   |  | Master Security agreement and related Promissory
    Note, by and between Presstek, Inc. and KeyCorp Leasing, a
    Division of Key Corporate Capital, Inc., dated
    September 27, 1999. (Previously filed as Exhibit 10(s)
    to Pressteks Form 10-Q for the quarter ended
    October 1, 1999, filed November 16, 1999, hereby
    incorporated by reference.)            
|10(o)   |  | Amendment to existing loan agreement with Keybank
    Corporate Capital, Inc., dated March 28, 2000. (Previously
    filed as Exhibit 10(u) to Pressteks Form 10-K
    for the fiscal year ended January 1, 2000, filed
    March 31, 2000, hereby incorporated by reference.)                                                                                                 
|10(p)*  |  | Master Supply and Distribution Agreement by and
    between Presstek, Inc. and Xerox Corporation dated
    September 22, 2000. (Previously filed as Exhibit 10.1
    to Pressteks Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2000, filed November 14,
    2000, hereby incorporated by reference.)                                                  
|10(q)   |  | Amendment to Loan Agreement and Related Loan
    Documents by and among Presstek, Inc., Lasertel, Inc., and
    Citizens Bank New Hampshire dated as of October 30, 2000.
    (Previously filed as Exhibit 10.2 to the Companys
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2000, filed November 14, 2000, hereby
    incorporated by reference.)
|10(r)   |  | Guaranty Agreement by Lasertel, Inc., to the
    benefit of Citizens Bank New Hampshire made as of
    October 30, 2000. (Previously filed as Exhibit 10.3 to
    the Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2000, filed November 14,
    2000, hereby incorporated by reference.)                                                     
|10(s)   |  | Term Note dated October 30, 2000 made by
    Presstek, Inc. in favor of Citizens Bank New Hampshire.
    (Previously filed as Exhibit 10.4 to Pressteks
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2000, filed November 14, 2000, hereby
    incorporated by reference.)                                                                        
|10(t)   |  | Security Agreement by and between Lasertel, Inc.
    and Citizens Bank New Hampshire dated October 30, 2000.
    (Previously filed as Exhibit 10.5 to Pressteks
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2000, filed November 14, 2000, hereby
    incorporated by reference.)                                                                
|10(u)   |  | Assignment of Lease Agreement by and between
    Presstek, Inc. and Citizens Bank New Hampshire made as of
    October 30, 2000. (Previously filed as Exhibit 10.6 to
    Pressteks Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2000, filed November 14,
    2000, hereby incorporated by reference.)                                                

38



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##### Table of Contents



|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Number   |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10(v)    |  | Mortgage and Security Agreement between Presstek,
    Inc. and Citizens Bank New Hampshire dated October 30,
    2000. (Previously filed as Exhibit 10.7 to Pressteks
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2000, filed November 14, 2000, hereby
    incorporated by reference.)                                                                                                                    
|10(w)    |  | Amended Master Supply and Distribution Agreement
    by and between Presstek, Inc. and Xerox Corporation dated
    May 11, 2001. (Previously filed as Exhibit 10.1 to
    Pressteks Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2001, filed August 14, 2001,
    hereby incorporated by reference.)                                                                                                                 
|10(x)*   |  | Agreement between Presstek, Inc. and Adamovski
    Strojírny a.s. dated as of April 24, 2001. (Previously
    filed as Exhibit 10.2 to Pressteks Quarterly Report
    on Form 10-Q for the quarter ended June 30, 2001,
    filed August 14, 2001, hereby incorporated by reference.)                                                                                                                                                    
|10(y)    |  | Amendment No. 4 to the Master Security
    Agreement by and between Presstek, Inc. and Key Equipment
    Finance, a Division of Key Corporate Capital, Inc. dated
    September 26, 2001. (Previously filed as Exhibit 10.1
    to Pressteks Quarterly Report on Form 10-Q for the
    quarter ended September 29, 2001, filed November 13,
    2001, hereby incorporated by reference.)                                                 
|10(z)    |  | Amendment to Loan Agreement and Related Documents
    by and between Presstek, Inc. and Citizens Bank New Hampshire
    dated as of October 19, 2001. (Previously filed as
    Exhibit 10.2 to Pressteks Quarterly Report on
    Form 10-Q for the quarter ended September 29, 2001,
    filed November 13, 2001, hereby incorporated by reference).                                                                                     
|10(aa)*  |  | Settlement Agreement made as of July 13,
    2001 by and between Heidelberger Druckmaschinen
    Aktiengesellschaft and Presstek, Inc. (Previously filed as
    Exhibit 10.3 to Pressteks Quarterly Report on
    Form 10-Q for the quarter ended September 29, 2001,
    filed November 13, 2001, hereby incorporated by reference.)                                                                                                    
|10(bb)*  |  | Letter Agreement dated September 19, 2001
    between Xerox Corporation and Presstek, Inc. amending the
    Amended Master Supply and Distribution Agreement by and among
    Presstek, Inc. and Xerox Corporation dated May 11, 2001.
    (Previously filed as Exhibit 10.1 to Pressteks
    Quarterly Report on Form 10-Q for the quarter ended
    September 29, 2001, filed November 13, 2001, hereby
    incorporated by reference.)
|10(cc)** |  | Resignation Agreement and General Release by and
    between Presstek, Inc. and Neil M. Rossen, dated
    November 14, 2001 and effective as of December 31,
    2001. (Previously filed as Exhibit 10.1 to Pressteks
    Quarterly Report on Form 10-Q for the quarter ended
    March 30, 2002, filed May 14, 2002, hereby
    incorporated by reference.)                                                                             
|10(dd)** |  | Separation Agreement by and between Presstek,
    Inc. and Robert W. Hallman dated as of April 26, 2002,
    and effective as of April 30, 2002. (Previously filed as
    Exhibit 10.1 to Pressteks Quarterly Report on
    Form 10-Q for the quarter ended June 29, 2002, filed
    August 13, 2002, hereby incorporated by reference.)                                                                                                 
|10(ee)** |  | Employment Agreement by and between Presstek,
    Inc. and Moosa E. Moosa, dated June 28, 2002.
    (Previously filed as Exhibit 10.3 to Pressteks
    Quarterly Report on Form 10-Q for the quarter ended
    June 29, 2002, filed August 13, 2002, hereby
    incorporated by reference.)                                                                                                                                              
|10(ff)*  |  | Agreement for Manufacture & Sale of Sun
    Press between Presstek, Inc. and Ryobi Limited, dated as
    of April 5, 2002. (Previously filed as Exhibit 10.4 to
    Pressteks Quarterly Report on Form 10-Q for the
    quarter ended June 29, 2002, filed on August 13, 2002,
    hereby incorporated by reference.)                                                                                                                  
|10(gg)** |  | 2002 Employee Stock Purchase Plan of Presstek,
    Inc. (Previously filed as Exhibit 4.3 to Pressteks
    Registration Statement on Form S-8 filed with the
    Commission on August 9, 2002, hereby incorporated by
    reference.)                                                                                                                                                                                                     
|10(hh)** |  | Description of Pressteks Non-Employee
    Director Compensation Arrangements, approved by Pressteks
    Board of Directors on July 17, 2002 and amended by
    Pressteks Board of Directors on December 17, 2002
    (filed herewith).                                                                                                                                                                                                 
|10(ii)   |  | Security Agreement by and between Presstek, Inc.
    and Citizens Bank New Hampshire dated October 25, 2002
    (filed herewith).                                                                                                                                                                                                                                                                                                         

39



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##### Table of Contents



|         |  |                                                                                                                                                                                               
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  |                                                                                                                                                                                               
|Number   |  | Description                                                                                                                                                                                   
|         |  |                                                                                                                                                                                               
|10(jj)   |  | Amendment to Loan Agreement and Related Loan
    Documents by and among Presstek, Inc., Lasertel, Inc., and
    Citizens Bank New Hampshire dated as of October 25, 2002
    (filed herewith).
|10(kk)   |  | Replacement Revolving Line of Credit Promissory
    Note dated October 25, 2002 issued by Presstek, Inc. in
    favor of Citizens Bank New Hampshire (filed herewith).                        
|10(ll)** |  | Retirement Agreement by and between Presstek,
    Inc. and Richard A. Williams, dated January 7, 2003
    (filed herewith).                                                                   
|21       |  | Subsidiaries of the Presstek, Inc. (filed
    herewith.)                                                                                                                                      
|23(a)    |  | Consent of BDO Seidman, LLP (filed herewith).                                                                                                                                                 
|99.1     |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002 (furnished herewith).                                          
|99.2     |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002 (furnished herewith).                                          



---



| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| | * | The SEC has granted Pressteks request of
    confidential treatment with respect to a portion of this exhibit.



|   |                                                                   
|-- | ------------------------------------------------------------------
|** | Denotes management employment contracts or
    compensatory plans.



|           |                    
|---------- | -------------------
|Item 15(b) | Reports on Form 8-K

None

Item 15(c)See
Item 15(a)(3) above.

Item 15(d)See
Item 15(a)(2) above.

40



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |               
| | --------------
| | PRESSTEK, INC.



| |     |                     
| | --- | --------------------
| | By: | /s/ EDWARD J. MARINO

| |                                          
| | -----------------------------------------
| |                                          
| | Edward J. Marino                         
| | President and Chief Executive
    Officer

Dated: March 28, 2003

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                                       |  |                                                                                                             |  |                |  | 
|------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                                       |  |                                                                                                             |  |               
|Signature                                              |  | Title                                                                                                       |  | Date          
|                                                       |  |                                                                                                             |  |               
|/s/ RICHARD A. WILLIAMSRichard A. Williams             |  | Chairman of the Board                                                                                       |  | March 28, 2003
|                                                      
|/s/ EDWARD J. MARINOEdward J. Marino                   |  | Chief Executive Officer,
    President, and Director
    (Principal Executive Officer)                      |  | March 28, 2003
|                                                      
|/s/ MOOSA E. MOOSAMoosa E. Moosa                       |  | Vice President of Finance,
    Chief Financial Officer
    (Principal Financial and
    Accounting Officer) |  | March 28, 2003
|                                                      
|/s/ DR. LAWRENCE HOWARDDr. Lawrence Howard             |  | Director                                                                                                    |  | March 28, 2003
|                                                      
|/s/ JOHN W. DREYERJohn W. Dreyer                       |  | Director                                                                                                    |  | March 28, 2003
|                                                      
|/s/ JOHN B. EVANSJohn B. Evans                         |  | Director                                                                                                    |  | March 28, 2003
|                                                      
|/s/ DANIEL S. EBENSTEIN, ESQ.Daniel S. Ebenstein, Esq. |  | Director                                                                                                    |  | March 28, 2003
|                                                      
|/s/ MICHAEL D. MOFFITTMichael D. Moffitt               |  | Director                                                                                                    |  | March 28, 2003
|                                                      
|/s/ DONALD C. WAITE, IIIDonald C. Waite, III           |  | Director                                                                                                    |  | March 28, 2003
|                                                      
|/s/ BARBARA A. PELLOWBarbara A. Pellow                 |  | Director                                                                                                    |  | March 28, 2003

41



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##### Table of Contents






CERTIFICATIONS

I, Edward J. Marino, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Presstek, Inc.;                                                                                                                                                                                                                                                                          
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared; and
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                          
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                    



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls;                                                                                                                                                        



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |                                          
| | -----------------------------------------
| | /s/ EDWARD J. MARINO                     
| |                                          
| | Edward J. Marino                         
| | President and Chief Executive
    Officer
| | (Principal Executive Officer)            

Date: March 28, 2003

42



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##### Table of Contents



I, Moosa E. Moosa, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Presstek, Inc.;                                                                                                                                                                                                                                                                          
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared; and
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                          
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                    



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls;                                                                                                                                                        



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |                                                         
| | --------------------------------------------------------
| | /s/ MOOSA E. MOOSA                                      
| |                                                         
| | Moosa E. Moosa                                          
| | Vice President  Finance and Chief
    Financial Officer
| | (Principal Financial and Accounting
    Officer)        

Date: March 28, 2003

43



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##### Table of Contents






INDEX TO FINANCIAL STATEMENTS

|                                                                                                                                                |  |      |      | 
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|                                                                                                                                                |  | Page
|                                                                                                                                                |  |     
|Report of Independent Certified Public Accountants                                                                                              |  |      | F-2  | 
|Balance Sheets as of December 28, 2002 and
    December 29, 2001                                                                                |  |      | F-3  | 
|Statements of Operations for the fiscal years
    ended December 28, 2002,
    December 29, 2001, and December 30, 2000                         |  |      | F-4  | 
|Statements of Changes in Stockholders
    Equity for the fiscal years ended
    December 28, 2002, December 29, 2001 and
    December 30, 2000 |  |      | F-5  | 
|Statements of Cash Flows for the fiscal years
    ended December 28, 2002,
    December 29, 2001, December 30, 2000                             |  |      | F-6  | 
|Notes to Financial Statements                                                                                                                   |  |      | F-7  | 
|Financial Statement Schedule:                                                                                                                   |  |      |      | 
|Schedule II  Valuation and
    Qualifying Accounts and Reserves                                                                                |  |      | FS-1 | 

F-1



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##### Table of Contents






REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS

To the Board of Directors and Stockholders

Presstek, Inc.


Hudson, New Hampshire


We have audited the accompanying balance sheets
of Presstek, Inc. as of December 28, 2002 and
December 29, 2001, and the related statements of
operations, changes in stockholders equity, and cash flows
for the fiscal years ended December 28, 2002,
December 29, 2001 and December 30, 2000. We have also
audited the financial statement schedule listed in the
accompanying index. These financial statements and schedule are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements and schedule. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly in all material respects, the financial
position of Presstek, Inc. at December 28, 2002 and
December 29, 2001, and the results of its operations and
its cash flows for the fiscal years ended December 28,
2002, December 29, 2001 and December 30, 2000, in
conformity with accounting principles generally accepted in the
United States of America.

Also, in our opinion, the schedule presents
fairly, in all material respects, the information set forth
therein.



| |                     
| | --------------------
| | /s/ BDO SEIDMAN, LLP
| |                     
| | BDO SEIDMAN, LLP    

New York, New York

February 13, 2003, except for Note 12,
as to which the date is March 18, 2003


F-2



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##### Table of Contents






PRESSTEK, INC.

BALANCE SHEETS

|                                           |                                                                                                                                                                               |                            |        |         |        |         |        |         |        |         | 
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | ------- | ------ | ------- | ------ | ------- | ------ | ------- | 
|                                           |                                                                                                                                                                               | Dec 28                     |        | Dec 29 
|                                           |                                                                                                                                                                               | 2002                       |        | 2001   
|                                           |                                                                                                                                                                               |                            |        |        
|                                           |                                                                                                                                                                               |                           
|                                           |                                                                                                                                                                               | (In thousands, except     
|                                           |                                                                                                                                                                               | share data)               
|ASSETS                                    
|CURRENT ASSETS:                            |                                                                                                                                                                               |                            |        |         |        |         |        |        
|                                           | Cash and cash equivalents                                                                                                                                                     |                            | $      | 17,563  |        |         | $      | 2,492   |       
|                                           | Accounts receivable, net of allowance for losses
    of $2,167 and $2,420 in fiscal 2002 and 2001, respectively                                                               |                            |        | 15,108  |        |         |        | 18,117  |       
|                                           | Inventories                                                                                                                                                                   |                            |        | 11,715  |        |         |        | 17,818  |       
|                                           | Other current assets                                                                                                                                                          |                            |        | 554     |        |         |        | 1,118   |       
|                                           |                                                                                                                                                                               |                            |        |         |        |         |        |        
|                                           |                                                                                                                                                                               | Total current assets       |        |         | 44,940 |         |        |         | 39,545 |        
|                                           |                                                                                                                                                                               |                            |        |         |        |         |        |        
|PROPERTY, PLANT AND EQUIPMENT, NET         |                                                                                                                                                                               |                            | 52,291 |         |        |         | 61,235 |        
|OTHER ASSETS:                              |                                                                                                                                                                               |                            |        |         |        |         |        |        
|                                           | Patent application costs and license rights, net                                                                                                                              |                            |        | 4,409   |        |         |        | 4,358   |       
|                                           | Other                                                                                                                                                                         |                            |        | 156     |        |         |        | 1,706   |       
|                                           |                                                                                                                                                                               |                            |        |         |        |         |        |        
|                                           |                                                                                                                                                                               | Total other assets         |        |         | 4,565  |         |        |         | 6,064  |        
|                                           |                                                                                                                                                                               |                            |        |         |        |         |        |        
|                                           |                                                                                                                                                                               |                            | TOTAL  |         | $      | 101,796 |        |         | $      | 106,844 | 
|                                           |                                                                                                                                                                               |                            |        |         |        |         |        |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY  
|CURRENT LIABILITIES:                       |                                                                                                                                                                               |                            |        |         |        |         |        |        
|                                           | Notes payable                                                                                                                                                                 |                            | $      |        |        |         | $      | 967     |       
|                                           | Current portion of long-term debt                                                                                                                                             |                            |        | 3,045   |        |         |        | 2,343   |       
|                                           | Accounts payable                                                                                                                                                              |                            |        | 3,331   |        |         |        | 2,067   |       
|                                           | Accrued expenses                                                                                                                                                              |                            |        | 9,603   |        |         |        | 5,920   |       
|                                           | Deferred revenue                                                                                                                                                              |                            |        | 389     |        |         |        | 1,507   |       
|                                           |                                                                                                                                                                               |                            |        |         |        |         |        |        
|                                           |                                                                                                                                                                               | Total current liabilities  |        |         | 16,368 |         |        |         | 12,804 |        
|                                           |                                                                                                                                                                               |                            |        |         |        |         |        |        
|LONG-TERM DEBT, NET OF CURRENT
    PORTION |                                                                                                                                                                               |                            | 13,662 |         |        |         | 14,055 |        
|COMMITMENTS AND CONTINGENCIES              |                                                                                                                                                                               |                            |        |         |        |         |        |        
|STOCKHOLDERS EQUITY:                      |                                                                                                                                                                               |                            |        |         |        |         |        |        
|                                           | Preferred stock, $.01 par value; authorized
    1,000,000 shares; no shares issued or outstanding                                                                             |                            |        |        |        |         |        |        |       
|                                           | Common stock, $.01 par value; authorized
    75,000,000 shares; issued and outstanding 34,125,481 shares at
    December 28, 2002; 34,115,906 shares at December 29,
    2001 |                            |        | 341     |        |         |        | 341     |       
|                                           | Additional paid-in capital                                                                                                                                                    |                            |        | 97,403  |        |         |        | 97,342  |       
|                                           | Accumulated deficit                                                                                                                                                           |                            |        | (25,978 | )      |         |        | (17,698 | )     
|                                           |                                                                                                                                                                               |                            |        |         |        |         |        |        
|                                           |                                                                                                                                                                               | Total stockholders equity |        |         | 71,766 |         |        |         | 79,985 |        
|                                           |                                                                                                                                                                               |                            |        |         |        |         |        |        
|                                           |                                                                                                                                                                               |                            | TOTAL  |         | $      | 101,796 |        |         | $      | 106,844 | 
|                                           |                                                                                                                                                                               |                            |        |         |        |         |        |        

See accompanying notes to financial statements

F-3



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##### Table of Contents






PRESSTEK, INC.

STATEMENTS OF OPERATIONS

|                                                                 |                                       |                                       |        |        |        |        |        |        |         |   |        |        |        | 
|---------------------------------------------------------------- | ------------------------------------- | ------------------------------------- | ------ | ------ | ------ | ------ | ------ | ------ | ------- | - | ------ | ------ | ------ | 
|                                                                 |                                       |                                      
|                                                                 |                                       | For the Fiscal Years Ended           
|                                                                 |                                       |                                      
|                                                                 |                                       | Dec 28                                |        | Dec 29 |        | Dec 30
|                                                                 |                                       | 2002                                  |        | 2001   |        | 2000  
|                                                                 |                                       |                                       |        |        |        |       
|                                                                 |                                       |                                      
|                                                                 |                                       | (In thousands, except per share data)
|REVENUE:                                                         |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|                                                                 | Product sales                         |                                       | $      | 78,988 |        |        | $      | 94,114 |         |   | $      | 78,121 |       
|                                                                 | Royalties and fees from licensees     |                                       |        | 4,465  |        |        |        | 8,189  |         |   |        | 9,173  |       
|                                                                 |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|                                                                 |                                       | Total revenue                         |        |        | 83,453 |        |        |        | 102,303 |   |        |        | 87,294 | 
|                                                                 |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|COSTS AND EXPENSES:                                              |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|                                                                 | Cost of products sold                 |                                       |        | 54,639 |        |        |        | 64,395 |         |   |        | 46,747 |       
|                                                                 | Research and product development      |                                       |        | 9,303  |        |        |        | 11,719 |         |   |        | 15,897 |       
|                                                                 | Sales, marketing and customer support |                                       |        | 10,425 |        |        |        | 13,004 |         |   |        | 9,613  |       
|                                                                 | General and administrative            |                                       |        | 10,554 |        |        |        | 15,802 |         |   |        | 9,635  |       
|                                                                 | Special charges                       |                                       |        | 5,961  |        |        |        |       |         |   |        |       |       
|                                                                 |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|                                                                 |                                       | Total costs and expenses              |        |        | 90,882 |        |        |        | 104,920 |   |        |        | 81,892 | 
|                                                                 |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|INCOME (LOSS) FROM OPERATIONS                                    |                                       |                                       | (7,429 | )      |        |        | (2,617 | )      |         |   | 5,402  |       
|                                                                 |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|OTHER INCOME (EXPENSE):                                          |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|                                                                 | Interest, net                         |                                       |        | (872   | )      |        |        | (1,136 | )       |   |        | (99    | )     
|                                                                 | Other, net                            |                                       |        | 21     |        |        |        | (63    | )       |   |        | 147    |       
|                                                                 |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|                                                                 |                                       | Total other income (expense), net     |        |        | (851   | )      |        |        | (1,199  | ) |        |        | 48     | 
|                                                                 |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|INCOME (LOSS) FROM CONTINUING OPERATIONS
    BEFORE INCOME TAXES |                                       |                                       | (8,280 | )      |        |        | (3,816 | )      |         |   | 5,450  |       
|PROVISION FOR INCOME TAXES                                       |                                       |                                       |       |        |        |        |       |        |         |   | 150    |       
|                                                                 |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|INCOME (LOSS) FROM CONTINUING
    OPERATIONS                     |                                       |                                       | (8,280 | )      |        |        | (3,816 | )      |         |   | 5,300  |       
|                                                                 |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|DISCONTINUED OPERATIONS:                                         |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|                                                                 | Income from discontinued operations   |                                       |        |       |        |        |        |       |         |   |        | 600    |       
|                                                                 |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|INCOME FROM DISCONTINUED OPERATIONS                              |                                       |                                       |       |        |        |        |       |        |         |   | 600    |       
|                                                                 |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|NET INCOME (LOSS)                                                |                                       | $                                     | (8,280 | )      |        | $      | (3,816 | )      |         | $ | 5,900  |       
|                                                                 |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|EARNINGS (LOSS) PER SHARE 
    BASIC:                           |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|                                                                 | From continuing operations            |                                       | $      | (0.24  | )      |        | $      | (0.11  | )       |   | $      | 0.16   |       
|                                                                 | From discontinued operations          |                                       | $      | 0.00   |        |        | $      | 0.00   |         |   | $      | 0.02   |       
|                                                                 |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|EARNINGS (LOSS) PER SHARE 
    BASIC                            |                                       | $                                     | (0.24  | )      |        | $      | (0.11  | )      |         | $ | 0.18   |       
|                                                                 |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|EARNINGS (LOSS) PER SHARE 
    DILUTED:                         |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|                                                                 | From continuing operations            |                                       | $      | (0.24  | )      |        | $      | (0.11  | )       |   | $      | 0.15   |       
|                                                                 | From discontinued operations          |                                       | $      | 0.00   |        |        | $      | 0.00   |         |   | $      | 0.02   |       
|                                                                 |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|EARNINGS (LOSS) PER SHARE 
    DILUTED                          |                                       | $                                     | (0.24  | )      |        | $      | (0.11  | )      |         | $ | 0.17   |       
|                                                                 |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|WEIGHTED AVERAGE                                                 |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|COMMON SHARES OUTSTANDING 
    BASIC                            |                                       |                                       | 34,124 |        |        |        | 34,096 |        |         |   | 32,826 |       
|                                                                 |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|WEIGHTED AVERAGE                                                 |                                       |                                       |        |        |        |        |        |        |         |   |        |       
|COMMON SHARES OUTSTANDING 
    DILUTED                          |                                       |                                       | 34,124 |        |        |        | 34,096 |        |         |   | 35,320 |       
|                                                                 |                                       |                                       |        |        |        |        |        |        |         |   |        |       

See accompanying notes to financial statements

F-4



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##### Table of Contents






PRESSTEK, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY



| | 
| | 
| | 

|                                                                                       |  |                |        |            |  |          |     |               |  |        |        |  |  |   |         |   |  |   |        |  
|-------------------------------------------------------------------------------------- |  | -------------- | ------ | ---------- |  | -------- | --- | ------------- |  | ------ | ------ |  |  | - | ------- | - |  | - | ------ | -
|                                                                                      
|For the Fiscal Year Ended December 28, 2002, December 29, 2001 and December 30, 2000  
|                                                                                      
|                                                                                       |  |                |        |           
|                                                                                       |  | Common Stock   |        | Additional |  | Retained |     | Total        
|                                                                                       |  |                |        | Paid-in    |  | Earnings |     | Stockholders
|                                                                                       |  | Shares         |        | Amount     |  | Capital  |     | (Deficit)     |  | Equity
|                                                                                       |  |                |        |            |  |          |     |               |  |       
|                                                                                       |  |               
|                                                                                       |  | (In thousands)
|BALANCE AT JANUARY 1, 2000                                                             |  |                | 32,516 |            |  | $        | 325 |               |  | $      | 69,312 |  |  | $ | (19,782 | ) |  | $ | 49,855 |  
|Net income for the year                                                                |  |                |       |            |  |          |    |               |  |        |       |  |  |   | 5,900   |   |  |   | 5,900  |  
|Issuance of warrants to purchase 300,000 shares
    of common stock                    |  |                |       |            |  |          |    |               |  |        | 2,488  |  |  |   |        |   |  |   | 2,488  |  
|Issuance of unregistered shares of common stock
    to settle the derivative lawsuit   |  |                | 61     |            |  |          | 1   |               |  |        | 949    |  |  |   |        |   |  |   | 950    |  
|Issuance of unregistered shares of common stock
    to settle the class action lawsuit |  |                | 1,245  |            |  |          | 12  |               |  |        | 21,988 |  |  |   |        |   |  |   | 22,000 |  
|Stock option exercises                                                                 |  |                | 206    |            |  |          | 2   |               |  |        | 1,948  |  |  |   |        |   |  |   | 1,950  |  
|                                                                                       |  |                |        |            |  |          |     |               |  |        |        |  |  |   |         |   |  |   |        |  
|BALANCE AT DECEMBER 30, 2000                                                           |  |                | 34,028 |            |  |          | 340 |               |  |        | 96,685 |  |  |   | (13,882 | ) |  |   | 83,143 |  
|Net loss for the year                                                                  |  |                |       |            |  |          |    |               |  |        |       |  |  |   | (3,816  | ) |  |   | (3,816 | )
|Stock option exercises                                                                 |  |                | 88     |            |  |          | 1   |               |  |        | 657    |  |  |   |        |   |  |   | 658    |  
|                                                                                       |  |                |        |            |  |          |     |               |  |        |        |  |  |   |         |   |  |   |        |  
|BALANCE AT DECEMBER 29, 2001                                                           |  |                | 34,116 |            |  |          | 341 |               |  |        | 97,342 |  |  |   | (17,698 | ) |  |   | 79,985 |  
|Net loss for the year                                                                  |  |                |        |            |  |          |     |               |  |        |        |  |  |   | (8,280  | ) |  |   | (8,280 | )
|Stock option exercises                                                                 |  |                | 9      |            |  |          |    |               |  |        | 61     |  |  |   |        |   |  |   | 61     |  
|                                                                                       |  |                |        |            |  |          |     |               |  |        |        |  |  |   |         |   |  |   |        |  
|BALANCE AT DECEMBER 28, 2002                                                           |  |                | 34,125 |            |  | $        | 341 |               |  | $      | 97,403 |  |  | $ | (25,978 | ) |  | $ | 71,766 |  
|                                                                                       |  |                |        |            |  |          |     |               |  |        |        |  |  |   |         |   |  |   |        |  

See accompanying notes to financial statements

F-5



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##### Table of Contents






PRESSTEK, INC.

STATEMENTS OF CASH FLOWS

|                                                     |                                                                                               |                                                                                                                                                            |                                                |        |       |        |        |        |       |        |        |         |     |         |  
|---------------------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------ | ----- | ------ | ------ | ------ | ----- | ------ | ------ | ------- | --- | ------- | -
|                                                     |                                                                                               |                                                                                                                                                           
|                                                     |                                                                                               | For the Fiscal Years Ended                                                                                                                                
|                                                     |                                                                                               |                                                                                                                                                           
|                                                     |                                                                                               | Dec 28                                                                                                                                                     |                                                | Dec 29 |       | Dec 30
|                                                     |                                                                                               | 2002                                                                                                                                                       |                                                | 2001   |       | 2000  
|                                                     |                                                                                               |                                                                                                                                                            |                                                |        |       |       
|                                                     |                                                                                               |                                                                                                                                                           
|                                                     |                                                                                               | (In thousands)                                                                                                                                            
|CASH FLOWS  OPERATING
    ACTIVITIES:               |                                                                                               |                                                                                                                                                            |                                                |        |       |        |        |        |       |        |        |        
|                                                     | Income (loss) from continuing operations                                                      |                                                                                                                                                            | $                                              | (8,280 | )     |        | $      | (3,816 | )     |        | $      | 5,300   |    
|                                                     |                                                                                               | Adjustments to reconcile income (loss) from
    continuing operations to net cash provided by (used in)
    operating activities of continuing operations: |                                                |        |       |        |        |        |       |        |        |         |     |        
|                                                     |                                                                                               |                                                                                                                                                            | Special charges and discontinued programs      |        |       | 9,646  |        |        |       |       |        |         |     |        |  
|                                                     |                                                                                               |                                                                                                                                                            | Depreciation and amortization                  |        |       | 9,422  |        |        |       | 9,003  |        |         |     | 6,653   |  
|                                                     |                                                                                               |                                                                                                                                                            | Provision for warranty and other costs         |        |       | 1,938  |        |        |       | 2,124  |        |         |     | 862     |  
|                                                     |                                                                                               |                                                                                                                                                            | Provision for losses on accounts receivable    |        |       | 901    |        |        |       | 990    |        |         |     | 686     |  
|                                                     |                                                                                               |                                                                                                                                                            | Other non-cash charge, net                     |        |       | 294    |        |        |       | 995    |        |         |     | 324     |  
|                                                     |                                                                                               | Changes in operating assets and liabilities:                                                                                                               |                                                |        |       |        |        |        |       |        |        |         |     |        
|                                                     |                                                                                               |                                                                                                                                                            | Accounts receivable                            |        |       | 2,117  |        |        |       | (2,161 | )      |         |     | (5,987  | )
|                                                     |                                                                                               |                                                                                                                                                            | Inventories                                    |        |       | 3,391  |        |        |       | (5,773 | )      |         |     | (4,831  | )
|                                                     |                                                                                               |                                                                                                                                                            | Advances to suppliers and other current assets |        |       | 564    |        |        |       | 6,484  |        |         |     | (6,743  | )
|                                                     |                                                                                               |                                                                                                                                                            | Accounts payable                               |        |       | 1,264  |        |        |       | (4,628 | )      |         |     | 1,658   |  
|                                                     |                                                                                               |                                                                                                                                                            | Accrued expenses                               |        |       | (3,221 | )      |        |       | (1,236 | )      |         |     | (1,427  | )
|                                                     |                                                                                               |                                                                                                                                                            | Deferred revenue                               |        |       | (68    | )      |        |       | (1,052 | )      |         |     | 2,459   |  
|                                                     |                                                                                               |                                                                                                                                                            | Other non-current assets                       |        |       | (1,016 | )      |        |       | (320   | )      |         |     | (978    | )
|                                                     |                                                                                               |                                                                                                                                                            |                                                |        |       |        |        |        |       |        |        |        
|                                                     | Net cash provided by (used in) operating
    activities                                       |                                                                                                                                                            |                                                | 16,952 |       |        |        | 610    |       |        |        | (2,024  | )  
|                                                     |                                                                                               |                                                                                                                                                            |                                                |        |       |        |        |        |       |        |        |        
|CASH FLOWS  INVESTING
    ACTIVITIES:               |                                                                                               |                                                                                                                                                            |                                                |        |       |        |        |        |       |        |        |        
|                                                     |                                                                                               |                                                                                                                                                            | Property, plant and equipment purchases        |        |       | (1,497 | )      |        |       | (9,643 | )      |         |     | (15,245 | )
|                                                     |                                                                                               |                                                                                                                                                            | Proceeds from the sale of equipment            |        |       | 213    |        |        |       |       |        |         |     | 22      |  
|                                                     |                                                                                               |                                                                                                                                                            |                                                |        |       |        |        |        |       |        |        |        
|                                                     | Net cash used in investing activities                                                         |                                                                                                                                                            |                                                | (1,284 | )     |        |        | (9,643 | )     |        |        | (15,223 | )  
|                                                     |                                                                                               |                                                                                                                                                            |                                                |        |       |        |        |        |       |        |        |        
|CASH FLOWS  FINANCING
    ACTIVITIES:               |                                                                                               |                                                                                                                                                            |                                                |        |       |        |        |        |       |        |        |        
|                                                     |                                                                                               |                                                                                                                                                            | Net proceeds from stock option exercises       |        |       | 61     |        |        |       | 658    |        |         |     | 1,950   |  
|                                                     |                                                                                               |                                                                                                                                                            | Proceeds from mortgage term loan               |        |       |       |        |        |       |       |        |         |     | 4,000   |  
|                                                     |                                                                                               |                                                                                                                                                            | Repayments of mortgage term loan               |        |       | (1,063 | )      |        |       | (890   | )      |         |     | (556    | )
|                                                     |                                                                                               |                                                                                                                                                            | Proceeds from lease line of credit             |        |       | 3,000  |        |        |       |       |        |         |     | 5,959   |  
|                                                     |                                                                                               |                                                                                                                                                            | Repayments of lease line of credit             |        |       | (1,628 | )      |        |       | (1,182 | )      |         |     | (787    | )
|                                                     |                                                                                               |                                                                                                                                                            | Revolving line of credit                       |        |       | (967   | )      |        |       | 967    |        |         |     |        |  
|                                                     |                                                                                               |                                                                                                                                                            |                                                |        |       |        |        |        |       |        |        |        
|                                                     | Net cash provided by (used in) financing
    activities                                       |                                                                                                                                                            |                                                | (597   | )     |        |        | (447   | )     |        |        | 10,566  |    
|                                                     |                                                                                               |                                                                                                                                                            |                                                |        |       |        |        |        |       |        |        |        
|INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS |                                                                                               |                                                                                                                                                            | 15,071                                         |        |       |        | (9,480 | )      |       |        | (6,681 | )      
|CASH AND CASH EQUIVALENTS BEGINNING OF
    PERIOD    |                                                                                               |                                                                                                                                                            | 2,492                                          |        |       |        | 11,972 |        |       |        | 18,653 |        
|                                                     |                                                                                               |                                                                                                                                                            |                                                |        |       |        |        |        |       |        |        |        
|CASH AND CASH EQUIVALENTS END OF
    PERIOD          |                                                                                               | $                                                                                                                                                          | 17,563                                         |        |       | $      | 2,492  |        |       | $      | 11,972 |        
|                                                     |                                                                                               |                                                                                                                                                            |                                                |        |       |        |        |        |       |        |        |        
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW
    INFORMATION |                                                                                               |                                                                                                                                                            |                                                |        |       |        |        |        |       |        |        |        
|                                                     | Cash paid during the period for:                                                              |                                                                                                                                                            |                                                |        |       |        |        |        |       |        |        |         |    
|                                                     |                                                                                               | Interest                                                                                                                                                   |                                                | $      | 1,057 |        |        | $      | 1,367 |        |        | $       | 813 |        
|                                                     |                                                                                               |                                                                                                                                                            |                                                |        |       |        |        |        |       |        |        |        
|                                                     |                                                                                               | Income taxes                                                                                                                                               |                                                | $      |      |        |        | $      | 121   |        |        | $       | 55  |        
|                                                     |                                                                                               |                                                                                                                                                            |                                                |        |       |        |        |        |       |        |        |        
|NON-CASH INVESTING AND FINANCING
    ACTIVITIES:     |                                                                                               |                                                                                                                                                            |                                                |        |       |        |        |        |       |        |        |        
|                                                     | Warrants issued in exchange for consulting
    services rendered                              |                                                                                                                                                            | $                                              |       |       |        | $      |       |       |        | $      | 2,488   |    
|                                                     |                                                                                               |                                                                                                                                                            |                                                |        |       |        |        |        |       |        |        |        
|                                                     | Issuance of unregistered shares of common stock
    in settlement of the Derivative Lawsuit   |                                                                                                                                                            | $                                              |       |       |        | $      |       |       |        | $      | 950     |    
|                                                     |                                                                                               |                                                                                                                                                            |                                                |        |       |        |        |        |       |        |        |        
|                                                     | Issuance of unregistered shares of common stock
    in settlement of the Class Action Lawsuit |                                                                                                                                                            | $                                              |       |       |        | $      |       |       |        | $      | 22,000  |    
|                                                     |                                                                                               |                                                                                                                                                            |                                                |        |       |        |        |        |       |        |        |        

See accompanying notes to financial statements

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##### Table of Contents



PRESSTEK, INC.

NOTES TO FINANCIAL STATEMENTS

1.     Summary of
Significant Accounting Policies

Nature of
Business Presstek, Inc.
(Presstek, or the Company) is a
manufacturer, developer and marketer of digital laser imaging
and chemistry-free plate technologies for the printing and
graphic arts industries. Pressteks products and
applications incorporate its patented DI® direct imaging
(DI), technologies and consumables for
computer-to-plate, (CTP) and direct-to-press
applications.

In April 2000, the Company incorporated an
Arizona subsidiary Lasertel, Inc. (Lasertel) and
established operations for the purpose of securing its supply of
laser diodes. Lasertel is engaged in the manufacture and
development of high-powered laser diodes for the Company and
external customers.

The Company operates in two reportable segments,
the Digital Imaging Products segment and the Lasertel segment.
The Digital Imaging Products segment is primarily engaged in the
development, manufacture and sales of patented digital imaging
systems and printing plate technologies for CTP and
direct-to-press applications. The Lasertel segment is primarily
engaged in the manufacture and development of Pressteks
high-powered laser diodes.

Basis of
Presentation The financial
statements include the accounts of the Company and its
subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain prior fiscal
years accounts have been reclassified for comparative
purposes.

Fiscal
Year The Company operates
and reports on a 52 or 53 week fiscal year ending on the
Saturday closest to December 31. Accordingly, the financial
statements include the 52 week fiscal years ended
December 28, 2002, (fiscal 2002),
December 29, 2001 (fiscal 2001) and
December 30, 2000 (fiscal 2000).

Use of
Estimates The Company
prepares its financial statements in accordance with accounting
principles generally accepted in the United States. The
preparation of these financial statements requires management to
make estimates and judgments that affect the reported amounts of
assets and liabilities and related disclosure of contingent
assets and liabilities at the date of the financial statements,
and the reported amounts of revenue and expenses during the
reporting period. The Company evaluates its estimates, including
those related to product returns, bad debts, inventories, income
taxes, warranty obligations, and litigation on an on-going
basis. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions.

Revenue
Recognition The Company
recognizes revenue in accordance with Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial
Statements (SAB No. 101). Under SAB No. 101,
revenue is recognized when persuasive evidence of an agreement
exists, delivery has occurred or services have been rendered,
the price to the customer is fixed or determinable, and
collection is reasonably assured.

Revenue and related royalties for products sold
where installation is not required is recorded at the time of
shipment. Revenue for products that require installation, for
which the installation is not deemed inconsequential, is
recognized upon completion of installation and customer
acceptance. Revenue related to service maintenance agreements is
recognized ratably over the duration of the contracts. Certain
fees and other reimbursements are recognized as revenue when the
related services have been performed. Deferred revenue includes
certain customer advances received as a result of the
Companys distribution agreements. This revenue is
recognized as product is shipped or services are performed.

Fair Value of Financial
Instruments The carrying
values of cash equivalents, accounts receivable, and accounts
payable approximate fair value due to the short-term maturity of
these instruments. The

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PRESSTEK, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

carrying amounts of the Companys bank
borrowings under its lease line of credit agreement approximates
fair value because the interest rates are based on floating
rates identified by reference to market rates. At
December 28, 2002 and December 29, 2001, the fair
value of the Companys long-term debt approximated carrying
value.

Cash
Equivalents For purposes
of reporting cash flows, the Company considers all savings
deposits, certificates of deposit, money market funds, and
highly liquid debt instruments with original maturities of three
months or less to be cash equivalents.

Concentration of Credit
Risk Financial instruments
that potentially subject the Company to concentrations of credit
risk consist primarily of cash equivalents and accounts
receivable. The Company invests in high-quality money market
instruments, securities of the U.S. government, and high-quality
corporate issues. Accounts receivable are generally unsecured
and are derived from the Companys customers located around
the world. Concentration of credit risk with respect to accounts
receivable results from a significant portion of the
Companys receivables concentrated with two major
customers. The Company performs ongoing credit evaluations of
its customers and maintains an allowance for potential credit
losses.

Accounts Receivable and Allowance for Doubtful
Accounts The
Companys accounts receivable are customer obligations due
under normal trade terms, carried at their face value less an
allowance for doubtful accounts.

The Company evaluates its accounts receivable on
an ongoing basis and establishes an allowance for doubtful
accounts based on specific customer circumstances and on its
historical rate of write-offs. The Company includes any accounts
receivable balances that are determined to be uncollectible,
along with a general reserve, in an overall allowance for
doubtful accounts. After all attempts to collect a receivable
have failed, the receivable is written off against the
allowance. The Company believes the allowance for doubtful
accounts as of December 28, 2002 is adequate, however,
actual write-offs might exceed the recorded allowance.

Inventories
Inventories are valued at the lower of cost or net realizable
value, with cost determined using the first-in, first-out
method. The Company assesses the recoverability of inventory to
determine whether adjustments for impairment are required.
Inventory that is in excess of future requirements is written
down to its estimated value based upon forecasted demand for its
products. If actual demand is less favorable than what has been
forecasted by management, additional inventory write-downs may
be required.

Property, Plant and
Equipment Property, plant
and equipment are stated at cost and are depreciated using a
straight-line method over their estimated useful lives as
indicated in the following table:

|                               |  |              |                   | 
|------------------------------ |  | ------------ | ----------------- | 
|                               |  | Estimated   
|                               |  | Useful Lives
|                               |  |             
|Buildings and improvements     |  |              | 25  30 years     | 
|Leasehold improvements         |  |              | term of the lease | 
|Production equipment and other |  |              | 5  10 years      | 
|Office furniture and equipment |  |              | 3  7 years       | 

Patent Application Costs and License
Rights Patent application
costs represent the cost of preparing and filing applications to
patent the Companys proprietary technologies, in addition
to certain patent and license rights obtained in the
Companys acquisitions. Such costs are amortized over a
period ranging from five to seven years, beginning on the date
the patents or rights are issued or acquired. Amortization

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PRESSTEK, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

expense relating to patent application costs and
license rights for fiscal 2002, 2001 and 2000, was $853,000,
$780,000 and $779,000, respectively.

Software Development
Costs Software development
costs for products and certain product enhancements are
capitalized subsequent to the establishment of their
technological feasibility (as defined in Statement of Financial
Accounting Standards No. 86) based upon the existence of
working models of the products that are ready for initial
customer testing. Costs incurred prior to such technological
feasibility or subsequent to a products general release to
customers are expensed as incurred. During fiscal 2002, 2001 and
2000, the Company did not incur material costs subject to
capitalization.

Long Lived
Assets Long-lived assets,
such as intangible assets and property and equipment, are
evaluated for impairment when events or changes in circumstances
indicate that the carrying amount of the assets may not be
recoverable through the estimated undiscounted future cash flows
from the use of these assets. When any such impairment exists,
the related assets will be written down to fair value.

Product
Warranties The Company
warrants its products against defects in material and
workmanship for various periods, determined by the product,
generally from a period of ninety days to a period of one year
from the date of installation. The Companys typical
warranties require it to repair or replace defective products
during the warranty period at no cost to the customer. The
Company provides for the estimated cost of product warranties,
based on historical experience, at the time revenue is
recognized. The Company periodically assesses the adequacy of
its recorded warranty liability and adjusts the amounts as
necessary. While the Company believes that its estimated
liability for product warranties is adequate and that the
judgment applied is appropriate, the estimated liability for
product warranties could differ materially from future actual
warranty costs.

Changes in the Companys warranty liability
during fiscal 2002 is as follows:

|                                                                        |  |                |        |  
|----------------------------------------------------------------------- |  | -------------- | ------ | -
|                                                                        |  | 2002          
|                                                                        |  |               
|                                                                        |  | (In thousands)
|Balance, beginning of year                                              |  | $              | 793    |  
|Warranties issued                                                       |  |                | 1,938  |  
|Settlements                                                             |  |                | (1,642 | )
|Changes in estimated pre-existing warranties,
    including expirations |  |                |       |  
|                                                                        |  |                |        |  
|Balance, end of year                                                    |  | $              | 1,089  |  
|                                                                        |  |                |        |  

Shipping and Handling
Costs Shipping and
handling costs billed to customers are recorded as revenue. The
costs associated with shipping goods to customers are recorded
as a cost of sales.

Research and Development
Costs Research and
development costs are expensed as incurred for financial
reporting purposes.

Stock-Based
Compensation The Company
accounts for stock options granted to employees under the
provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB
25), as permitted by Statement of Financial Accounting
Standards No. 123, (SFAS 123) Accounting
for Stock-Based Compensation. APB 25 provides for
compensation cost to be recognized over the vesting period of
the options based on the difference, if any, between the fair
market value of the Companys stock and the option price on
the grant date. As the Company has only issued fixed term stock
option grants at or above the quoted market price on the date of
the grant, there is no compensation expense recognized in the
accompanying financial statements. The Company adopted the
disclosure provisions of SFAS 123 which requires the Company to
provide pro forma disclosure of net income and earnings per
share as if the optional fair value method had been applied to
determine compensation costs for the Companys Stock Option
plans.

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PRESSTEK, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Accordingly, the Companys net income
(loss) and earnings (loss) per share would have been
reduced to the pro forma amounts indicated in the following
table:

|                                                         |         |                                      |         |       |   |      |        |       |   |   |        |      | 
|-------------------------------------------------------- | ------- | ------------------------------------ | ------- | ----- | - | ---- | ------ | ----- | - | - | ------ | ---- | 
|                                                         |         | 2002                                 |         | 2001  |   | 2000
|                                                         |         |                                      |         |       |   |     
|                                                         |         |                                     
|                                                         |         | (In thousands except per share data)
|Net income (loss), as reported                           |         | $                                    | (8,280  | )     |   | $    | (3,816 | )     |   | $ | 5,900  |     
|Add: Total stock-based employee compensation
    expense |         | $                                    | (4,707  | )     |   | $    | (1,104 | )     |   | $ | (2,996 | )   
|                                                         |         |                                      |         |       |   |      |        |       |   |   |        |     
|Pro forma net income (loss)                              |         | $                                    | (12,987 | )     |   | $    | (4,920 | )     |   | $ | 2,904  |     
|                                                         |         |                                      |         |       |   |      |        |       |   |   |        |     
|Net income (loss) per common share, as reported:         |         |                                      |         |       |   |      |        |       |   |   |        |     
|                                                         | Basic   |                                      | $       | (0.24 | ) |      | $      | (0.11 | ) |   | $      | 0.18 | 
|                                                         |         |                                      |         |       |   |      |        |       |   |   |        |     
|                                                         | Diluted |                                      | $       | (0.24 | ) |      | $      | (0.11 | ) |   | $      | 0.17 | 
|                                                         |         |                                      |         |       |   |      |        |       |   |   |        |     
|Pro forma net income (loss) per common share:            |         |                                      |         |       |   |      |        |       |   |   |        |     
|                                                         | Basic   |                                      | $       | (0.38 | ) |      | $      | (0.14 | ) |   | $      | 0.09 | 
|                                                         |         |                                      |         |       |   |      |        |       |   |   |        |     
|                                                         | Diluted |                                      | $       | (0.38 | ) |      | $      | (0.14 | ) |   | $      | 0.08 | 
|                                                         |         |                                      |         |       |   |      |        |       |   |   |        |     

The above pro forma net income (loss) and
net income (loss) per share do not consider any related tax
benefit from option exercises in fiscal 2002, 2001 or 2000.

The Company used the Black-Scholes option-pricing
model to estimate the fair value of $3.78, $5.60, and $11.81 for
each stock option issued in fiscal 2002, 2001 and 2000,
respectively, using the following weighted average assumptions:

|                        |  |      |       |      |  |      |       |   |  |  |       |  
|----------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                        |  | 2002 |       | 2001 |  | 2000
|                        |  |      |       |      |  |     
|Dividend yield          |  |      | none  |      |  |      | None  |   |  |  | None  |  
|Expected volatility     |  |      | 74.57 | %    |  |      | 71.76 | % |  |  | 75.95 | %
|Risk free interest rate |  |      | 3.43  | %    |  |      | 4.95  | % |  |  | 6.13  | %
|Expected option life    |  |      | 6.45  |      |  |      | 6.29  |   |  |  | 6.61  |  

Comprehensive
Income The Company
accounts for Comprehensive Income in accordance with Statement
of Financial Accounting Standards (SFAS)
No. 130 Reporting Comprehensive Income.
Comprehensive income is comprised of net income and all changes
in stockholders equity except those due to investments by
owners. During fiscal 2002, 2001 and 2000, comprehensive income
(loss) was comprised solely of net income (loss).

Basic and Diluted Earnings (Loss) per
Share 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. Diluted earnings (loss) per
share is computed giving effect to all potential dilutive common
shares that were outstanding during the period. Potential
dilutive common shares consist of the incremental common shares
issuable upon the exercise of warrants and stock options. For
fiscal 2002 and 2001, potentially dilutive securities that
related to shares issuable upon the exercise of warrants and
stock options granted by the Company were excluded, as their
effect was antidilutive.

Effect of New Accounting
Pronouncements In June
2001, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement
Obligations (SFAS 143). This statement
addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and
the associated retirement costs. SFAS 143 is effective for
fiscal years beginning after June 15, 2002. The Company
does not anticipate that the adoption of SFAS 143 will have
a material effect on its results of operations or financial
position.

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PRESSTEK, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

In July 2002, the FASB issued Statement of
Financial Accounting Standards No. 146, Accounting
for Restructuring Costs (SFAS 146).
SFAS 146 applies to costs associated with an exit activity
(including restructuring) or with a disposal of long-lived
assets. Under SFAS 146, a company will record a liability for a
cost associated with an exit or disposal activity when that
liability is incurred and can be measured at fair value. SFAS
146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002. Under SFAS 146, a
company may not restate its previously issued financial
statements and the new statement grandfathers the accounting for
liabilities that a company had previously recorded under
Emerging Issues Task Force Issue 94-3. The Company does not
anticipate that the adoption of SFAS 146 will have a material
effect on its results of operations or financial condition.

In November 2002, the FASB issued Interpretation
No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45
requires that a liability be recorded in the guarantors
balance sheet upon issuance of a guarantee. FIN 45 also
requires additional disclosures about the guarantees an entity
has issued, including a roll forward of the entitys
product warranty liabilities. The Company will apply the
recognition provisions of FIN 45 prospectively to
guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for the Companys
financial statements for the year ending December 28, 2002.
The Company does not anticipate that the adoption of this
statement will have a material impact on its results of
operations or financial condition.

In November 2002, the Emerging Issues Task Force
(EITF) issued EITF Issue No. 00-21, Accounting
for Revenue Arrangements with Multiple Deliverables. EITF
Issue No. 00-21 addresses how to determine whether a
revenue arrangement involving multiple deliverables contains
more than one unit of accounting for the purposes of revenue
recognition and how the revenue arrangement consideration should
be measured and allocated to the separate units of accounting.
EITF Issue No. 00-21 applies to all revenue arrangements that
the Company enters into after June 29, 2003. The Company
does not anticipate that the adoption of this statement will
have a material impact on its results of operations or financial
condition.

In December 2002, the FASB issued Statement of
Financial Accounting Standards No. 148, Accounting
for Stock-Based Compensation  Transition and
Disclosure (SFAS 148). This statement amends
SFAS 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for
stock-based compensation. It also amends the disclosure
provisions of SFAS 123 in annual financial statements and
requires disclosures in interim financial statements. Those
disclosures are required regardless of the method being used to
account for stock-based employee compensation. The amended and
new disclosure requirements are effective for the fiscal year
ending December 28, 2002. The adoption of the disclosure
requirements of SFAS 148 will not have a material affect on the
Companys financial statements. The Company plans to
continue to use the intrinsic value method of accounting for the
stock options issued to employees.



|   |                        
|-- | -----------------------
|2. | Discontinued Operations

During fiscal 1999 the Company discontinued the
operations of its subsidiary, Delta V Technologies, Inc.
(Delta V), to allow the Company to focus its efforts
on the core business of digital imaging and plate manufacturing.
Located in Tucson, Arizona, Delta V was engaged in the
development, manufacture, and sale of vacuum deposition coating
equipment for vacuum coating applications. The Company shut-down
the operations of Delta V at the end of fiscal 1999.

Delta V recorded income from discontinued
operations of $600,000 in fiscal 2000, resulting from subsequent
payments received from the licensing of the Companys
intellectual property relating to vacuum-deposited polymer
multi-layer technology.

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PRESSTEK, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Net current liabilities of discontinued
operations at December 28, 2002 and December 29, 2001
were $1.4 million and $1.5 million, respectively. The
remaining net current liabilities of discontinued operations
represent liabilities related to Delta Vs equipment
installations and outstanding litigation.



|   |            
|-- | -----------
|3. | Inventories

Inventories consisted of the following at
December 28, 2002 and December 29, 2001:

|                  |  |                |        |      |  |   |        | 
|----------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                  |  | 2002           |        | 2001
|                  |  |                |        |     
|                  |  |               
|                  |  | (In thousands)
|Raw materials     |  | $              | 2,162  |      |  | $ | 4,458  | 
|Work in process   |  |                | 4,179  |      |  |   | 4,530  | 
|Finished goods    |  |                | 5,374  |      |  |   | 8,830  | 
|                  |  |                |        |      |  |   |        | 
|Total inventories |  | $              | 11,715 |      |  | $ | 17,818 | 
|                  |  |                |        |      |  |   |        | 

Inventories were written down to net realizable
value in June 2002 by $2.7 million, for inventory related
to certain discontinued programs. See Note 12.



|   |                                       
|-- | --------------------------------------
|4. | Property, Plant and Equipment,
    Net

Property, plant and equipment, net consisted of
the following at December 28, 2002 and December 29,
2001:

|                                         |                               |                |        |         |   |   |        |         |  
|---------------------------------------- | ----------------------------- | -------------- | ------ | ------- | - | - | ------ | ------- | -
|                                         |                               | 2002           |        | 2001   
|                                         |                               |                |        |        
|                                         |                               |               
|                                         |                               | (In thousands)
|At cost:                                 |                               |                |        |         |   |   |        |        
|Land and improvements                    |                               | $              | 2,038  |         |   | $ | 2,038  |        
|Buildings and leasehold improvements     |                               |                | 24,456 |         |   |   | 26,245 |        
|Production equipment and other           |                               |                | 46,023 |         |   |   | 49,147 |        
|Office furniture and equipment           |                               |                | 4,545  |         |   |   | 5,119  |        
|                                         |                               |                |        |         |   |   |        |        
|                                         |                               |                | 77,062 |         |   |   | 82,549 |        
|                                         | Less accumulated depreciation |                |        | (24,771 | ) |   |        | (21,314 | )
|                                         |                               |                |        |         |   |   |        |        
|Total property, plant and equipment, net |                               | $              | 52,291 |         |   | $ | 61,235 |        
|                                         |                               |                |        |         |   |   |        |        

The Company wrote off certain property and
equipment totaling $1.7 million in June 2002 for equipment
and leasehold improvements as a result of the consolidation of
facilities. See Note 12.

Certain property and equipment is pledged as
security for long-term debt. See Note 6.

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##### Table of Contents



PRESSTEK, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)



|   |                 
|-- | ----------------
|5. | Accrued Expenses

Accrued expenses consisted of the following at
December 28, 2002 and December 29, 2001:

|                                           |  |                |       |      |  |   |       | 
|------------------------------------------ |  | -------------- | ----- | ---- |  | - | ----- | 
|                                           |  | 2002           |       | 2001
|                                           |  |                |       |     
|                                           |  |               
|                                           |  | (In thousands)
|Accrued payroll and benefits               |  | $              | 2,152 |      |  | $ | 1,811 | 
|Accrued warranty                           |  |                | 1,089 |      |  |   | 793   | 
|Accrued special charges                    |  |                | 3,226 |      |  |   |      | 
|Other current liabilities                  |  |                | 1,687 |      |  |   | 1,795 | 
|Net liabilities of discontinued operations |  |                | 1,449 |      |  |   | 1,521 | 
|                                           |  |                |       |      |  |   |       | 
|Total accrued expenses                     |  | $              | 9,603 |      |  | $ | 5,920 | 
|                                           |  |                |       |      |  |   |       | 



|   |               
|-- | --------------
|6. | Long-Term Debt

Long-term debt consisted of the following at
December 28, 2002 and December 29, 2001:

|                     |                      |                |        |        |   |   |        |        |  
|-------------------- | -------------------- | -------------- | ------ | ------ | - | - | ------ | ------ | -
|                     |                      | 2002           |        | 2001  
|                     |                      |                |        |       
|                     |                      |               
|                     |                      | (In thousands)
|Mortgage term loans  |                      | $              | 7,417  |        |   | $ | 8,480  |       
|Lease line of credit |                      |                | 9,290  |        |   |   | 7,918  |       
|                     |                      |                |        |        |   |   |        |       
|                     |                      |                | 16,707 |        |   |   | 16,398 |       
|                     | Less current portion |                |        | (3,045 | ) |   |        | (2,343 | )
|                     |                      |                |        |        |   |   |        |       
|Total long-term debt |                      | $              | 13,662 |        |   | $ | 14,055 |       
|                     |                      |                |        |        |   |   |        |       

The Companys long term debt consists of two
mortgage term loans from Citizens Bank New Hampshire
(Citizens), and a lease line of credit from Keybank
National Association (Keybank).

The first mortgage term loan is a 1998 ten-year
mortgage term loan from Citizens in the amount of
$6.9 million and bears a fixed rate of interest of 7.12%
per year during the first five years, and a variable rate of
interest at the LIBOR rate plus 2%, (3.4% at December 28,
2002) for the remaining five years. Principal and interest
payments during the first five years of the loan will be made in
60 monthly installments of $80,500. During the remaining
five years, principal and interest payments will be made on a
monthly basis in the amount of one-sixtieth of the outstanding
principal amount as of the first day of the second five year
period, plus accrued interest through the monthly payment date.
All outstanding principal and accrued interest is due and
payable on February 6, 2008.

The second mortgage term loan is a 2000 ten-year
mortgage term loan in the amount of $4.0 million and bears
a fixed rate of interest equal to 7.95% per year during the
first five years, a fixed rate of interest equal to United
States Treasury Notes or Bills with a maturity date closest to
the end of the second five years plus 225 basis points for the
remaining five years. During the first five years, principal and
interest payments will be made in 60 monthly installments
including principal of $34,993 plus interest. During the
remaining five years, principal and interest payments will be
made on a monthly basis in the amount of one-sixtieth of the
outstanding principal amount as of the first day of the second
five year period, plus accrued interest through the monthly
payment date. All outstanding principal and accrued and unpaid
interest is due and payable on October 30, 2010.

The two mortgage term loans are secured by land
and buildings with a cost and net book value of approximately
$25.6 million and $22.3 million, respectively.

F-13



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##### Table of Contents



PRESSTEK, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

The Company borrowed $13.0 million against a
$15.0 million lease line of credit facility, which expired
in April 2002, from Keybank pursuant to a 1999 loan agreement.
The $13.0 million in borrowings to date is secured by
equipment with a book value at December 28, 2002 of
$18.4 million. The loan bears a variable rate of interest
based upon the LIBOR rate plus 4.25% (5.65% at December 28,
2002) or the prime rate (4.25% at December 28, 2002), with
a future fixed rate conversion provision. Principal and interest
under the lease line are payable in 84 monthly installments.

In addition to the mortgage term loans and the
borrowings under the lease line of credit, the Company has a
revolving line of credit loan with Citizens, which expires in
October 2003 under which the Company may borrow from Citizens a
maximum of $16.0 million. The revolving line of credit is
subject to a borrowing base formula based on eligible accounts
receivable and inventories, as defined by the loan agreement,
and reduced by the amount of all letters of credit outstanding.
The revolving line of credit loan is secured by substantially
all of the Companys assets, with interest payable at the
LIBOR rate plus 1.50% (2.9% at December 28, 2002). As of
December 28, 2002, the Company had $10.2 million
available under the revolving line of credit loan, reduced by
$6.3 million outstanding under standby letters of credit.

Under the terms of the mortgage term loans, the
lease line of credit and the revolving line of credit
agreements, the Company is required to meet various restrictive
covenants on a quarterly and annual basis, including maximum
funded debt to EBITDA and minimum fixed charge coverage
covenants. As of December 28, 2002, the Company was in
compliance with all financial covenants.

As of December 28, 2002, aggregate debt
maturities for long-term debt were as follows:

|           |                                 |                |       |        | 
|---------- | ------------------------------- | -------------- | ----- | ------ | 
|           |                                 | (In thousands)
|2003       |                                 | $              | 3,045 |       
|2004       |                                 |                | 3,221 |       
|2005       |                                 |                | 3,472 |       
|2006       |                                 |                | 3,478 |       
|2007       |                                 |                | 2,090 |       
|Thereafter |                                 |                | 1,401 |       
|           |                                 |                |       |       
|           | Total long-term debt maturities |                | $     | 16,707 | 
|           |                                 |                |       |       

7.     Stockholders
Equity

Preferred
Stock The Companys
certificate of incorporation empowers the Board of Directors,
without stockholder approval, to issue up to
1,000,000 shares of $.01 par value preferred stock, with
dividend, liquidation, conversion, and voting or other rights to
be determined upon issuance by the Board of Directors.

Employee Stock Option
Plans As of
December 28, 2002 the Company had two stock option plans in
effect, namely, the 1994 Stock Option Plan (the 1994
Plan), and the 1998 Stock Incentive Plan (the 1998
Plan).

The 1988 Stock Option Plan (the 1988
Plan) expired on August 21, 1998, the 1991 Stock
Option Plan (the 1991 Plan) expired on
August 18, 2001, and 1997 Interim Stock Option Plan (the
1997 Plan) expired on September 22, 2002. No
future grants will be issued under these expired plans, however
200, 314,525 and 176,650, options remain outstanding under these
plans, respectively, and will expire according to the specified
expiration terms of the individual option grant.

The 1994 Plan provides for the award of options,
to key employees and other persons, to purchase up to
2,500,000 shares of the Companys common stock.
Options granted under this plan may be either Incentive Stock
Options (ISOs) or Nonqualified Options
(NQOs). Generally, ISOs may only be

F-14



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##### Table of Contents



PRESSTEK, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

granted to employees of the Company, at an
exercise price of not less than fair market value of the stock
at the date of grant. NQOs may be granted to any person, at any
exercise price not less than par value, within the discretion of
the Board of Directors or a committee appointed by the Board of
Directors (Committee). Under the 1994 Plan, any
options granted will generally become exercisable in increments
over a period not to exceed ten years from the date of grant, to
be determined by the Board of Directors or Committee. These
options generally will expire not more than ten years from the
date of grant.

The 1998 Plan provides for the award
(collectively awards) of stock options, restricted
stock, deferred stock, and other stock based awards to officers,
directors, employees, and other key persons. A total of
3,000,000 shares of common stock, subject to anti-dilution
adjustments have been reserved under this plan. Options under
the 1998 Plan become exercisable upon the earlier of a date set
by the Board of Directors or Committee at the time of grant or
the close of business on the day before the tenth anniversary of
the stock options date of grant. Options become
exercisable the day before the fifth anniversary of the date of
grant in the case of an ISO.

Director Stock Option
Plan The Companys
Non-employee Director Stock Option Plan (the Director
Plan) allows only non-employee directors of the Company to
receive grants under the plan. The plan provides that eligible
directors automatically receive a grant of options to purchase
5,000 shares of common stock at fair market value upon
first becoming a director and, thereafter, an annual grant, in
January of each year, of options to purchase 2,500 shares
at fair market value. Options granted under this plan become
100% exercisable after one year and terminate five years from
date of grant.

Employee Stock Purchase
Plan The Companys
2002 Employee Stock Purchase Plan (ESPP) provides
for all eligible employees of the Company and its participating
subsidiaries to purchase shares of the Companys common
stock through payroll deductions at 85% of the fair market value
of the Companys common stock on specified days. A total of
950,000 shares of the Companys common stock, subject
to adjustment, have been reserved for issuance under this plan.

The following table summarizes information about
all stock options outstanding at December 28, 2002:

|                    |  |                     |           |             |  |          |     |                |  |          |       |  |  |  |           |  |  |   |       | 
|------------------- |  | ------------------- | --------- | ----------- |  | -------- | --- | -------------- |  | -------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                    |  |                    
|Options Outstanding |  | Options Exercisable
|                    |  |                    
|                    |  | Weighted            |           | Weighted    |  |          |     | Weighted      
|                    |  | Average             |           | Average     |  |          |     | Average       
|Range of            |  | Outstanding         |           | Contractual |  | Exercise |     | Exercisable    |  | Exercise
|Exercise Prices     |  | As of 12/28/02      |           | Years       |  | Price    |     | as of 12/28/02 |  | Price   
|                    |  |                     |           |             |  |          |     |                |  |         
|$ 0.00 - $ 5.25     |  |                     | 683,250   |             |  |          | 8.7 |                |  | $        | 4.99  |  |  |  | 206,250   |  |  | $ | 5.23  | 
|$ 5.26 - $ 6.75     |  |                     | 742,950   |             |  |          | 9.1 |                |  | $        | 6.25  |  |  |  | 56,562    |  |  | $ | 6.09  | 
|$ 6.76 - $ 8.00     |  |                     | 778,475   |             |  |          | 3.8 |                |  | $        | 7.39  |  |  |  | 666,460   |  |  | $ | 7.44  | 
|$ 8.01 - $13.50     |  |                     | 558,100   |             |  |          | 5.6 |                |  | $        | 9.95  |  |  |  | 388,725   |  |  | $ | 9.72  | 
|$13.51 - $13.75     |  |                     | 508,276   |             |  |          | 5.2 |                |  | $        | 13.75 |  |  |  | 503,901   |  |  | $ | 13.75 | 
|$13.76 - $26.94     |  |                     | 368,750   |             |  |          | 5.1 |                |  | $        | 15.79 |  |  |  | 332,562   |  |  | $ | 15.64 | 
|                    |  |                     |           |             |  |          |     |                |  |          |       |  |  |  |           |  |  |   |       | 
|                    |  |                     | 3,639,801 |             |  |          | 6.4 |                |  | $        | 8.84  |  |  |  | 2,154,460 |  |  | $ | 10.35 | 
|                    |  |                     |           |             |  |          |     |                |  |          |       |  |  |  |           |  |  |   |       | 

F-15



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##### Table of Contents



PRESSTEK, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Information concerning all stock option activity
under the 1988, 1991, 1994, 1997, 1998 and the Director Plans
for the fiscal years ended December 28, 2002,
December 29, 2001 and December 30, 2000 is summarized
as follows:

|                                     |  |        |            |              |  |               |                |  |  |   |       | 
|------------------------------------ |  | ------ | ---------- | ------------ |  | ------------- | -------------- |  |  | - | ----- | 
|                                     |  |        |            |              |  | Weighted     
|                                     |  | Option |            | Option Price |  | Average Price
|                                     |  | Shares |            | Per Share    |  | Per Share    
|                                     |  |        |            |              |  |              
|Outstanding at January 1, 2000       |  |        | 3,083,803  |              |  | $             | 4.85 - $16.81  |  |  | $ | 10.01 | 
|Granted                              |  |        | 399,000    |              |  | $             | 10.00 - $26.94 |  |  | $ | 16.13 | 
|Exercised                            |  |        | (206,502   | )            |  | $             | 4.85 - $14.75  |  |  | $ | 9.44  | 
|Cancelled/ Expired                   |  |        | (83,464    | )            |  | $             | 6.00 - $22.75  |  |  | $ | 11.82 | 
|                                     |  |        |            |              |  |               |                |  |  |   |       | 
|Outstanding at December 30, 2000     |  |        | 3,192,837  |              |  | $             | 5.88 - $26.94  |  |  | $ | 10.77 | 
|Granted                              |  |        | 331,500    |              |  | $             | 5.50 - $14.95  |  |  | $ | 9.15  | 
|Exercised                            |  |        | (87,925    | )            |  | $             | 6.50 - $ 8.00  |  |  | $ | 7.40  | 
|Cancelled/ Expired                   |  |        | (130,925   | )            |  | $             | 6.88 - $21.00  |  |  | $ | 12.60 | 
|                                     |  |        |            |              |  |               |                |  |  |   |       | 
|Outstanding at December 29, 2001     |  |        | 3,305,487  |              |  | $             | 5.50 - $26.94  |  |  | $ | 10.62 | 
|Granted                              |  |        | 1,508,900  |              |  | $             | 2.85 - $ 8.79  |  |  | $ | 5.72  | 
|Exercised                            |  |        | (9,575     | )            |  | $             | 6.88 - $ 7.78  |  |  | $ | 7.25  | 
|Cancelled/ Expired                   |  |        | (1,165,011 | )            |  | $             | 5.82 - $19.19  |  |  | $ | 9.87  | 
|                                     |  |        |            |              |  |               |                |  |  |   |       | 
|Outstanding at December 28,
    2002 |  |        | 3,639,801  |              |  | $             | 2.85 - $26.94  |  |  | $ | 8.84  | 
|                                     |  |        |            |              |  |               |                |  |  |   |       | 

Options exercisable under the Companys
stock option plans at January 1, 2000, December 30,
2000, December 29, 2001 and December 28, 2002 were
1,659,078, 2,012,404, 2,322,224 and 2,154,460, respectively.

The incentive and non-qualified stock options
summarized in the previous table were granted under various
vesting schedules ranging from immediate to five years, with
termination dates ranging from five to ten years from dates of
grant and may be subject to earlier termination as provided in
the plans.

The proceeds to the Company from stock options
exercised during fiscal years 2002, 2001, and 2000, totaled
$61,000, $658,000, and $2.0 million, respectively.

In addition to the above mentioned plans, as of
December 28, 2002, the Companys Lasertel subsidiary
has in place a stock option plan, the Lasertel Inc. 2000 Stock
Incentive Plan (the Lasertel Plan). The Lasertel
Plan, as amended in fiscal 2001, provides for the award of
NQOs to employees and other key individuals of Lasertel
and Presstek, to purchase up to 2,100,000 shares of
Lasertels common stock. These options generally vest over
a period of four years with termination dates generally ten
years from date of grant and are subject to earlier termination
as provided in the Lasertel Plan.

In fiscal 2002, Lasertel granted options to
purchase 89,500 shares of Lasertels common stock at
exercise price of $0.15 per share, which represented the
estimated fair value of Lasertels common stock at the time
of grant. During fiscal 2002, Lasertel cancelled 265,950 options
and 496,119 options were exercised. The proceeds from stock
options exercised during fiscal year 2002 totaled $50,284. At
December 28, 2002 there were 564,175 options outstanding
with a weighted average exercise price of $0.19 per share,
of which 206,498 options were exercisable.

In fiscal 2001, Lasertel granted options to
purchase 297,450 shares of Lasertels common stock at
exercise prices ranging from $0.15 to $1.00 per share, which
represented the estimated fair value of Lasertels common
stock at the time of grant. During fiscal 2001, Lasertel
cancelled 1,546,269 options and 78,687 options were exercised.
The proceeds from stock options exercised during fiscal year
2001 totaled

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##### Table of Contents



PRESSTEK, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

$8,000. At December 29, 2001 there were
1,236,744 options outstanding with a weighted average exercise
price of $0.16 per share, of which 700,312 options were
exercisable.

In fiscal 2000, Lasertel granted options to
purchase 2,565,300 shares of Lasertel common stock at
exercise prices ranging from $.10 to $.75, which represented the
estimated fair value of Lasertels common stock at the time
of grant. During fiscal 2000, Lasertel cancelled 1,050 options
and no options were exercised. At December 30, 2000 there
were 2,564,250 options outstanding with a weighted average
exercise price of $.11 per share, of which no options were
exercisable.

The Lasertel Plan contains a provision that in
the event that a public offering of Lasertels common stock
has not occurred prior to a specified date during 2004, Lasertel
is obligated to repurchase, at their then fair value, all of the
Lasertel common stock issued and outstanding as a result of the
exercise of the options under the Lasertel Plan, provided such
shares of Lasertel common stock have been issued and outstanding
for at least six months. Fair value is to be determined by an
independent third party. Fair value as of December 28, 2002
was not material.

In May 2000, warrants to purchase
300,000 shares of the Companys common stock were
issued at a price of $20.81 in exchange for consulting services.
These warrants were valued at $2.5 million, using the
Black-Scholes pricing model. The valuation was recorded as a
long-term asset through May of 2002, and was being amortized
over the five-year term of the consulting agreement. In June
2002, as a result of the termination of the consulting
agreement, the balance of $1.4 million was written down as
part of the special charge recorded in the quarter ended
June 29, 2002. See Note 12. Amortization expense
recorded in fiscal years 2002, 2001 and 2000 was $207,000,
$498,000 and $415,000, respectively. Warrants to purchase
200,000 shares of the Companys common stock were
outstanding at December 28, 2002, of which
100,000 shares expire in each of 2003 and 2004.

On March 30, 2001 and November 15,
2000, the Company issued 808,050 and 437,196 shares of
common stock, respectively, pursuant to the settlement of the
Class Action Lawsuit. On August 2, 2000 the Company issued
60,582 shares of common stock pursuant to the settlement of
the Derivative Lawsuit. These shares have been recorded in the
financial statements as if issued in fiscal 2000. See
Note 15.

8.     Income
Taxes

The Company utilizes an asset and liability
approach for differences in financial accounting and reporting
for income taxes. The primary objectives of accounting for
income taxes are to (a) recognize the amount of tax payable
for the current fiscal year and (b) recognize the amount of
deferred tax liability or asset for the future tax consequences
of events that have been reflected in the Companys
financial statements or tax returns.

The Company did not record a provision for
federal income taxes in fiscal 2002 or 2001 due to operating
losses. The Company did not record a provision for federal
income taxes in fiscal 2000 as a result of the utilization of
net operating loss carryforwards. The Company recorded a
provision of $150,000 for state income taxes for fiscal 2000.

Deferred income taxes reflect the impact of
temporary differences between the amount of assets and
liabilities for financial reporting purposes and such amounts as
measured by tax laws and regulations.

F-17



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##### Table of Contents



PRESSTEK, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Deferred tax assets and liabilities consisted of
the following at December 28, 2002, December 29, 2001
and December 30, 2000:

|                          |                                                    |                                |         |        |        |      |         |        |        |   |         |        |        | 
|------------------------- | -------------------------------------------------- | ------------------------------ | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                          |                                                    | 2002                           |         | 2001   |        | 2000
|                          |                                                    |                                |         |        |        |     
|                          |                                                    |                               
|                          |                                                    | (In thousands)                
|Deferred tax assets:      |                                                    |                                |         |        |        |      |         |        |        |   |         |       
|                          | Net operating loss carryforwards                   |                                | $       | 31,300 |        |      | $       | 32,100 |        |   | $       | 27,000 |       
|                          | Tax credits                                        |                                |         | 4,600  |        |      |         | 4,800  |        |   |         | 4,600  |       
|                          | Warranty provisions, litigation and other accruals |                                |         | 4,700  |        |      |         | 3,100  |        |   |         | 3,000  |       
|                          |                                                    |                                |         |        |        |      |         |        |        |   |         |       
|                          |                                                    | Gross deferred tax assets      |         |        | 40,600 |      |         |        | 40,000 |   |         |        | 34,600 | 
|                          |                                                    |                                |         |        |        |      |         |        |        |   |         |       
|Deferred tax liabilities: |                                                    |                                |         |        |        |      |         |        |        |   |         |       
|                          | Amortizable and depreciable assets                 |                                |         |       |        |      |         | 100    |        |   |         | 400    |       
|                          | Accumulated depreciation and amortization          |                                |         | 3,600  |        |      |         | 3,700  |        |   |         | 5,000  |       
|                          |                                                    |                                |         |        |        |      |         |        |        |   |         |       
|                          |                                                    | Gross deferred tax liabilities |         |        | 3,600  |      |         |        | 3,800  |   |         |        | 5,400  | 
|                          |                                                    |                                |         |        |        |      |         |        |        |   |         |       
|                          |                                                    |                                | 37,000  |        |        |      | 36,200  |        |        |   | 29,200  |       
|Less valuation allowance  |                                                    |                                | (37,000 | )      |        |      | (36,200 | )      |        |   | (29,150 | )     
|                          |                                                    |                                |         |        |        |      |         |        |        |   |         |       
|Deferred tax assets  net |                                                    | $                              |        |        |        | $    |        |        |        | $ | 50      |       
|                          |                                                    |                                |         |        |        |      |         |        |        |   |         |       

The valuation allowance increased $800,000,
$7.1 million and $1.2 million in fiscal 2002, 2001 and
2000, respectively.

The difference between income taxes at the United
States federal income tax rate and the effective income tax rate
was primarily a result of the change in the valuation allowance
for fiscal 2002, 2001 and 2000.

As of December 28, 2002, the Company had net
operating loss carryforwards totaling approximately
$90.7 million, of which $55.8 million resulted from
compensation deductions for tax purposes relating to stock
option compensation and $34.9 million resulted from
operating losses. To the extent net operating losses resulting
from stock option compensation deductions become realizable, the
benefit will be credited directly to additional paid in capital.
The amount of the net operating loss carryforwards that may be
utilized to offset future taxable income, when earned, may be
subject to certain limitations, based upon changes in the
ownership of the Companys common stock.

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##### Table of Contents



PRESSTEK, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

The following is a breakdown of the net operating
losses and their expiration dates:

|           |  |                              |        | 
|---------- |  | ---------------------------- | ------ | 
|Expiration |  | Amount of Remaining Net     
|Date       |  | Operating Loss Carryforwards
|           |  |                             
|           |  | (In thousands)              
|2005       |  | $                            | 2,240  | 
|2006       |  |                              | 5,020  | 
|2008       |  |                              | 50     | 
|2009       |  |                              | 500    | 
|2010       |  |                              | 9,570  | 
|2011       |  |                              | 22,710 | 
|2012       |  |                              | 12,580 | 
|2013       |  |                              | 570    | 
|2014       |  |                              | 12,310 | 
|2015       |  |                              | 5,000  | 
|2016       |  |                              | 14,380 | 
|2017       |  |                              | 5,730  | 

In addition, the Company has available tax credit
carryforwards (adjusted to reflect provisions of the Tax Reform
Act of 1986) of approximately $4.6 million which are
available to offset future income tax liabilities when incurred.

9.     Earnings
(Loss) Per Share

The following represents the calculation of basic
and diluted earnings (loss) per share for fiscal 2002, 2001 and
2000:

|                                                         |                              |                        |        |       |   |      |        |       |   |   |        |      | 
|-------------------------------------------------------- | ---------------------------- | ---------------------- | ------ | ----- | - | ---- | ------ | ----- | - | - | ------ | ---- | 
|                                                         |                              | 2002                   |        | 2001  |   | 2000
|                                                         |                              |                        |        |       |   |     
|                                                         |                              |                       
|                                                         |                              | (In thousands,        
|                                                         |                              | except per share data)
|Income (loss) from continuing operations                 |                              | $                      | (8,280 | )     |   | $    | (3,816 | )     |   | $ | 5,300  |     
|Income (loss) from discontinued operations               |                              |                        |       |       |   |      |       |       |   |   | 600    |     
|                                                         |                              |                        |        |       |   |      |        |       |   |   |        |     
|Net income (loss)                                        |                              | $                      | (8,280 | )     |   | $    | (3,816 | )     |   | $ | 5,900  |     
|                                                         |                              |                        |        |       |   |      |        |       |   |   |        |     
|Weighted average common shares
    outstanding  Basic   |                              |                        | 34,124 |       |   |      | 34,096 |       |   |   | 32,826 |     
|Effect of assumed conversion of stock options            |                              |                        |       |       |   |      |       |       |   |   | 2,494  |     
|                                                         |                              |                        |        |       |   |      |        |       |   |   |        |     
|Weighted average common shares
    outstanding  Diluted |                              |                        | 34,124 |       |   |      | 34,096 |       |   |   | 35,320 |     
|                                                         |                              |                        |        |       |   |      |        |       |   |   |        |     
|Earnings (loss) per share  Basic:                       |                              |                        |        |       |   |      |        |       |   |   |        |     
|                                                         | From continuing operations   |                        | $      | (0.24 | ) |      | $      | (0.11 | ) |   | $      | 0.16 | 
|                                                         | From discontinued operations |                        | $      | 0.00  |   |      | $      | 0.00  |   |   | $      | 0.02 | 
|                                                         |                              |                        |        |       |   |      |        |       |   |   |        |     
|Earnings (loss) per share  Basic                        |                              | $                      | (0.24  | )     |   | $    | (0.11  | )     |   | $ | 0.18   |     
|                                                         |                              |                        |        |       |   |      |        |       |   |   |        |     
|Earnings (loss) per share 
    Diluted:                 |                              |                        |        |       |   |      |        |       |   |   |        |     
|                                                         | From continuing operations   |                        | $      | (0.24 | ) |      | $      | (0.11 | ) |   | $      | 0.15 | 
|                                                         | From discontinued operations |                        | $      | 0.00  |   |      | $      | 0.00  |   |   | $      | 0.02 | 
|                                                         |                              |                        |        |       |   |      |        |       |   |   |        |     
|Earnings (loss) per share  Diluted                      |                              | $                      | (0.24  | )     |   | $    | (0.11  | )     |   | $ | 0.17   |     
|                                                         |                              |                        |        |       |   |      |        |       |   |   |        |     

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##### Table of Contents



PRESSTEK, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

All stock options and warrants outstanding have
been excluded from the fiscal 2002 and 2001 calculations of
diluted earnings per share, as their effect would be
anti-dilutive.

Options and warrants to purchase 318,250 shares
of common stock at exercise prices ranging from $18.50 to $26.94
per share were not included in the computation of diluted
earnings per share for fiscal 2000, as the exercise prices of
the options and warrants were greater than the average market
price of the common shares. These options and warrants, which
expire between January 26, 2010 and September 29, 2010,
were all outstanding at the end of fiscal 2000.

10.     Related
Parties

During fiscal 2002, 2001 and 2000, the Company
recorded sales of equipment and consumables to Pitman Company
(Pitman) of $15.0 million, $14.3 million
and $15.4 million, respectively. At December 28, 2002
and December 29, 2001, the Company had accounts receivable
from Pitman of $1.9 million and $2.5 million,
respectively. John Dreyer, who has been a director of the
Company since February 1996, was Chairman of the Board and Chief
Executive Officer and a director of Pitman until his retirement
in 2001.

During fiscal 2002, the Company paid the law firm
of Amster, Rothstein & Ebenstein (Amster),
$632,000 in legal fees and expenses, while representing the
Company on various intellectual property matters.
Mr. Daniel Ebenstein, who has been a director of the
Company since November 1999, is a partner of Amster and shares
in the profits of that firm. The Company paid Amster
$3.0 million in fiscal 2001 and $1.1 million in fiscal
2000.

During fiscal 2002, the Company made payments to
Mr. Michael Moffitt, a director, totaling approximately
$133,000 for consulting services. Mr. Moffitt provides
consulting services if and when requested by the Company, and is
paid based on the actual number of days he provides such service
and his related expenses. Mr. Moffitt has been a director
of the Company since June 2000. The Company paid
Mr. Moffitt $16,000 in fiscal 2001.

The Company paid R.H. Ventures, Inc.,
(RH), $144,000 for consulting services provided to
the Company in fiscal 2002. Mr. Robert Howard, an executive
of RH served as the Companys Chairman Emeritus from
October 1998 to December 2000, when he resigned from this
position. The Company paid RH $144,000 in fiscal 2001 and
$181,000 in fiscal 2000.

The Company has a receivable from a former
executive and director in the amount of $202,000, resulting from
advances made in a prior year. Although the Company intends to
pursue collection of this receivable, it has provided a reserve
against this amount in 2002 because of questions concerning its
collection.

11.     Segment
Information and Major Customers

The Company operates in two reportable segments,
the Digital Imaging Products segment and the Lasertel segment.
The Digital Imaging Products segment is primarily engaged in the
development, manufacture and sales of its patented digital
imaging systems and printing plate technologies for CTP and
direct-to-press applications. The Lasertel segment is primarily
engaged in the manufacture and development of the Companys
high-powered laser diodes.

The accounting policies of the reportable
segments are consistent with those of the Company. Sales between
the segments are recorded at prices which approximate pricing
for sales conducted at an arms length basis. The segments
are measured on operating profits or losses before net interest
income, minority interest and income taxes.

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##### Table of Contents



PRESSTEK, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

A summary of the Companys operations by
segment for the years ended December 28, 2002,
December 29, 2001 and December 30, 2000 were as
follows:

|                              |  |                 |         |          |  |         |         |       |  |   |        |   |  |   |         |  
|----------------------------- |  | --------------- | ------- | -------- |  | ------- | ------- | ----- |  | - | ------ | - |  | - | ------- | -
|                              |  | Digital Imaging |         |          |  | Inter-  |         |      
|                              |  | Products        |         | Lasertel |  | Segment |         | Total
|                              |  |                 |         |          |  |         |         |      
|                              |  |                
|                              |  | (In thousands) 
|Year ended December 28, 2002  |  |                 |         |          |  |         |         |       |  |   |        |   |  |   |         |  
|Net revenue                   |  | $               | 83,417  |          |  | $       | 2,959   |       |  | $ | (2,923 | ) |  | $ | 83,453  |  
|Income (loss) from operations |  |                 | 397     |          |  |         | (7,826  | )     |  |   |       |   |  |   | (7,429  | )
|Total assets                  |  |                 | 85,676  |          |  |         | 16,120  |       |  |   |       |   |  |   | 101,796 |  
|Depreciation and amortization |  |                 | 6,797   |          |  |         | 2,625   |       |  |   |       |   |  |   | 9,422   |  
|Capital expenditures          |  |                 | 1,006   |          |  |         | 491     |       |  |   |       |   |  |   | 1,497   |  
|                             
|Year ended December 29, 2001  |  |                 |         |          |  |         |         |       |  |   |        |   |  |   |         |  
|Net revenue                   |  | $               | 103,717 |          |  | $       | 2,046   |       |  | $ | (3,460 | ) |  | $ | 102,303 |  
|Income (loss) from operations |  |                 | 8,745   |          |  |         | (11,362 | )     |  |   |       |   |  |   | (2,617  | )
|Total assets                  |  |                 | 83,805  |          |  |         | 23,039  |       |  |   |       |   |  |   | 106,844 |  
|Depreciation and amortization |  |                 | 7,205   |          |  |         | 1,798   |       |  |   |       |   |  |   | 9,003   |  
|Capital expenditures          |  |                 | 2,636   |          |  |         | 7,007   |       |  |   |       |   |  |   | 9,643   |  
|                             
|Year ended December 30, 2000  |  |                 |         |          |  |         |         |       |  |   |        |   |  |   |         |  
|Net revenue                   |  | $               | 85,794  |          |  | $       | 1,670   |       |  | $ | (170   | ) |  | $ | 87,294  |  
|Income (loss) from operations |  |                 | 7,555   |          |  |         | (2,153  | )     |  |   |       |   |  |   | 5,402   |  
|Total assets                  |  |                 | 102,017 |          |  |         | 13,885  |       |  |   |       |   |  |   | 115,902 |  
|Depreciation and amortization |  |                 | 6,517   |          |  |         | 136     |       |  |   |       |   |  |   | 6,653   |  
|Capital expenditures          |  |                 | 8,590   |          |  |         | 6,655   |       |  |   |       |   |  |   | 15,245  |  

The geographic information included in the
following table for fiscal 2002, 2001 and 2000 attributes
revenue to the geographic locations based on the location of the
Companys customer.

|                    |               |                |        |        |  |      |         |        |  |   |        |        | 
|------------------- | ------------- | -------------- | ------ | ------ |  | ---- | ------- | ------ |  | - | ------ | ------ | 
|                    |               | 2002           |        | 2001   |  | 2000
|                    |               |                |        |        |  |     
|                    |               |               
|                    |               | (In thousands)
|Geographic Revenue: |               |                |        |        |  |      |         |        |  |   |        |       
|                    | United States |                | $      | 33,211 |  |      | $       | 39,948 |  |   | $      | 28,544 | 
|                    | Germany       |                |        | 25,083 |  |      |         | 32,738 |  |   |        | 39,333 | 
|                    | Japan         |                |        | 6,886  |  |      |         | 13,410 |  |   |        | 4,769  | 
|                    | All Other     |                |        | 18,273 |  |      |         | 16,207 |  |   |        | 14,648 | 
|                    |               |                |        |        |  |      |         |        |  |   |        |       
|Total revenue       |               | $              | 83,453 |        |  | $    | 102,303 |        |  | $ | 87,294 |       
|                    |               |                |        |        |  |      |         |        |  |   |        |       

The Companys long-lived assets are located
in the United States.

Revenue generated under the Companys
agreements with Heidelberg and its distributors and Pitman
Company totaled $30.2 million and $15.0 million,
respectively for fiscal 2002, with accounts receivable balances
of $5.5 million and $1.9 million, respectively, at
December 28, 2002.

Revenue generated under the Companys
agreements with Heidelberg and its distributors, Pitman Company
and Xerox Corporation, totaled $42.6 million,
$14.3 million and $14.2 million, respectively, for
fiscal 2001 with accounts receivable balances of
$5.9 million, $2.5 million and $4.7 million,
respectively at December 29, 2001.

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PRESSTEK, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Revenue generated under the Companys
agreements with Heidelberg and its distributors, and Pitman
Company totaled $49.4 million and $15.4 million,
respectively for fiscal 2000.

No other customer represented more than ten
percent of the Companys revenue in fiscal 2002, 2001 and
2000.

12.     Discontinued
Programs and Special Charges

In the second quarter of fiscal 2002, the Company
initiated a process to evaluate the Companys resources and
strategically re-focus the Company. During this process, the
Company evaluated all aspects of the business, and concluded to
reposition and rescale its resources. As part of this exercise,
the Company initiated various repositioning actions during the
second quarter of fiscal 2002. These actions included the
following: (i) creation of market-focused Direct Imaging
(DI) and Computer-to-Plate (CTP) product
lines; (ii) creation of a new senior management
organization; (iii) discontinuance of certain programs; and
(iv) the consolidation of the Companys Hampshire
Drive research and development facility into the main Executive
Drive facility in Hudson, NH. As a result of these actions, the
Company recorded a charge of $4.7 million to cost of
products sold in the second quarter of fiscal 2002, which
included $2.7 million for inventory write-downs and
$2.0 million for other charges related to discontinued
programs. In addition, the Company recorded special charges of
$6.0 million in the second quarter of fiscal 2002. The
special charges included $1.0 million related to severance
and fringe benefit costs associated with the reduction of
approximately 50 employees, primarily in manufacturing and
research and development, $2.0 million related to the
write-down of equipment and lease termination costs as a result
of the Hampshire Drive consolidation, $1.8 million related
primarily to other asset write-downs and costs associated with
the repositioning, and $1.2 million related to executive
contractual obligations, as a result of a separation agreement
with Robert W. Hallman, former President and Chief Executive
Officer of the Company. Pursuant to the separation agreement,
effective April 30, 2002, the Company agreed to pay
Mr. Hallman a separation payment equal to three times his
current then annual salary, payable bi-weekly over
36 months, until May 2005.

In the fourth quarter of fiscal 2002, the Company
adjusted the discontinued programs and special charge provision
recorded in the second quarter of fiscal 2002. The
$2.0 million in charges related to discontinued programs
was reduced by $1.0 million, as a result of a favorable
negotiation with Xerox. The $1.0 million charge related to
severance and fringe benefit costs was reduced by $150,000, as a
result of the finalization of severance payments related to the
workforce reduction. The $2.0 million associated with the
write-down of equipment and lease termination costs was reduced
by $116,000 as a result of a delay in vacating the Hampshire
Drive research and development facility. The $1.8 million
in other costs associated with the repositioning was reduced by
$230,000 as a result of favorable settlements. In addition to
these adjustments, an increase in the $1.2 million in
executive contractual settlements of $311,000 was recorded as a
result of a resignation agreement with Richard A. Williams,
former Chief Scientific Officer of Presstek. Under the terms of
the agreement, effective January 8, 2003, the Company
agreed to pay Mr. Williams a severance payment equal to
$200,000 in 2003 and $100,000 in 2004, payable bi-weekly, until
December 2004.

The repositioning activity and workforce
reduction, which was initiated in June 2002, was substantially
complete at the end of the second quarter of fiscal 2002. The
consolidation of the Hampshire Drive facility was completed in
the third quarter of fiscal 2002.

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##### Table of Contents



PRESSTEK, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

The following table summarizes the charge for
discontinued programs and special charges recorded in June 2002
and their respective balances at December 28, 2002:

|                                                            |  |                |       |         |  |             |        |            |  |            |        |   |  |   |        |   |  |   |       | 
|----------------------------------------------------------- |  | -------------- | ----- | ------- |  | ----------- | ------ | ---------- |  | ---------- | ------ | - |  | - | ------ | - |  | - | ----- | 
|                                                            |  | Balance at     |       | Fiscal  |  | Fiscal      |        | Fiscal     |  | Balance at
|                                                            |  | Dec 29         |       | 2002    |  | 2002        |        | 2002       |  | Dec 28    
|                                                            |  | 2001           |       | Expense |  | Utilization |        | Adjustment |  | 2002      
|                                                            |  |                |       |         |  |             |        |            |  |           
|                                                            |  |               
|                                                            |  | (In thousands)
|Inventory write-downs                                       |  | $              |      |         |  | $           | 2,711  |            |  | $          | (2,711 | ) |  | $ |       |   |  | $ |      | 
|Equipment and other asset write downs                       |  |                |      |         |  |             | 3,017  |            |  |            | (3,017 | ) |  |   | 39     |   |  |   | 39    | 
|Discontinued programs                                       |  |                |      |         |  |             | 2,024  |            |  |            | (523   | ) |  |   |       |   |  |   | 1,501 | 
|Executive contractual obligations                           |  |                |      |         |  |             | 1,275  |            |  |            | (342   | ) |  |   | 324    |   |  |   | 1,257 | 
|Severance and fringe benefits                               |  |                |      |         |  |             | 944    |            |  |            | (682   | ) |  |   |       |   |  |   | 262   | 
|Lease termination and other miscellaneous costs             |  |                |      |         |  |             | 725    |            |  |            | (195   | ) |  |   | (363   | ) |  |   | 167   | 
|                                                            |  |                |       |         |  |             |        |            |  |            |        |   |  |   |        |   |  |   |       | 
|Total accrued special charges and discontinued
    programs |  | $              |      |         |  | $           | 10,696 |            |  | $          | (7,470 | ) |  | $ |       |   |  | $ | 3,226 | 
|                                                            |  |                |       |         |  |             |        |            |  |            |        |   |  |   |        |   |  |   |       | 
|Deferred revenue associated with discontinued
    programs  |  | $              | 1,400 |         |  | $           |       |            |  | $          | (230   | ) |  | $ | (1,050 | ) |  | $ | 120   | 
|                                                            |  |                |       |         |  |             |        |            |  |            |        |   |  |   |        |   |  |   |       | 

The Company paid $1.7 million through
December 28, 2002 as a result of the forgoing repositioning
actions, and anticipates the remaining payments related to the
discontinued programs and special charges will be completed by
May 2005.

13.     Commitments
and Contingencies

The Company leases a number of its facilities
under non-cancelable operating leases, many of which contain
renewal options. The agreements generally require minimum
monthly rents, adjusted annually, plus a pro rata share of real
estate taxes and certain other expenses. Total rental expenses
as a result of these agreements were $323,000, $472,000, and
$424,000 for fiscal 2002, 2001 and 2000, respectively.

As of December 28, 2002, future minimum
lease payments under these agreements were as follows:

|      |  |   |         | 
|----- |  | - | ------- | 
|2003  |  | $ | 113,000 | 
|2004  |  |   | 8,000   | 
|      |  |   |         | 
|Total |  | $ | 121,000 | 
|      |  |   |         | 

The above includes the Companys lease
payment obligations for its 18 Hampshire Drive facility of which
$104,000 was included in the discontinued programs and special
charges recorded in June 2002.

The Company has employment agreements with
certain key executive officers. The agreements provide for
minimum salary levels, subject to periodic review by the
Companys Board of Directors or Compensation Committee. The
employment agreements also contain certain termination and
change in control provisions, as defined in the agreements. The
Companys maximum contingent liability under such
agreements as of December 28, 2002 would be
$1.8 million.

The Company entered into an agreement in fiscal
2000 with Fuji Photo Film Co., Ltd. (Fuji), whereby
minimum royalty payments to Fuji are required based on specified
sales volumes of the Companys A3 format size four-color
sheet-fed press. The agreement provides for payment of a total
of $14.0 million in royalties, of which a minimum of
$6.0 million is required to be paid by June 2005. The
remaining commitment under the agreement is payable at specified
rates based on units shipped. The

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##### Table of Contents



PRESSTEK, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Companys maximum remaining liability under
the royalty agreement is $11.9 million as of
December 28, 2002.

14.     Heidelberg
Agreements

In January 1991, the Company entered into a
Master Agreement and a Technology License Agreement
(collectively referred to as the Heidelberg
Agreements) with Heidelberg. Heidelberger Druckmaschinen
AG (Heidelberg), one of the worlds largest
manufacturers of printing presses and printing equipment, based
in Germany, which covered the integration of the DI technology
into various presses manufactured by Heidelberg.

Under the Heidelberg Agreements, Heidelberg is
required to pay royalties to the Company based on the net sales
prices of various specified types of Heidelberg presses on which
the Companys DI technology is used. Heidelberg has been
provided with certain rights for use of the DI technology for
the Quickmaster DI format size. The Heidelberg Agreements expire
in December 2011 subject to certain early termination and
extension provisions.

In July 2001, the Company settled its outstanding
arbitration proceedings with Heidelberg. Under the terms of the
settlement, the Company and Heidelberg agreed that the licensing
arrangements for the Heidelberg Quickmaster 46DI shall be
non-exclusive. Also under the terms of the settlement, the
Company agreed to reduce the royalty payable by Heidelberg for
imaging kits delivered with the Heidelberg Quickmaster 46DI by
approximately $9,000 per kit. This reduced royalty rate became
effective for imaging kits ordered and delivered after
May 1, 2002.

In addition, in consideration for the resolution
of certain issues related to prior lost revenue that formed part
of the arbitration proceedings, Heidelberg made a one-time
payment of $750,000 to the Company in the fourth quarter of 2001.

Additionally, pursuant to the terms of the
settlement, the Company and Heidelberg agreed to license on a
non-exclusive basis certain know-how and patent rights. The
Company also licensed to Heidelberg the right to use the DI
trademark in connection with its press and imaging products.

15.     Other
Information

In March 2000, the Company entered into an
agreement with the plaintiffs in several class actions lawsuits
consolidated under the common caption Bill Berke,
et al. v. Presstek, Inc., et al. in
the United States District Court, District of New Hampshire to
settle the class action lawsuit. The Company also executed a
memorandum of understanding with respect to the settlement of
the derivatives lawsuits, filed on behalf of the Company, one in
the Chancery Court of the State of Delaware and the other in the
United States District Court, District of New Hampshire. Under
the terms of the class action settlement, $22.0 million, in
the form of 1,245,246 shares of the Companys common stock,
was to be paid to the class. The Company issued 808,050 of such
shares in the first quarter of fiscal 2001 and issued 437,196 of
such shares in the fourth quarter of fiscal 2000. In the
memorandum of understanding in the derivative litigation, the
Company agreed to issue 60,582 shares of common stock and agreed
to certain therapeutic improvements to its internal policies.
The Company issued the 60,582 shares in the third quarter of
fiscal 2000. As a result of these issuances all shares of common
stock required to be issued under both the class action
settlement and the memorandum of understanding in the derivative
litigation have been issued. These shares were recorded as
issued in fiscal 2000. The Company recorded a charge of
$23.2 million in the fourth quarter of fiscal 1999 related
to the settlements.

In August 1999 Creo Inc., (Creo),
filed an action in the United States District Court for the
District of Delaware against the Company asserting that Creo has
a reasonable apprehension that it will be sued by Presstek
for infringement of two of the Companys patents and
seeking a declaration that

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##### Table of Contents



PRESSTEK, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Creos products do not and will not
infringe any valid and enforceable claims of the patents
in question. In September 1999, the Company filed a counterclaim
against Creo for patent infringement. The Company claimed that
Creo infringed two direct imaging patents owned by the Company
which had recently been the subject of re-examination by the
U.S. Patent and Trademark Office. This action went to trial
before the District Court without a jury during the week of
June 25, 2001. The District Court issued a decision on
September 11, 2001, in which it affirmed the validity and
enforceability of the Companys on-press imaging patents,
but held that the current Creo DOP System did not infringe the
patents. Creo appealed the District Courts decision that
the patents are valid and enforceable, and the Company
cross-appealed the finding of non-infringement by the current
Creo DOP System. On September 17, 2002, the United States
Court of Appeals for the Federal Circuit affirmed the District
Courts decision that the Companys patents are valid
and enforceable, but that they are not infringed by the current
Creo DOP System. Neither party appealed this decision.

In December of 1999, PPG, Inc. (PPG)
brought suit against Delta V Technologies, Inc.
(Delta V), a subsidiary of the Company, and
Presstek. The suit, which is pending in the United States
District Court for the Middle District of Pennsylvania, alleges
that Delta V sold to PPG certain vacuum coating equipment that
did not meet certain product specifications. PPG seeks damages
in excess of $7.0 million. PPG sought to hold Presstek
liable for the alleged breach of contract by its subsidiary,
Delta V, on a theory of indirect liability. Presstek and
Delta V have answered PPGs complaint. Delta V
asserted a counterclaim against PPG for PPGs failure to
make the final installment payment in excess of $400,000 for
Delta Vs work, and also asserted a cross-claim
against Circonix, a Delta V subcontractor for the vacuum
coater project. Circonix filed cross-claims against Presstek and
Delta V. On February 1, 2002, Circonix filed a
voluntary petition of bankruptcy in the United States Bankruptcy
Court, staying the litigation of the claims against, and
asserted by, Circonix. In November 2002, the U.S. District
Court granted summary judgment in favor of Presstek, because as
a matter of law, PPG was unable to demonstrate any grounds upon
which to hold Presstek liable for any alleged breach of contract
by Delta V. The Company continues to vigorously defend
PPGs claim against Delta V, and vigorously pursue
Delta Vs counterclaim against PPG. The Company
believes it has adequate reserves available to defend these
claims.

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

16.     Financial
Statements and Supplementary Data




Selected Quarterly Financial Data
(unaudited)

|                                                         |  |    |        |    |  |    |         |     |  |   |        |  |  |   |        |    
|-------------------------------------------------------- |  | -- | ------ | -- |  | -- | ------- | --- |  | - | ------ |  |  | - | ------ | ---
|Fiscal 2002                                              |  | Q1 |        | Q2 |  | Q3 |         | Q4 
|                                                         |  |    |        |    |  |    |         |    
|Total revenue                                            |  | $  | 20,797 |    |  | $  | 19,293  |     |  | $ | 20,986 |  |  | $ | 22,377 |    
|Total costs and expenses                                 |  |    | 20,413 |    |  |    | 30,577  | (3) |  |   | 20,152 |  |  |   | 19,740 | (4)
|Net income (loss)                                        |  | $  | 183    |    |  | $  | (11,521 | )   |  | $ | 621    |  |  | $ | 2,437  |    
|                                                         |  |    |        |    |  |    |         |     |  |   |        |  |  |   |        |    
|Earnings (loss) per share  Basic                        |  | $  | 0.01   |    |  | $  | (0.34   | )   |  | $ | 0.02   |  |  | $ | 0.07   |    
|                                                         |  |    |        |    |  |    |         |     |  |   |        |  |  |   |        |    
|Earnings (loss) per share  Diluted                      |  | $  | 0.01   |    |  | $  | (0.34   | )   |  | $ | 0.02   |  |  | $ | 0.07   |    
|                                                         |  |    |        |    |  |    |         |     |  |   |        |  |  |   |        |    
|Weighted average common shares
    outstanding  Basic   |  |    | 34,122 |    |  |    | 34,125  |     |  |   | 34,125 |  |  |   | 34,125 |    
|                                                         |  |    |        |    |  |    |         |     |  |   |        |  |  |   |        |    
|Weighted average common shares
    outstanding  Diluted |  |    | 34,164 |    |  |    | 34,125  |     |  |   | 34,127 |  |  |   | 34,150 |    
|                                                         |  |    |        |    |  |    |         |     |  |   |        |  |  |   |        |    

F-25



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##### Table of Contents



PRESSTEK, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

|                                                         |  |    |        |    |  |    |        |    |  |   |        |   |  |   |        |    
|-------------------------------------------------------- |  | -- | ------ | -- |  | -- | ------ | -- |  | - | ------ | - |  | - | ------ | ---
|Fiscal 2001                                              |  | Q1 |        | Q2 |  | Q3 |        | Q4
|                                                         |  |    |        |    |  |    |        |   
|Total revenue                                            |  | $  | 25,765 |    |  | $  | 27,131 |    |  | $ | 26,324 |   |  | $ | 23,083 | (1)
|Total costs and expenses                                 |  |    | 24,589 |    |  |    | 26,675 |    |  |   | 28,788 |   |  |   | 24,868 | (2)
|Net income (loss)                                        |  | $  | 973    |    |  | $  | 105    |    |  | $ | (2,816 | ) |  | $ | (2,078 | )  
|                                                         |  |    |        |    |  |    |        |    |  |   |        |   |  |   |        |    
|Earnings (loss) per share  Basic                        |  | $  | 0.03   |    |  | $  | 0.00   |    |  | $ | (0.08  | ) |  | $ | (0.06  | )  
|                                                         |  |    |        |    |  |    |        |    |  |   |        |   |  |   |        |    
|Earnings (loss) per share  Diluted                      |  | $  | 0.03   |    |  | $  | 0.00   |    |  | $ | (0.08  | ) |  | $ | (0.06  | )  
|                                                         |  |    |        |    |  |    |        |    |  |   |        |   |  |   |        |    
|Weighted average common shares
    outstanding  Basic   |  |    | 34,064 |    |  |    | 34,101 |    |  |   | 34,109 |   |  |   | 34,111 |    
|                                                         |  |    |        |    |  |    |        |    |  |   |        |   |  |   |        |    
|Weighted average common shares
    outstanding  Diluted |  |    | 34,621 |    |  |    | 34,662 |    |  |   | 34,109 |   |  |   | 34,111 |    
|                                                         |  |    |        |    |  |    |        |    |  |   |        |   |  |   |        |    



---



|    |                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes a $1.5 million sales reversal
    related to a return of a shipment by the Companys Lasertel
    subsidiary.                                               
|   
|(2) | Includes a $2.1 million write-off recorded
    in fiscal 2001 against pre-payments made as a result of a
    suppliers bankruptcy petition in 2002.                 
|   
|(3) | Includes a $10.7 million special charge
    related to the repositioning activities and workforce reduction
    implemented by the Company in June 2002. See Note 12.
|   
|(4) | Includes a $1.0 million favorable adjustment
    related to the special charges recorded in June 2002. See
    Note 12.                                              

F-26



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##### Table of Contents



PRESSTEK, INC.






SCHEDULE II


VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES


|       |  |                                             |  |                |       |            |  |               |       |             |  |             |   |  |  |   |        |      |  |   |       | 
|------ |  | ------------------------------------------- |  | -------------- | ----- | ---------- |  | ------------- | ----- | ----------- |  | ----------- | - |  |  | - | ------ | ---- |  | - | ----- | 
|       |  |                                             |  | Balance at     |       | Charged to |  | Charged to    |       | Charges Add |  | Balance at 
|Fiscal |  |                                             |  | Beginning of   |       | Costs and  |  | Other Account |       | (Deduct)    |  | End of     
|Year   |  | Description                                 |  | Fiscal Year    |       | Expenses   |  | Describe      |       | Describe    |  | Fiscal Year
|       |  |                                             |  |                |       |            |  |               |       |             |  |            
|       |  |                                             |  |               
|       |  |                                             |  | (In thousands)
|2000   |  | Allowance for losses on accounts receivable |  | $              | 3,302 |            |  | $             | 686   |             |  | $           |  |  |  | $ | (1,146 | )(1) |  | $ | 2,842 | 
|       |  |                                             |  |                |       |            |  |               |       |             |  |             |   |  |  |   |        |      |  |   |       | 
|       |  | Warranty reserve                            |  |                | 957   |            |  |               | 862   |             |  |             |  |  |  |   | (1,221 | )(2) |  |   | 598   | 
|       |  |                                             |  |                |       |            |  |               |       |             |  |             |   |  |  |   |        |      |  |   |       | 
|2001   |  | Allowance for losses on accounts receivable |  | $              | 2,842 |            |  | $             | 990   |             |  | $           |  |  |  | $ | (1,412 | )(1) |  | $ | 2,420 | 
|       |  |                                             |  |                |       |            |  |               |       |             |  |             |   |  |  |   |        |      |  |   |       | 
|       |  | Warranty reserve                            |  |                | 598   |            |  |               | 2,124 |             |  |             |  |  |  |   | (1,929 | )(2) |  |   | 793   | 
|       |  |                                             |  |                |       |            |  |               |       |             |  |             |   |  |  |   |        |      |  |   |       | 
|2002   |  | Allowance for losses on accounts receivable |  | $              | 2,420 |            |  | $             | 945   |             |  | $           |  |  |  | $ | (1,198 | )(1) |  | $ | 2,167 | 
|       |  |                                             |  |                |       |            |  |               |       |             |  |             |   |  |  |   |        |      |  |   |       | 
|       |  | Warranty reserve                            |  |                | 793   |            |  |               | 1,938 |             |  |             |  |  |  |   | (1,642 | )(2) |  |   | 1,089 | 
|       |  |                                             |  |                |       |            |  |               |       |             |  |             |   |  |  |   |        |      |  |   |       | 



---



|    |                      
|--- | ---------------------
|(1) | Allowance for losses 
|   
|(2) | Warranty expenditures

FS-1