SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

_X_  Annual Report  Pursuant to Section 13 or 15(d) of the  Securities  Exchange
     Act of 1934 for the fiscal year ended January 2, 1999

                                       OR

__   Transition  Report  Pursuant  to  Section  13 or  15(d)  of the  Securities
     Exchange  Act of 1934 for the  transition  period from  _______________  to
     _______________.

                                     0-17541
                              (Commission File No.)

                                 PRESSTEK, INC.
             (Exact name of registrant as specified in its charter)

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

                9 Commercial Street, Hudson, New Hampshire 03051
          (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  _X_   No __

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. |X|

The  aggregate   market  value  of  the   registrant's   common  stock  held  by
non-affiliates  of  the  registrant  as  of  March  ,  1999,  was  approximately
$209,000,000.

As of March 10, 1999, there were 32,307,563  shares of the  registrant's  common
stock outstanding.

                           Documents Incorporated by Reference:

Parts of the definitive Proxy Statement for the  Registrant's  Annual Meeting of
Stockholders to be held on June 8, 1999 are  incorporated by reference into Part
III of this Form 10-K.


<PAGE>


                                     PART I


Item 1.  Business.

     "Safe Harbor" Statement under the Private Securities  Litigation Reform Act
of  1995:   Certain   statements   contained   in  this  Form  10-K   constitute
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation Reform Act of 1995. Such forward-looking  statements involve a number
of known and unknown risks,  uncertainties and other factors which may cause the
actual  results,  performance  or  achievements  of the Company to be materially
different  from any future  results,  performance or  achievements  expressed or
implied by such  forward-looking  statements.  Such factors include, but are not
limited  to,  the  risks of  uncertainty  of  patent  protection,  the  risks of
uncertainty of strategic  alliances,  the risk of Year 2000  noncompliance,  the
impact of third-party  suppliers,  manufacturing  constraints  or  difficulties,
market  acceptance  of and  demand  for the  Company's  products  and  resulting
revenues,  development of technology and manufacturing  capabilities,  impact of
competitive  products and pricing,  litigation  and other risks  detailed in the
Company's other filings with the Securities and Exchange  Commission.  The words
"looking forward,"  "believe,"  "demonstrate,"  "intend," "expect,"  "estimate,"
"anticipate,"   "likely"  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  statement was
made.

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

A2 (4-up)           a printing term  referring to a standard  paper size capable
                    of printing four 8.5" x 11" pages on a sheet of paper

A3 (2-up)           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 the
                    Company's PEARL(R) consumables

Computer-to-plate   a general term  referring  to the  exposure of  lithographic
(CTP),              plate material from a digital database,  off-press 
(direct-to-plate)

Dampening solution  traditional lithographic printing chemical bath used to coat
                    the non-image areas of a printing plate
                    
Direct Imaging (DI) Digital  Imaging  systems  that  allow  image
                    technologies  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

                                       2

<PAGE>

Effluents           waste  materials  that  flow  from  photographic  processing
                    equipment, which are often toxic in nature

GTO-DI              the first  generation of direct imaging,  waterless  presses
                    available   in  two,   four   and  five   printing   station
                    configurations,   a  joint  effort  between  Heidelberg  and
                    Presstek

Halftone            a printing  reproduction  process  which  converts the image
                    into dots of various sizes and equal spacing between centers

Heidelberg          Heidelberger Druckmaschinen AG, the world's largest printing
                    press manufacturer, headquartered in Heidelberg, Germany

Hydrophobic/        used in printing to describe  whether a material will reject
Hydrophilic         water (hydrophobic) or will be water receptive (hydrophilic)
                    

Infrared            lying outside of the visible  spectrum at its red-end longer
                    wavelengths; used in the Company's thermal imaging process

Large               format a printing  term  referring to printing  layouts that
                    include four or more pages on a single sheet of paper

Lithographic        printing  from a single plane  surface  under the  principle
                    that image area carries ink and the nonimage  area does not,
                    and that ink and water do not mix

Off-press           making a  printing  plate  from  either an analog or digital
                    source independently of the press on which it will be used

Oleophilic/         used in printing to describe  whether a material will be ink
Oleophobic          receptive  (oleophilic) or reject ink (oleophobic)

On-demand           a manufacturing philosophy when applied to printing provides
                    faster service, shorter run lengths and less inventory      

On-press            the use of Presstek's direct imaging  technologies to make a
                    plate directly from a digital file on the press

PEARL(R)            the name associated  with  Presstek's  current laser imaging
                    technologies and related products and consumables


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<PAGE>

PEARL Imaging       the Presstek  components  required to convert a conventional
systems             printing press into a direct imaging press,  including laser
                    diode arrays, computers, electronics

PEARLsetter(TM)     the Company's product line of  computer-to-plate,  off-press
PEARLhdp(TM)        plate making and digital proofing equipment 

Photosensitive      silver  halide  emulsions  exposed  by a  reaction  to light
                    requiring   a   subsequent    chemical    development    and
                    stabilization process

Plate making        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,  exposure of image
                    carriers (film and/or plate), proofing

Proofer/proof       a machine  that creates an image that is a duplicate of what
                    will be printed, or the duplicated image itself.

Quickmaster  46-4;  the second generation of direct imaging,  waterless presses,
Quickmaster  DI     highly automated with roll-fed PEARL plate material, a joint
                    development effort between Heidelberg and Presstek          

Semiconductor laser a high-powered,  infrared imaging technology employed in the
diode               PEARL imaging system  

Short-run           a graphic  arts  classification  used to denote an  emerging
markets/printing    trend for lower print quantities   
                   
Spark               Discharge  Technology  the  Company's  first direct  imaging
                    technology in which a proprietary  printing plate was imaged
                    by means of discharging an electrical spark

Thermally-based     a method  of  digitally  exposing  a  material  via the heat
                    generated from a laser beam

Vapor deposition    a technology to accurately,  uniformly coat  substrates in a
process             controlled environment                                      
                    
Waterless           a lithographic printing method that uses dry offset printing
                    plates and inks thus it does not require a dampening system

"YAG" laser         one  of  the  more   commonly   used   laser   sources   for
                    direct-to-plate imaging systems


                                       4
<PAGE>

General

     Presstek, Inc. (the "Company" or "Presstek"), incorporated in Delaware, was
founded  in  September  of 1987 as a  development  company  to find a new way to
produce  color  offset  printing.  This new  printing  method  would  take  full
advantage of computer based,  electronic  prepress  processes which were rapidly
becoming available and expedite the design,  image  manipulation,  page assembly
and  related  aspects  used to produce  high  quality  color  pages in a totally
digital  manner.  At that  time,  digitally  created  pages  could not be easily
converted to finished, four or more color offset printed pages. The process used
involved  costly and time  consuming  methods  including the use of  specialized
photosensitive  film recording  systems and related plate exposure devices along
with the need to  chemically  process  these  photosensitive  analog  films  and
plates. These photographically based methods generated waste effluents that were
difficult  to dispose  of in an  environmentally  sound  manner.  The  Company's
objective was to eliminate these non-digital  processes and develop a new system
that  would  allow  digitally  formatted  file  data to be used to image a plate
directly on the printing  press.  This would reduce cost,  eliminate the time it
normally takes to make films and plates, and improve the quality of the finished
printed offset page.

     The Company's  development work ultimately led to the  commercialization of
its proprietary PEARL based direct imaging  technology.  This new direct imaging
technology,  which now uses high powered  semiconductor laser diodes and thermal
ablation printing plate materials,  is currently being used in a variety of both
on-press and off-press applications.  The Company believes that PEARL represents
a technological breakthrough for the worldwide printing and publishing industry,
since  PEARL can be used for both  on-press  and  off-press  applications.  This
capability  provides  a number  of new  applications  for the  Company's  direct
imaging systems and its proprietary  consumable  thermal-based  printing plates.
The  Company's  past  investments  in  its  proprietary   PEARL  direct  imaging
technologies  have resulted in more than 94 patents issued and 130  applications
pending  throughout the world.  The Company believes these patents together with
its eleven years of experience in developing digital imaging systems,  place the
Company in a  significant  position  in the  markets it has chosen to serve.  To
further  strengthen  its patent  portfolio,  on January  5,  1998,  the  Company
acquired the stock of Heath Custom Press, Inc. ("Heath") of Seattle, Washington.
In October  1998 the  Company  sold  certain  assets of Heath  Custom  Press but
retained all rights to the Heath patents. See "Patents and Proprietary Rights."

Strategy, Background, and Important Relationships

     The  Company's  business  strategy  is  based  in  part  on  alliances  and
relationships  with major  companies  in the  graphic  arts  industry  and other
markets. This strategy includes licensing the Company's  intellectual  property;
specialized product development based on the Company's proprietary technologies;
and the manufacture of imaging subsystems for inclusion in other  manufacturers'
products.  The  manufacture  of the  Company's  own end user and  private  label
products,  as well as the manufacture of the Company's proprietary thermal plate
materials for use in the Company's and other manufacturers' imaging hardware and
printing presses, is also an important aspect of the business strategy.


                                       5
<PAGE>

     This  strategy  led  to  the  development  of an  important  and  long-term
relationship with Heidelberger  Druckmaschinen  AG  ("Heidelberg"),  the world's
largest  manufacturer  of printing  presses  and  printing  equipment,  based in
Germany. This relationship was formalized with the signing of a Master Agreement
and a Technology  License  Agreement in January 1991.  The Master  Agreement and
Technology License Agreement are sometimes collectively referred to hereafter as
the "Heidelberg Agreements."

The Heidelberg Agreements

     The Heidelberg Agreements and amendments govern the Company's  relationship
with  Heidelberg  and  relate to the  integration  of the PEARL  Direct  Imaging
technology into various presses  manufactured by Heidelberg.  The manufacture of
components,  at specified rates, for such presses and the  commercialization  of
such presses are also covered.

     The  Heidelberg  Agreements  currently  expire in December  2011 subject to
certain early  termination  and extension  provisions.  Under these  agreements,
Heidelberg  agreed to pay royalties to the Company based on the net sales prices
of various  specified  types of Heidelberg  presses on which the Company's PEARL
Direct Imaging technology would be used. Pursuant to the Heidelberg  Agreements,
Heidelberg has been provided with certain  exclusive rights for use of the PEARL
Direct  Imaging  technology  for the  Quickmaster  DI format  size.  The  Master
Agreement has also been modified to provide Heidelberg with a fixed royalty rate
for the Company's PEARL Direct Imaging systems used on the Quickmaster DI.

     In March 1998, the Company and Heidelberg concluded  negotiations  relating
to  production  levels and  schedules  for fiscal  1998,  which  resulted in the
Company materially  reducing production levels of direct imaging systems used in
the  Quickmaster  DI press for fiscal  1998.  The Company  has not yet  received
orders from  Heidelberg  for fiscal 1999 in connection  with its direct  imaging
systems used on the  Quickmaster DI.  Management  believes that orders for these
direct  imaging  systems  will  resume at some time in the second half of fiscal
1999. There can be no assurance, however, that any orders will be received.

Other Business Relationships

     In addition to its on-going  association with  Heidelberg,  the Company has
also developed and announced business relationships with:

     Adamovske  Strojirny a.s. ("Adast"),  a Czech Republic company,  which uses
the  Company's  direct  imaging  technology  on a  larger  format  (19"  x  26")
multicolor offset press.

     Scitex  Corporation  Limited  ("Scitex"),  a leading supplier of electronic
pre-press  products  and  systems  which,  along  with  KBA-Planeta  AG, a major
supplier  of  medium  and  large  format  sheet-fed  offset  printing   presses,
established a joint venture to develop,  produce and market a new digital offset
press. This new press, called the 74 Karat uses the



                                       6
<PAGE>

Company's direct imaging and related  intellectual  property (under license from
Presstek), and Presstek's patented thermal ablation printing plates.

     Nilpeter  A/S of Denmark  has begun  marketing  an offset  label press that
utilizes the Company's direct imaging technology and printing plates.

     Alcoa Packaging  Equipment,  a division of the Aluminum Company of America,
which has publicly  shown a new method of printing  halftone  images on beverage
cans that is based on Presstek's direct imaging  technology and thermal ablation
printing plates.

     Imation Corp.,  which  together with Presstek have jointly  developed a new
method for the  production  of true  half-tone  "dot for dot" color press proofs
using the Company's  computer-to-plate  imaging system, the PEARLhdp,  specially
modified for this application.

     Fuji Photo Film Ltd., one of the world's  leading  suppliers to the graphic
communications  industry,  which together with the Company announced in 1997 the
signing of a long-range  Development  and Sales Agreement which will involve the
use of the Company's proprietary intellectual property and know how.

     The Company's Delta V Technologies,  Inc. subsidiary has also announced its
intention to form a strategic  relationship with Battelle Memorial Institute,  a
worldwide non-profit research and development organization,  for the development
and  marketing  of  polymer  multi-layer  (PML)  and  liquid  multi-layer  (LML)
technologies.

     The Company has formed and is pursuing other business relationships that it
believes should result in broader use of the Company's  direct imaging and plate
technologies in existing as well as new applications. There can be no assurance,
however, that the Company, any Company product or any products incorporating the
Company's technology will be able to compete successfully in the market.

     The Company has also established a worldwide  distribution  network through
which it markets,  sells and supports its PEARLsetter branded  computer-to-plate
and PEARL thermal  ablation  printing  plate  products.  This network  currently
encompasses 36 dealers  located  worldwide and includes the largest graphic arts
dealer in the  United  States,  the Pitman  Company,  which  sells its  products
through  multiple  branch  locations.  In addition,  Fuji Photo of Canada is the
Company's exclusive dealer for its products in Canada.

The Company's PEARL Direct Imaging System and Its Manufacture

     The Company's  PEARL Direct 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 32 or more
diodes.  Each diode is  responsible  for imaging a specific area of the printing
plate.


                                       7
<PAGE>

     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,  micron  measured  beam of high powered,  infrared  laser
light.  The beam is  focused on a specific  area on the  surface of the  thermal
printing  plate and  causes  this area of the plate to  instantaneously  heat up
causing an ablation  effect and creating a  microscopic  hole.  This hole on the
surface of the printing plate is ink receptive.  The area  surrounding  the hole
that has not been exposed to the laser beam is not, thus an image can be created
by  controlling  the  placement  of each laser beam.  This  laser-based  imaging
concept is used on both the Company's  computer-to-press  and  computer-to-plate
systems.

     The Company is also  developing its next  generation  laser imaging system.
With this new technology,  multiple beams of  high-powered  infrared laser light
are created  from the same laser  diode.  This  concept is expected to allow the
Company to expand the number of diodes  mounted on a fixed  array,  resulting in
faster imaging speeds at a lower cost than current technology.

     These  imaging  systems  are  manufactured  by the  Company in its  imaging
systems  manufacturing  facility located at 9 Commercial  Street in Hudson,  New
Hampshire.  The Company uses a number of outside  vendors who supply many of the
imaging  system's  sub-system  assemblies.  These  assemblies and components are
manufactured  and  assembled  by the  Company  into  completed  systems - either
computer-to-press  direct imaging systems such as the Quickmaster DI systems, or
PEARLsetter  computer-to-plate  imaging  systems.  Both  of  these  systems  use
semiconductor  laser diode  devices built to the  Company's  specifications  and
currently  supplied by one source pursuant to open purchase orders.  The Company
believes  however,  that there will be several sources  available to manufacture
the laser diodes to its specifications, if required in the future.

The Company's PEARL Thermal Ablation Printing Plate and Its Manufacture.

     The Company continues to develop its proprietary thermally-based consumable
plate products that are imaged by both its own direct imaging systems as well as
high-energy laser based,  direct-to-plate and direct-to-press systems offered by
companies such as Scitex, Creo and others.

     The Company's PEARL thermal ablation  printing plates are available in both
waterless   PEARLdry(TM)   or  for  dampening   system   equipped   press  plate
configurations,  PEARLgold.  Both of these  plates  are  based on the  Company's
proprietary  ablation imaging  technology.  This means that they respond to heat
and not to light.  The  Presstek  plate is able to convert  the laser light into
heat because of a special  metalized  layer that is sensitive to the wave length
of the laser light source.  The Company's  plate  materials have a wide infrared
spectral  sensitivity  range  (800 to 1200  nanometers)  and can be used  with a
variety of both "YAG" and diode based laser imaging systems.

     The Company's  newest plate  technology,  PEARLgold,  is a first generation
"wet", or dampening  system equipped press,  lithographic  offset printing plate
specifically targeted to the



                                       8
<PAGE>

short-run,  color  market.  It  requires  no post  imaging  cleaning or chemical
processing.  PEARLgold  is an ablation  based  printing  plate using a metalized
infrared absorbing  material with an additional  metalized layer placed over the
infrared absorber. This additional metal layer is a hydrophilic material and ink
will not adhere to it (ink,  which is oil  based,  and water do not mix) but ink
will adhere to those areas of the plate that have been ablated away by the laser
beam thus  forming a printable  image.  The Company  believes a wet offset plate
product  has  broad  market  potential  due to the large  number  of wet  offset
printing presses installed on a worldwide basis. The market  opportunity for the
first generation  PEARLgold plate is limited to short-run (25,000 impressions or
less)  applications  and  may  require  modifications  of  press  conditions  to
accommodate the characteristics of this unique, no-process plate technology. The
Company is continuing to develop this plate and believes that future generations
of PEARLgold will be suitable for use in markets  requiring  longer run lengths.
Shortly after its introduction in 1997, the Company's PEARLgold plate technology
received  both the 1997  Graphic  Arts  Technical  Foundation  (GATF)  Intertech
Technology  Award and Publish  Magazine's  Impact  Award.  Although  the Company
believes it can compete  successfully in this newly developing  market there can
be no assurances that it can do so.

     The PEARLdry plate uses a specially  formulated  silicone  material that is
coated over the  metalized  infrared  absorbing  layer.  The  silicone  layer is
oleophobic and when the imaging laser causes the ablation  process to occur, the
resulting  hole  created by the laser in the  silicone  becomes  ink  receptive.
Presstek's PEARLdry plates are used on the Quickmaster DI, the GTO-DI, the Adast
705C DI, the Scitex & KBA 74 Karat, the Alcoa can decorating  imaging system and
the Kammann CD Imaging system.  Other  direct-to-plate  systems also are able to
image  the  Company's  PEARLdry  plate  that can then be used on a  conventional
waterless press.

     The Company owns 97% of the outstanding  common stock of Catalina Coatings,
Inc.,  now renamed  Delta V  Technologies,  Inc.  ("Delta  V).  Based in Tucson,
Arizona, Delta V develops processes,  materials and equipment for vacuum coating
applications. Its equipment and process innovations are used in a broad range of
industries and applications  including  graphic arts,  capacitors,  electronics,
optics, architectural and decorative glass, flat panel displays and packaging.

     Delta  V  has  developed  and  manufactured  customized  vacuum  deposition
equipment  the  Company  requires  to  manufacture  its PEARL  thermal  ablation
printing  plate at a lower  cost than  using  currently  available  conventional
coating technology.  In 1997 the Company completed construction of a new 100,000
square foot  manufacturing  facility located on a site in Hudson, New Hampshire,
six miles from the  Company's  existing  offices.  This  building now houses the
Company's new thin film vacuum coating system and other manufacturing  equipment
that the Company  requires to produce the  Company's  thermal  plate  consumable
products. In late 1998 the Company also moved its plate converting and finishing
equipment from a leased  facility to its new consumable  manufacturing  facility
thus consolidating all of its plate  manufacturing and finishing  equipment into
this new  location.  The Company,  determined to more  vertically  integrate the
manufacture of PEARL thermal printing plates, has also approved  expenditures of
$7,500,000 for additional plate manufacturing equipment that is



                                       9
<PAGE>

expected  to reduce the cost of plate  manufacture  and  enhance  the  Company's
development capabilities.

     Through  the third  quarter of 1998,  the  Company's  PEARLdry  plates were
manufactured by Rexam Custom Coaters  ("Rexam") based in North Carolina under an
existing manufacturing agreement. In late 1998 the Company decided to bring more
of the  PEARLdry  manufacturing  process in house and is now  implementing  this
decision.  Rexam will continue to provide  custom  coating  requirements  to the
Company for the foreseeable future,  however the Company expects to provide most
of its PEARLdry manufacturing  requirements internally by the middle of 2000. As
the Company more vertically integrates the manufacture of PEARL thermal printing
plates,  it may still need to enter  into  manufacturing  agreements  with third
parties.

The PEARLsetter Product Line

     The PEARLsetter is a  computer-to-plate  imaging device that can image both
the  Company's  wet and dry  thermal  offset  plates in both an A3 (2-up) and A2
(4-up) format size. The product can produce  completely  imaged printing plates,
ready to be mounted on a printing press,  within 4 to 8 minutes depending on the
resolution  (number of dots per inch) chosen by the user. If the  PEARLsetter is
imaging PEARLgold plates,  these plates can be mounted  immediately on the press
with no further cleaning or processing. In the case of PEARLdry plates, the user
must first wipe the ablated  debris from the imaging  process off the surface of
the plate.

     In addition to making printing  plates,  a specially  modified  PEARLsetter
product referred to as the PEARLhdp (halftone dot proofer),  which uses proofing
materials  supplied by Imation  Corp.,  is also being sold by the Company.  This
halftone  proofing  system  offers  the user the  ability  to make  proofs  that
replicate  the dot  structure  used for  imaging  plates.  Both  Imation and the
Company believe this is an important market  opportunity and are working jointly
to successfully market this product.

     The Company has entered into  distribution  agreements with 22 graphic arts
dealers to sell,  support and service its products in various  countries  around
the world.  The  Company  has also  entered  into OEM  arrangements  or reseller
relationships  with  respect to the  PEARLsetter  product  line and/or its PEARL
based consumable  products with companies such as Sakurai  Machinery Company and
Fuji Photo Film Co. Ltd. These  agreements  permit the OEM resellers to sell the
PEARL based products under their own label.

     The  Company  continues  to  develop  and  commercialize  its  PEARL  based
computer-to-plate  and  Imation  proofing  systems.  However,  there  can  be no
assurance   that  the  Company  will  be  able  to   successfully   complete  or
commercialize these or other products, or enter into any additional arrangements
which will  result in the further  commercialization  of its  PEARLsetter  based
product line.

     Market  acceptance  for any products  incorporating  the Company's  various
technologies and proprietary know-how will require substantial marketing efforts
and the expenditure of  


                                       10
<PAGE>

significant sums, either by the Company,  and/or its strategic and OEM partners.
There can be no assurance  that any existing or new products will achieve market
acceptance or be commercially viable.

Patents and Proprietary Rights

     As of March 5, 1999, the Company and its subsidiaries  hold eighty-one (81)
U.S.  patents,  (including three (3) design  patents),  of which the Company has
elected to maintain  sixty-three (63) in force. The Company has also been issued
thirty-four  (34) foreign  patents,  and has received notice of allowance for an
additional eight (8) patents consisting of two (2) U.S. and six (6) foreign. The
Company has applied for and is pursuing its  applications  for  twenty-two  (22)
additional U.S. patents and one hundred eight (108) foreign patents. The Company
anticipates  that it will apply for additional  patents and for  copyrights,  as
deemed  appropriate.  There can be no  assurance  as to the issuance of any such
patents or the breadth or degree of protection  which the  Company's  patents or
copyrights may afford the Company.  There is rapid technological  development in
the computer and image  reproduction  industries,  resulting in extensive patent
filings  and a rapid rate of  issuance  of new  patents.  Although  the  Company
believes that its  technology  has been  independently  developed,  and that the
products it markets and proposes 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 the  Company  may be  required to modify its design or
obtain a license.  No assurance can be given that the Company 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 the
Company.  Furthermore,  there can be no assurance that the Company will have the
financial  or  other  resources   necessary  to  successfully  defend  a  patent
infringement or proprietary rights violation action.  Moreover,  the Company may
be unable,  for financial or other  reasons,  to enforce its rights under any of
its patents.

     The Company  intends to rely on proprietary  know-how and to employ various
methods to protect its source code,  concepts,  ideas and  documentation  of its
proprietary  software,  which  methods may  include  copyrights.  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 the
Company's  know-how  or  software  codes,  concepts,  ideas  and  documentation.
Furthermore,  although  the  Company  has and  expects  to have  confidentiality
agreements with its employees and appropriate vendors, there can be no assurance
that such arrangements will adequately protect the Company's trade secrets.

Competition

     The Company believes that its imaging, thermal plate and other intellectual
property,  its  proprietary  technologies,  its new thermal plate  manufacturing
facilities,  along with its strategic  alliances and its worldwide  distribution
network provide the Company with a competitive  advantage.  However, the Company
is also  aware of a number of other  companies  that  address  markets  in which
Presstek  products are used, and therefore could be viewed as competitive 


                                       11
<PAGE>

to the Company's  proprietary  direct imaging,  thermal plate  technologies  and
related capabilities.

     In the  area  of  direct  imaging  and  the  short-run,  on-demand  market,
potential competitive companies use  electrophotographic  technology,  sometimes
referred to as xerography,  as the basis of their product lines. These companies
include,  among  others,  Canon  Inc.,  Indigo  N.V.,  Xeikon  N.V.,  and  Xerox
Corporation.  Agfa Gevaert N.V, IBM, and Scitex are 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 800 dots per inch.

     The Company is aware that most of the major  entities  in the graphic  arts
industry  have  developed   and/or  are   developing  and  marketing   off-press
computer-to-plate  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  treating.  Potential
competitors in this area include, among others, Agfa Gevaert N.V., Creo Products
Inc., Dainippon Screen Mfg, Ltd.,  Heidelberger  Druckmaschinen AG, Krause GmbH,
Scitex  Corporation  Ltd.,  and other  smaller or lessor  known  companies.  The
Company's  PEARLsetter  computer-to-plate  off-press plate imaging system is, in
the Company's opinion, a further technological advancement because it eliminates
the need for post chemical processing.  The Company believes however,  that some
of the  graphic  arts  companies  mentioned  above are  likely to be  working on
similar  plate  concepts that would  eliminate the need for post image  chemical
processing.

     The Company also anticipates competition from printing plate, manufacturing
companies  that  manufacture,  or have the  potential  to  manufacture,  digital
thermal  plates.  Such  companies  include Agfa Gevaert N.V.,  Kodak  Polychrome
Graphics LLC, Fuji Photo Film Co., Ltd., and others.

     Products  incorporating the Company's  technologies can also be expected to
face competition  from  conventional  methods of printing and creating  printing
plates.  While these  methods are  considered  by the Company to be more costly,
less  efficient  and  are  not  as  environmentally  conscious  as  those  being
implemented by the Company, they do offer their users the ability to continue to
employ their existing means of print and plate  production.  Companies  offering
these more traditional means and methods are also refining these technologies to
make them more acceptable to the market.

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

     The Company has determined that it operates in two reportable segments. The
Digital  Imaging  Products  segment is principally  engaged in the  development,
manufacture and sale 



                                       12
<PAGE>

of PEARL,  its patented,  proprietary  digital  imaging system and  process-free
thermal ablation printing plate technologies.  Delta V is principally engaged in
the development,  manufacture and sale of vacuum deposition  coating  equipment.
Delta  V  develops  processes,   materials  and  equipment  for  vacuum  coating
applications. Its equipment and process innovations are used in a broad range of
industries and applications  including  graphic arts,  capacitors,  electronics,
optics,  architectural  and decorative glass, flat panel displays and packaging.
See Note 8 of Notes to the Financial Statements.

Backlog

     As of March 11,  1999,  the Company and its  subsidiaries  had a backlog of
products  under contract  aggregating  approximately  $21,649,000  compared to a
backlog  of  $39,316,000  as of March 8,  1998.  Substantially  all  backlog  of
products as of March 11, 1999 is expected to be shipped in 1999.

Employees

     As of March 11,  1999,  the  Company and its  subsidiaries  had two hundred
sixty (260)  employees.  One hundred  fourteen  (114) are engaged  primarily  in
engineering,  service  and  marketing;  one  hundred  seven  (107)  are  engaged
primarily in manufacturing,  manufacturing  engineering and quality control; and
thirty nine (39) are engaged primarily in corporate  management,  administration
and finance.  The Company  considers its  relationship  with its employees to be
good.

Item 2.  Properties.

     The  Company's  Direct  Imaging  Products  operations  are located in three
facilities in Hudson, New Hampshire:

     The Company  leases  approximately  36,000 square feet to  accommodate  its
direct  imaging  systems   manufacturing,   and  corporate  and   administrative
facilities at 9 Commercial  Street.  The lease  specifies a base monthly rent of
$14,354,  adjusted  annually,  plus a pro  rata  share  of  real  estate  taxes,
utilities,  and certain other expenses. The lease expires on September 30, 2000,
subject to an option to renew for an  additional  three years and the  Company's
right of first refusal to purchase the property.

     The Company also leases  approximately  50,000  square feet at 18 Hampshire
Drive.  This  facility  houses  the  consumables  and  equipment   research  and
development  groups.  The lease of these  premises,  which  expires in May 1999,
subject  to two  one-year  renewal  options,  provides  for  rent at the rate of
$15,417  per month,  adjusted  annually,  plus a pro rata  share of real  estate
taxes, utilities, and certain other expenses.

     The Company also  completed  construction  of the first phase of its future
facilities at 55 Executive  Drive in December 1997.  This first phase includes a
100,000 square foot  manufacturing  operation that houses certain  manufacturing
equipment the Company requires 


                                       13
<PAGE>

to produce its thermal plate consumable products.  The Company believes that its
existing  facilities  will be adequate for its current  operations and near-term
capacity increases.

     Delta V is located in a new 70,000  square foot  manufacturing  facility in
Tucson,  Arizona.  This new  building  houses  all of Delta V's  operations  and
includes space for future expansion.

     On February 6, 1998, the Company obtained a ten-year  mortgage term loan in
the principal amount of $6,900,000, which is secured by the land and building in
Tucson,  Arizona,  and a certain  parcel of land and  building  in  Hudson,  New
Hampshire with an aggregate cost of $17,000,000.

Item 3.  Legal Proceedings.

     As previously  disclosed,  seven  federal class action  lawsuits were filed
against the Company and others,  all of which have been consolidated  before the
United  States  District  Court,  District  of New  Hampshire,  under the common
caption Bill Berke, et al. V. Presstek, Inc., et al. The plaintiffs have jointly
filed and served a Second Consolidated Amended Class Action Complaint naming the
Company,  certain of its present or former  officers and  directors  ("the Berke
Officer  and  Director  Defendants"),  and  other  parties  as  defendants.  The
plaintiffs allege, among other things, that the Company and/or the Berke Officer
and Director Defendants violated Section 10(b) ("Sect. 10(b)") of the Securities
Exchange  Act of 1934,  (the  "Exchange  Act")  and Rule  10b-5  ("Rule  10b-5")
promulgated  thereunder,  and  violated  New  Hampshire  law; and that the Berke
Officer and Director  Defendants  violated  Section  20(a)  ("Sect.  20(a)") and
Section 20A of the Exchange Act. The Complaint alleges, among other things, that
the Company  and/or the Berke Officer and Director  Defendants  issued false and
misleading  reports,  failed to disclose material facts including a misstatement
of earnings in the Company's  financial  statements  for the first quarter ended
March 30, 1996,  misstated  or failed to fully  disclose  the  Company's  supply
contracts  with,  payments  received  from,  sales  made by,  backlog  of orders
received from, and delays in production by the Company's principal customer, the
alleged  circulation of, and alleged failure to correct certain research reports
concerning  the Company  that  contained  alleged  misrepresentations  regarding
allegedly  inflated  financial  projections  and the alleged failure to properly
disclose the scope of an investigation by the Securities and Exchange Commission
("SEC").  Certain of the Berke  Officer and Director  Defendants  are alleged to
have sold the Company's  common stock at  artificially  inflated prices while in
possession  of material  non-public  information  concerning  the  Company.  The
plaintiffs seek  unspecified  compensatory  and punitive  damages,  attorney and
expert  fees  and  other  costs  and  expenses  incurred  by the  plaintiffs  in
connection with the action.

     On March 30, 1999 the United States  District Court for the District of New
Hampshire  issued orders  dismissing  several of the claims brought  against the
Company and others in the Berke lawsuit.

     As previously  disclosed,  on July 16, 1996,  Richard  Strauss  commenced a
derivative  suit on behalf of the  Company in the Court of Chancery of the State
of Delaware,  New Castle County,  against certain  officers and directors of the
Company ("the Strauss Officer and Director  Defendants").  The plaintiff alleges
that the Strauss Officer and Director Defendants breached their fiduciary duties
to the Company  and its public  stockholders  and wasted  corporate  assets,  by
making allegedly false and misleading  statements of fact or concealing material
facts concerning the viability of the Company's "key" patent and its proprietary
interest  in its PEARL  technology,  causing  the  Company  to fail to  properly
disclose the scope of an investigation by


                                       14
<PAGE>

the SEC, and causing the Company to misstate its financial results for the first
quarter of 1996. The plaintiff also alleges that certain of the Strauss  Officer
and Director  Defendants sold securities of the Company at inflated prices while
they were in  possession  of  material  non-public  information  concerning  the
Company.  The  plaintiff  alleges  that the actions of the Officer and  Director
Defendants  resulted in breaches of Sect. 10(b) and Rule 10b-5 which resulted in
other  lawsuits  being  commenced  against  the Company  which will  require the
Company to expend resources to defend. The plaintiff seeks to recover, on behalf
of the  Company,  unspecified  damages  allegedly  sustained by the Company as a
result of the defendants'  alleged  breaches of fiduciary duty,  disgorgement of
any profits  derived from their sale of the Company's  common stock,  as well as
other  relief.  This  action had been  stayed  pending  the outcome of the Berke
action.

     As previously  disclosed,  on March 14, 1997, James P. Cassidy  commenced a
derivative suit on behalf of the Company in the United States District Court for
the District of New Hampshire  against,  among others,  certain of the Company's
officers and directors  (the  "Cassidy  Officer and Director  Defendants").  The
plaintiff  alleges  that the Cassidy  Officer and Director  Defendants  breached
their  fiduciary  duty to the  Company  and its public  stockholders  and wasted
corporate assets by making false and misleading statements of fact or concealing
material facts concerning the scope and viability of the Company's "key" patents
and its proprietary interest in its PEARL technology, and causing the Company to
issue  false and  misleading  reports  or  failure to  disclose  material  facts
including a misstatement of earnings in the Company's  financial  statements for
the year ended  December 30,  1995,  and for the first  quarter  ended March 30,
1996.  The  plaintiff  also  alleges  that  certain of the  Cassidy  Officer and
Director Defendants sold securities of the Company at inflated prices while they
were in possession of material  non-public  information  concerning the Company.
The plaintiff also alleges that the actions of the Cassidy  Officer and Director
Defendants  resulted in breaches of Sect. 10(b) and Rule 10b-5 which resulted in
other  lawsuits  being  commenced  against  the Company  which will  require the
Company to expend resources to defend, and also constituted gross negligence and
breaches of their contractual obligations to the Company. The plaintiff seeks to
recover on behalf of the Company  unspecified damages allegedly sustained by the
Company as a result of the Defendants'  actions as alleged,  disgorgement of any
profits from the sale of the  Company's  common  stock,  as well as other relief
against the defendants. By agreement of the parties, this action has been stayed
\pending the outcome of certain motions made by the parties in the Berke action.

     As  previously  disclosed,  on  June  16,  1997,  Seena  Stevens  Silverman
commenced a purported  class action in the United States  District Court for the
District of New Hampshire  against the Company and certain of its present and/or
former officers and directors (the "Silverman Officer and Director Defendants"),
and other  parties.  The plaintiff  purports to bring this action on behalf of a
class of persons who sold put options in the common stock of the Company between
November 7, 1995 and June 20, 1996. The complaint  alleges,  among other things,
that the Company and/or the Silverman Officer and Director  Defendants  violated
Sect.  10(b) and Rule  10b-5,  and  violated  New  Hampshire  law;  and that the
Silverman  Officer and Director  Defendants  violated Sect. 20(a). The plaintiff
alleges that the defendants defrauded the putative class members by manipulating
the price and supply of the Company's common


                                       15
<PAGE>

stock,  issuing  false and  misleading  statements  regarding  the nature of the
Company's  proprietary PEARL technology,  failing to disclose the true depth and
target  of an  investigation  by  the  SEC,  and  making  misleading  statements
regarding the Company's claims to its PEARL technology and its contract with the
Company's  principal  customer.  The plaintiff  also alleges that certain of the
Silverman  Officer and Director  Defendants  sold  securities  of the Company at
inflated prices while they were in possession of material non-public information
concerning the Company. The plaintiff seeks to recover unspecified  compensatory
and punitive damages on behalf of the putative class, as well other relief.

     The Company  intends to  vigorously  defend the  foregoing  investor  class
actions.  However, the outcome of any litigation is subject to uncertainty and a
successful  claim  against  the  Company  in any of such  actions  could  have a
material adverse effect on the Company.

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

     Not Applicable.



                                       16
<PAGE>


                                    PART II


Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.

     The Company's common stock has traded in the over-the-counter market on the
NASDAQ  National  Market System under the symbol PRST since July 18, 1990,  and,
prior thereto, from May 11, 1990, to July 17, 1990, traded on the NASDAQ System.
Prior thereto,  from the Company's  initial public  offering until May 11, 1990,
the principal redemption date of the Warrants, the Company's Units, common stock
and Warrants were traded on the NASDAQ System.  The following  table sets forth,
for the periods indicated, the high and low sales prices of the Company's common
stock as  reported  by  NASDAQ  and  retroactively  adjusted  for the  Company's
two-for-one  stock split  effected in the form of a 100% stock  dividend paid in
July 1997.


Fiscal Year Ended                        High                          Low
January 2, 1999                          ----                          ---
-----------------

First Quarter                           $ 30 1/4                      $ 15

Second Quarter                            18 5/8                        10 15/16

Third Quarter                             13 13/16                       7 1/4

Fourth Quarter                            10                             5 1/4



Fiscal Year Ended
January 3, 1998
-----------------
First Quarter                           $  38 1 /4                    $ 19 3/4

Second Quarter                             47 1/2                       22

Third Quarter                              54                           33 3/4

Fourth Quarter                             41 1/2                       24

     On March 10,  1999  there were  1,503  holders  of record of the  Company's
common stock.

Dividend Policy

     To date,  the Company has not paid any cash  dividends on its common stock.
The payment of cash dividends,  if any in the future is within the discretion of
the Company's  Board of Directors  and will depend upon the Company's  earnings,
its capital requirements and 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 the Company's business operations.



                                       17
<PAGE>

Issuance of Unregistered Securities

     During the quarter  ending  January 2, 1999,  the Company issued to certain
employees, options to purchase 14,500 shares of its common stock pursuant to the
Company's  1997 Interim Stock Option Plan.  These options were granted at prices
ranging  from $7.19 to $9.00 per share with  expiration  dates  ranging  between
October 12, and November 30, 2004. In April 1998, the Company repriced  previous
grants issued under its 1997 Interim Stock Option Plan and Non-Employee Director
Stock Option Plan. A total of 140,250 and 50,000 options were repriced to $13.75
and $14.75, respectively.  These options were previously granted between January
2, 1996 and March 30, 1998,  with exercise  prices ranging from $22.38 to $48.50
per share.  The foregoing  options were issued  pursuant to the  exemption  from
registration  provided by Section 2(3) and/or Section 4(2) of the Securities Act
of 1933 (the "Act").


                                       18

<PAGE>


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
statement of operations  data for the years ended December 30, 1995 and December
31, 1994 and the balance sheet data at December 28, 1996, December 30, 1995, and
December 31,  1994,  which is not included in such  financial  statements).  All
references  to common  shares and  earnings  per share  data have been  restated
retroactively  to reflect the fiscal 1997 and fiscal  1995  two-for-one  and the
1994 five-for-four  stock splits,  effected in the form of stock dividends.  The
fiscal 1998 data includes the accounts of Heath Custom  Press,  Inc. and Delta V
Technologies,  Inc. (formerly  Catalina  Coatings,  Inc.) which were acquired as
subsidiaries  of the  Company  during  fiscal 1998 and 1996,  respectively.  The
fiscal 1997 and fiscal 1996 data include the  accounts of Delta V  Technologies,
Inc. See Note 2 of Notes to Financial Statements.



<TABLE>
<CAPTION>
                                                                                    Statements of Operations
------------------------------------------------------------------------------------------------------------------------------------
For the Fiscal Years Ended                                    JAN 2,          JAN 3,        DEC 28,         DEC 30,          DEC 31,
                                                               1999            1998           1996            1995             1994
                                                                             (In thousands, except per share data)
<S>                                                        <C>             <C>             <C>             <C>             <C>      
Revenues:                                                  $  84,386       $  91,561       $  48,627       $  27,611       $  16,518

Costs and Expenses:
   Costs of products sold                                     54,774          45,678          21,826          14,924           6,944
   Engineering and product development                        16,488          11,246           8,894           6,155           5,123
   Sales and marketing                                         5,867           4,522           2,587           1,727           1,226
   General and administrative                                 10,834           6,507           4,740           2,050           1,604
                                                           ---------       ---------       ---------       ---------       ---------
      Total costs and expenses                                87,963          67,953          38,047          24,856          14,897
                                                           ---------       ---------       ---------       ---------       ---------
Other Income (Expense):
   Dividend and interest, net                                    633             379             786             327             408
   Other, net                                                    263            (155)           (245)             (2)              0
                                                           ---------       ---------       ---------       ---------       ---------
      Other income, net                                          896             224             541             325             408
                                                           ---------       ---------       ---------       ---------       ---------
Income (Loss) Before Income Taxes                             (2,681)         23,832          11,121           3,080           2,029
Provision for Income Taxes                                        --           9,460           4,000             220             187
Net Income (Loss)                                          $  (2,681)      $  14,372       $   7,121       $   2,860       $   1,842
                                                           =========       =========       =========       =========       =========
Basic Earnings (Loss) Per Share                            $   (0.08)      $    0.46       $    0.24       $    0.10       $    0.07
                                                           =========       =========       =========       =========       =========
Diluted Earnings (Loss) Per Share                          $   (0.08)      $    0.44       $    0.21       $    0.09       $    0.06
                                                           =========       =========       =========       =========       =========

Common Shares Outstanding                                     31,986          31,300          29,858          29,124          28,053
                                                           =========       =========       =========       =========       =========
Common Shares Outstanding Assuming Dilution                   31,986          32,695          33,163          31,710          29,731
                                                           =========       =========       =========       =========       =========

<CAPTION>
                                                                                      Balance Sheet Data
------------------------------------------------------------------------------------------------------------------------------------
As of                                                         JAN 2,          JAN 3,        DEC 28,         DEC 30,          DEC 31,
                                                               1999            1998           1996            1995             1994
                                                                                        (In thousands)
<S>                                                        <C>             <C>             <C>             <C>             <C>   
Working Capital                                            $  37,080       $  32,962       $  29,179       $  16,837       $   7,676
Total Assets                                                 107,874         100,473          68,823          26,669          18,324
Short-Term Debt                                                  522           4,800              --              --              --
Long-Term Debt                                                 5,922              --              --              --              --
Stockholders' Equity                                          87,453          85,990          57,443          22,726          16,473
Cash Dividends                                                    --              --              --              --              --
</TABLE>





                                       19


<PAGE>


Item 7.   Management's  Discussion  and  Analysis  of  Financial  Condition  and
          Results of Operations.

Background

     Presstek, Inc. (The "Company" or "Presstek"), incorporated in Delaware, was
founded in September 1987 as a development company. It was established to find a
new  way to  produce  color  offset  printing.  Heidelberger  Druckmaschinen  AG
("Heidelberg"), the world's largest printing press manufacturer, and the Company
established  a  relationship  that was  formalized  in 1991 and  resulted in the
introduction of the first jointly developed  product,  the spark discharge based
GTO-DI. In 1993, after investing  substantial effort and resources,  the Company
completed the  development  of its high  resolution,  semiconductor  based laser
diode imaging and thermal plate technology referred to as PEARL. PEARL's thermal
laser diode  system  enables its  customers to image  various  types of Presstek
printing  plates either  off-press or on-press which may then be used to produce
high-quality,  full color  lithographic  printed  materials for the printing and
graphic arts industries.  These printed materials typically can be produced at a
lower cost than  traditional  competitive  methods.  The PEARL-based  GTO-DI was
introduced  in  late  1993,  and in  May  of  1995,  Heidelberg  introduced  the
Quickmaster DI 46-4,  which replaced the GTO-DI product line. The Quickmaster DI
represents the second generation of Presstek's  proprietary  PEARL-based  direct
imaging  technology.  It also employs the  Company's  patented  automatic  plate
changing  cylinder,  which eliminates the need to manually change plates between
jobs,  as well as a  number  of other  productivity  improvement  features.  The
Company began shipment of its PEARL-based  Quickmaster direct imaging systems to
Heidelberg in the second quarter of 1995.  The Company  estimates that as of the
end of 1998,  there are more than 950  PEARL-equipped  GTO-DI and Quickmaster DI
presses  installed  utilizing  the  Company's  proprietary  consumable  printing
plates.

     The Company is also engaged in the  development  of additional  PEARL-based
products that incorporate its patented, proprietary,  digital imaging system and
process  free   thermal   ablation   printing   plate   technologies   for  both
computer-to-plate and computer-to-press  applications.  During the first quarter
of fiscal 1996, the Company began shipments of its PEARL  platesetter,  referred
to as the  PEARLsetter.  The PEARLsetter is a  computer-to-plate  imaging system
that images both the  Company's  wet and dry offset  plates.  Also,  in December
1996,  the Company  began  shipments of its direct  imaging  system for a larger
format  Omni-Adast  (19" x 26")  multicolor  press. In the second half of fiscal
1998 the Company  began  shipments of its PEARLhdp  laser  imaging  system.  The
PEARLhdp, jointly developed with Imation Corp., is a digital halftone,  proofing
device.  It can produce true halftone "dot for dot" color press proofs using the
Company's  computer-to-plate  imaging system specially  modified for this unique
application.

     The Company also has announced  agreements with a number of other companies
including Scitex Corporation LTD., Nilpeter A/S, Werner Kammann  Maschinenfabrik
GmbH, Alcoa Packaging  Equipment,  Sakurai Graphic Systems Corp., and Fuji Photo
Film Co.,  Ltd.  These  agreements  typically  are for the use of the  Company's
direct imaging  systems,  technology  licenses,  and/or thermal plate materials.
They include a variety of "direct-to" offset 


                                       20
<PAGE>

printing applications ranging from high quality label production and printing on
aluminum cans to the production of normal four-color printing.

     On February 15, 1996, the Company  acquired 90% of the  outstanding  common
stock of  Catalina  Coatings,  Inc.,  now  known as Delta V  Technologies,  Inc.
("Delta  V"),  an Arizona  corporation.  Delta V is engaged in the  development,
manufacture and sale of vacuum  deposition  coating  equipment and the licensing
and sublicensing of patent rights with respect to a vapor deposition  process to
coat moving webs of material at high speeds. The aggregate consideration paid by
the Company was $8,400,000,  of which $8,200,000  represented the purchase price
of  the  purchased  shares  and  $200,000  represented   consideration  for  the
non-competition and confidentiality covenants of the selling shareholders.

     Simultaneous with the closing of the acquisition,  the Company entered into
a Put and Call Option Agreement (the "Option  Agreement").  The Option Agreement
provides the Company  with the right,  at any time after  February 15, 2000,  to
acquire the  remaining  10% of the  outstanding  common  stock of Delta V for an
aggregate  consideration  of $2,000,000.  The Option Agreement also provides the
selling  shareholders of Delta V, and another  individual with the right, at any
time after  August 15,  2000,  to cause the  Company to purchase  the  remaining
shares for aggregate  consideration  of  $1,000,000.  The Option  Agreement will
terminate if Delta V consummates  an initial  public  offering of its securities
prior to February 15, 2000.

     On  December  28,  1998,  the  Company  acquired  an  additional  7% of the
outstanding  common stock of Delta V for  consideration of $500,000  pursuant to
the Option Agreement.

     The   acquisition  of  Delta  V  was  accounted  for  as  a  purchase  and,
accordingly,  the  results of Delta V's  operations  have been  included  in the
Company's  fiscal  1998,  1997  and  1996  financial   statements.   Significant
intercompany accounts and transactions have been eliminated.

     In January 1998, the Company acquired the stock of Heath Custom Press, Inc.
("Heath"),  of  Seattle,  Washington.  Heath  was  engaged  in  the  design  and
manufacture  of  custom  printing  presses.   Heath  was  purchased  for  94,865
unregistered shares of the Company's common stock. The acquisition was accounted
for as a purchase and, accordingly,  the results of Heath's operations have been
included in the  Company's  financial  statements  for the year ended January 2,
1999. The results of Heath's  operations would not have had a material impact on
the Company's results of operations for fiscal 1997 or 1996.

     In October 1998, the Company sold certain  assets of Heath for  $1,000,000,
which  approximated  book value.  The Company  retained  all rights to the Heath
patent.

     The Company  operates and reports on a 52/53,  week fiscal year,  ending on
the Saturday closest to December 31. Accordingly,  the 1998 fiscal year ended on
January 2, 1999 ("fiscal  1998"),  the 1997 fiscal year ended on January 3, 1998
("fiscal  1997"),  and the fiscal year 1996 ended on December 28, 1996  ("fiscal
1996").  The 1998 and 1996 fiscal  years each  reflect 52 weeks,  while the 1997
fiscal year reflects 53 weeks.


                                       21
<PAGE>

     The Company has determined that it operates in two reportable segments. The
Digital  Imaging  Products  segment is principally  engaged in the  development,
manufacture and sale of PEARL, its patented,  proprietary digital imaging system
and  process-free  thermal  ablation  printing  plate  technologies.  Delta V is
principally  engaged  in  the  development,   manufacture  and  sale  of  vacuum
deposition  coating  equipment.  Delta  V  develops  processes,   materials  and
equipment for vacuum coating applications. Its equipment and process innovations
are used in a broad range of industries and applications including graphic arts,
capacitors,  electronics, optics, architectural and decorative glass, flat panel
displays and packaging.

Results of Operations

Fiscal 1998 versus Fiscal 1997

Revenues

     Revenues for fiscal year 1998 of $84,386,000,  consisting of product sales,
royalties, fees and other reimbursements, decreased $7,175,000 or 8% as compared
to revenues of $91,561,000 for fiscal 1997.

     Revenues for Digital Imaging Products  totaled  $74,165,000 for fiscal 1998
as compared to $89,792,000 for fiscal 1997:

     Net product sales for fiscal 1998 of $60,833,000  decreased  $10,445,000 or
15% as compared to net product sales of $71,278,000 in fiscal 1997, primarily as
a result of a reduction in sales volume of direct imaging  systems to Heidelberg
for use in the  Quickmaster DI. These  reductions  were partially  offset by the
increased sales volume of custom printing presses as a result of the acquisition
of Heath in 1998, as well as increased sales volume of the Company's proprietary
thermal printing plates.  The revenues  generated from the sale of the Company's
PEARLdry and other  consumable  products  were  $28,268,000  for the fiscal year
1998, an increase of $10,843,000 or 62% over fiscal 1997 due to increased  sales
volume.

     Royalties and fees from licensees for fiscal 1998 of $13,332,000  decreased
$5,181,000  or 28% as compared to royalties and fees of  $18,513,000  for fiscal
1997.  Royalties  decreased  $9,492,000 or 56%  comparing  fiscal 1998 to fiscal
1997, as a result of the reduction in sales volume of direct imaging  systems to
Heidelberg for use in the Quickmaster DI. Engineering fees increased  $4,311,000
or 302% in fiscal  1998  primarily  as a result of  engineering  and other  fees
received  from Fuji Photo Film Co.,  Ltd.  Included in fiscal 1997 were  certain
fees related to the Company's  agreement to license its on-press imaging patents
to Scitex Corporation Ltd.

     Revenues  for Delta V totaled  $10,221,000  for fiscal  1998 as compared to
$1,769,000 for fiscal 1997. The increase of $8,452,000  relates primarily to the
increase in sales  volume of vacuum  deposition  coating  equipment  to external
customers.  During  fiscal  1997, a  substantial  part of Delta V's efforts were
devoted to  developing  and  manufacturing  equipment  required  for the Digital
Imaging Products manufacture of PEARL thermal plates.


                                       22
<PAGE>


     Revenues  generated under the Company's  agreements with Heidelberg and its
distributors  were  $42,123,000 in fiscal 1998, a decrease of $31,624,000 or 43%
from fiscal 1997 revenues of $73,747,000.  Revenues from Heidelberg  represented
50% and 81% of total revenues for the fiscal years 1998 and 1997, respectively.

     Heidelberg has indicated to the Company that the  substantial  backlog that
existed  for its  Quickmaster  DI,  which  uses  the  Company's  direct  imaging
technology,  has now been  reduced to normal  levels.  The  Company  has not yet
received  orders from  Heidelberg for fiscal 1999 in connection  with its direct
imaging systems used on the Quickmaster DI. Management  believes that orders for
these  direct  imaging  systems  will  resume at some time in the second half of
fiscal  1999.  There  can be no  assurance,  however,  that any  orders  will be
received.

     The  Company  believes  that net  revenues  will be lower in fiscal 1999 as
compared to fiscal 1998. This is due to a reduction in the  requirements for the
direct imaging systems used on the QM-DI and to a lesser extent the reduction in
sales of custom printing presses due to the sale of certain assets of Heath. The
anticipated  increase  in sales  volume  related  to the  Company's  proprietary
consumables sold for the QM-DI and other  equipment,  as well as the anticipated
increase  in sales  volume  of the  PEARLhdp  imaging  systems  is  expected  to
partially  mitigate  the effect of the  decrease  in  revenues.  There can be no
assurance,  however,  that the Company will  achieve  these  offsetting  revenue
increases.

Cost of Products Sold

     Cost of products sold consists of the costs of material, labor and overhead
as well as future warranty costs associated with product sales. Cost of products
sold for fiscal  1998 were  $54,774,000,  an increase  of  $9,096,000  or 20% as
compared to fiscal  1997.  The gross  margin  decrease to 23% from 37% in fiscal
1997 is primarily related to the Digital Imaging Products operations.  The gross
margin  decrease  is a result of  reduced  manufacturing  volume  of the  direct
imaging  systems sold to Heidelberg  for use in the QM-DI,  as well as increased
fixed costs associated with the Hudson, New Hampshire manufacturing  operations.
Also included in fiscal 1998 was an allowance of $1,300,000  provided to a major
supplier as a result of a change in requirements  and an allowance of $1,600,000
for  inventory  obsolescence  as a result  of the  planned  introduction  of the
Company's next generation laser technology.

     The  Company  anticipates  that the gross  margin  on  product  sales  will
continue at reduced  levels  through the first six months of fiscal 1999, due to
the reduction in sales of direct imaging systems to Heidelberg. The Company does
anticipate  gross  margin  improvement  in the second  half of fiscal 1999 as it
continues to improve manufacturing  processes,  and seeks alternate distribution
methods  for its  proprietary  consumable  products.  There can be no  assurance
however, that these process improvements or alternate  distribution methods will
result in improved gross margins for fiscal 1999.


                                       23
<PAGE>

Engineering and Product Development

     Engineering and product  development  expenses consist primarily of payroll
and related expenses for personnel,  parts and supplies, and contracted services
required to conduct the Company's  equipment and consumable product  development
efforts.

     Engineering and product development expenses were $16,488,000 or 20% of net
revenues  for fiscal 1998 as compared to  $11,246,000  or 12% of fiscal 1997 net
revenues.  The increase  resulted  principally  from increased  expenditures for
parts and supplies  related to the Company's  continued  development of products
incorporating its PEARL technology.  Included in these development  efforts were
significant  expenditures  for the  Company's  PEARLgold  and  other  consumable
products as well as expenditures for its next-generation  laser diode technology
and other product development efforts.  These increased expenditures were also a
result of increased  engineering  programs  related to the development  contract
with Fuji Photo Film Co., Ltd.

     The Company expects these increased development expenditures to continue as
it  prepares  for  the  introduction  of  its   next-generation   laser  imaging
technology,  expands its PEARLgold  family of  proprietary  consumable  printing
plates,  and pursues the  development of additional  products for the DRUPA 2000
international printing-media trade show. There can be no assurance however, that
these expenses will not be greater than anticipated.

Sales and Marketing

     Sales and  marketing  expenses  consist  primarily  of payroll  and related
expenses for personnel,  advertising and promotional expenses, and travel costs.
Sales and marketing  expenses  were  $5,867,000 or 7% of net revenues for fiscal
1998  compared to  $4,522,000  or 5% of fiscal 1997 net  revenues.  The increase
resulted  primarily from increased  expenditures for  professional  services and
other related costs associated with the Company's  attendance at trade shows and
the  continued  expansion of its  worldwide  sales,  distribution  and technical
support network.

     It is expected that these expenditures for fiscal 1999 will increase as the
Company continues to expand its direct sales force and distribution channels for
its products.  There can be no assurance,  however, that these expenditures will
not be greater than currently anticipated.

General and Administrative

     General  and  administrative  expenses  consist  primarily  of payroll  and
related expenses for personnel,  and contracted  professional services.  General
and  administrative  expenses  for fiscal 1998 were  $10,834,000,  or 13% of net
revenues compared to $6,507,000 or 7% of fiscal 1997 net revenues.  The increase
of  $4,327,000  related  primarily  to  increased  expenditures  for  additional
personnel   required  to  conduct  the   finance,   information   systems,   and
administrative  functions of the Company.  In addition,  the Company  recorded a
charge for


                                       24
<PAGE>

uncollectible  accounts  in the  amount  of  $321,000  relating  to  Delta V and
$2,200,000  for  certain  disputed  and  uncollectible  accounts  related to its
Digital Imaging Products operations.

     The Company  anticipates that general and  administrative  costs for fiscal
1999 will be reduced from current levels, however there can be no assurance that
these expenses will not be greater than anticipated.

Other Income and Expense

     Other income was $896,000 or 1% of net revenues for fiscal 1998 compared to
$224,000 or .2% of net revenues for fiscal 1997. The increase of $672,000 can be
attributed to increased  interest  income  earned as a result of higher  average
balances of funds available for  investment,  the gain from the sale of a parcel
of land in Hudson,  New  Hampshire,  as well as the absence of foreign  exchange
losses incurred on certain receivables from Heidelberg in fiscal 1997.

Provision for Income Taxes

     For fiscal 1998, the Company did not record a provision for income taxes as
a result of the $2,681,000  net loss reported for the period.  The provision for
income  taxes for fiscal  1997  represents  the tax benefit  arising  from stock
option  deductions  and the  realization  of net  operating  loss  carryforwards
resulting from compensation deductions for tax purposes. The tax benefit related
to such stock option deductions has been credited to additional paid in capital.

Net Income (Loss)

     As a result of the foregoing,  the Company had net losses of $2,681,000 for
fiscal 1998 as compared to net income of $14,372,000 for fiscal 1997.

Fiscal 1997 versus Fiscal 1996

Revenues

     Revenues for fiscal year 1997 of $91,561,000,  consisting of product sales,
royalties, fees and other reimbursements, increased $42,934,000, or 88% compared
to fiscal 1996 revenues as a result of the following:

     Product sales for fiscal 1997 increased  $39,289,000,  or 117%, over fiscal
1996,  primarily  as a result of volume  increases  in sales by the  Company  of
direct imaging systems used in the  Quickmaster DI, as well as volume  increases
in sales of the Company's consumable printing plates.

     Royalties and fees from licensees increased  $3,645,000 in fiscal 1997 over
fiscal 1996,  primarily as a result of royalty increases of $10,907,000,  offset
by a decrease of $7,262,000 in  engineering  and other fees  primarily  received
from Heidelberg. Included in fiscal 1997 were


                                       25
<PAGE>

certain fees related to the Company's  agreement to license its on-press imaging
patents to Scitex Corporation Ltd.

     Other fees from  licensees for fiscal 1997 and 1996 are based  primarily on
amounts annually agreed upon between the Company and Heidelberg.  No significant
fees were received from Heidelberg in fiscal 1997.

     Revenues  generated under the Company's  agreements with Heidelberg and its
distributors represented 81% and 73% of total revenues for the fiscal years 1997
and 1996, respectively.

Cost of Products Sold

     Cost of products sold for fiscal 1997 of $45,678,000  increased $23,852,000
over  fiscal  1996.  The  increase  in such costs  related  primarily  to volume
increases in product sales. The improvement in the gross margin on product sales
to 37% for fiscal 1997 from 35% in fiscal 1996 resulted  primarily from a change
in product mix and certain volume related manufacturing efficiencies.

Engineering and Product Development

     Engineering  and  product  development  expenses  for fiscal  1997  totaled
$11,246,000  compared to $8,894,000  for fiscal 1996. The increase of $2,352,000
or 26% for fiscal 1997  resulted  principally  from  increased  expenditure  for
parts,  supplies,  labor, and contracted services related to the Company's PEARL
technology,  including the Company's  PEARLgold plates, as well as other product
development efforts.

Sales and Marketing

     Sales and Marketing expenses for fiscal 1997 totaled $4,522,000 compared to
$2,587,000  for fiscal year 1996. The increase of  $1,935,000,  or 75%,  related
principally  to increased  expenditures  for  additional  personnel  and related
costs, as well as various promotional activities.

General and Administrative

     General and  administrative  expenses for fiscal 1997  totaled  $6,507,000,
compared to $4,740,000 for fiscal 1996, an increase of  $1,767,000,  or 37%. The
increase related  primarily to increased  expenditures for additional  personnel
and other related costs.

Other Income and Expense

     Dividend and interest  income earned on the Company's cash and  investments
decreased  $407,000 for fiscal 1997  compared to the same period in fiscal 1996,
principally as a result of decreased funds invested in securities.


                                       26
<PAGE>

Income Taxes

     The charge in lieu of income  taxes  included in the fiscal 1997  provision
for income taxes represents the tax benefit arising from stock option deductions
in that year and the realization of net operating loss  carryforwards  resulting
from  compensation  deductions  for tax  purposes.  The charge in lieu of income
taxes included in the fiscal 1996 provision for income taxes  represents the tax
benefit  arising from stock  option  deductions  in that year.  The tax benefits
related to such stock  option  deductions  have been  credited to  stockholders'
equity.

Net Income

     As a result of the foregoing, the Company had net income of $14,372,000 for
fiscal  1997,  compared  to net  income  of  $7,121,000  for  fiscal  1996.  The
operations  of Delta V did not have a  material  effect  on net  income  for the
fiscal years ended January 3, 1998 and December 28, 1996.

Liquidity and Capital Resources

     At January 2, 1999, the Company had cash, cash equivalents,  and short-term
marketable  securities of  $19,281,000  and working  capital of  $37,080,000  as
compared to cash, cash  equivalents and marketable  securities of $6,209,000 and
working capital of $32,962,000 at January 3, 1998.

     Cash  generated from operating  activities was  $15,725,000  for the fiscal
year ended January 2, 1999. The cash flow resulted  primarily from reductions in
accounts   receivable  and   inventories   of  $5,347,000,   non-cash  items  of
depreciation  and  amortization  of $5,069,000 and provisions for  uncollectible
accounts of $5,006,000,  offset by the loss from operations of $2,681,000.  Cash
flow from  operations was also affected by the increase in billings in excess of
costs and  estimated  earnings on  uncompleted  contracts  of  $3,030,000.  This
increase  was  primarily  a  result  of  advance  payments  on  equipment  under
construction at the Company's Delta V subsidiary,  and the Company's development
program with Fuji Photo Film Co.,  Ltd. The Company  expects to expend this cash
over the next twelve  months as it completes its  obligations  under the related
contracts.

     Net cash used for investing  activities was $20,771,000 for the fiscal year
ended  January 2, 1999 and consisted  primarily of additions to property,  plant
and equipment  used in the  Company's  business of  $5,835,000,  the purchase of
marketable  securities  of  $16,036,000,  offset by the  maturity of  marketable
securities of $1,000,000.

     Net cash  provided  by  financing  activities  during the fiscal year ended
January 2, 1999 totaled $2,780,000 and consisted  primarily of the proceeds from
a mortgage  term loan of  $6,900,000  and  proceeds  from the issuance of common
stock of $1,736,000. These proceeds were offset by payments of $5,400,000 on the
Company's revolving lines of credit.

     In December 1998, the Company  renewed its agreement with Citizens Bank New
Hampshire  ("Citizens")  for a  revolving  line of credit  loan under  which the
Company may borrow 



                                       27
<PAGE>

a maximum of $10,000,000 for working capital  requirements and general corporate
purposes.  Borrowings are secured by  substantially  all of the Company's assets
and are  guaranteed  by the  Company's  subsidiary,  Delta V and  secured by its
assets.  Interest  on the line of credit is payable at the LIBOR rate plus 1.50%
(7.12% at January 2, 1999).  The loan agreement  terminates on July 31, 2000, at
which date, the entire principal and accrued interest is due and payable.  As of
January 2, 1999, the Company had $10,000,000  available under the line of credit
loan agreement.

     On February 6, 1998, the Company obtained a ten-year  mortgage term loan in
the principal  amount of $6,900,000  from Citizens.  Borrowings are secured with
land and buildings with a cost of  approximately  $17,000,000.  The loan 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% (7.62% at January 2, 1999)
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 shall be made
on a monthly basis in the amount of one-sixtieth  of the  outstanding  principal
amount as of the first day of each month 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 February 6, 2008.

     At January 2, 1999,  the Company was in  violation  of a certain  financial
covenant,  which was  waived by the bank  through  April 3, 1999.  Citizens  has
agreed  to  modify  the  financial  covenants  currently  contained  in the loan
agreement, through the term of the revolving line of credit loan agreement.

     The Company has approved  expenditures  of $7,500,000 for additional  plate
manufacturing equipment that is expected to reduce the cost of plate manufacture
and  enhance the  Company's  development  capabilities.  The Company has not yet
determined  whether to purchase the equipment  with existing  funds,  or to seek
additional financing.

     The Company believes that existing funds,  cash flows from operations,  and
cash  available  under its revolving  line of credit and mortgage loan should be
sufficient to satisfy working capital  requirements and capital expenditures for
the next twelve months.

Effect of Inflation

     Inflation has not had, and is not expected to have, a material  impact upon
the Company's operations.

Net Operating Loss Carryforwards

     As of January 2, 1999,  the Company had net  operating  loss  carryforwards
totaling   approximately   $38,000,000  resulting  primarily  from  compensation
deductions, for tax purposes,  relative to stock option plans. To the extent net
operating losses resulting from stock option plan 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


                                       28
<PAGE>

utilized in any future period may be subject to certain limitations,  based upon
changes in the ownership of the Company's common stock.

Recently Issued Accounting Standards

     The American Institute of Certified Public Accountants has issued Statement
of Position 98-5,  "Reporting on the Costs of Start-Up Activities" ("SOP 98-5").
This SOP defines  start-up  activities as those one-time  activities  related to
opening  a new  facility,  introducing  a new  product  or  service,  conducting
business in a new territory,  conducting business with a new class of customers,
initiating  a new  process  in an  existing  facility,  or  commencing  some new
operation.  SOP 98-5 requires that these start-up costs be expensed as incurred.
This SOP is effective for financial  statements for fiscal years beginning after
December 15, 1998, although earlier  application is encouraged.  Management does
not  believe  that  adoption of SOP 98-5 will  materially  impact the results of
operations, financial position, and future financial statement disclosures.

     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging Activities." ("SFAS No. 133"), which requires companies to recognize
all  derivatives  as either assets or  liabilities in the statement of financial
position and measure those  instruments at fair value. SFAS No. 133 is effective
for fiscal years  beginning  after June 15, 1999. The Company does not presently
enter into any  transactions  involving  derivative  financial  instruments and,
accordingly,  does not  anticipate  the new standard will have any effect on its
financial statements for the foreseeable future.

YEAR 2000

     The Year 2000 ("Y2K") problem arose because many existing  computer systems
use only the last two  digits to  identify  the year  instead  of using all four
digits.  These computer  systems cannot  recognize the difference in a year that
begins with "20" from a year that begins with "19".  If not  corrected,  many of
these computer systems could fail or create erroneous results.

     The Company has  established  a program to determine  the impact of the Y2K
issue on the software and hardware utilized in the Company's internal operations
and included in its products manufactured for sale to customers. This assessment
includes  applications  and  systems  software,  information  technology  ("IT")
infrastructure,  manufacturing  and process  control  technology,  products  and
services,  and third party  suppliers and customers.  Representatives  from each
functional area of the Company meet weekly to monitor program status and address
issues relating to the program's progress.

     The major project  phases  include;  inventorying  affected  technology and
assessing the impact of the Y2K issue on items  determined to be material to the
Company;  modifying  or  replacing  items  determined  not to be Y2K  compliant;
testing and certifying material items; and developing contingency plans.


                                       29
<PAGE>


     The  inventory  and  assessment  phase of the project  has been  completed.
Certain  non-compliant  systems  were  replaced  in January  1998 as the Company
installed Y2K  compliant  business  systems  software.  All other  components of
software and hardware for the Company are in various phases. The Company expects
to have its IT systems and server  infrastructure  and manufacturing and process
control  technology  Y2K compliant by August 1999. The Company also expects that
currently  supported products available for sale to customers will be tested for
compliance by the end of September 1999. The product  commercialization  process
is being modified to produce compliant products in the future.

     The Company relies on third-party suppliers for many systems,  products and
services    including   its   security    system,    building    equipment   and
telecommunications. Failure of such third party systems and equipment to operate
properly could  adversely  effect the Company.  The Company is in the process of
evaluating the compliance status of critical third party suppliers.

     The total costs  associated with becoming Y2K compliant are not expected to
be material to the Company's  financial  position or operations.  Costs incurred
through January 2, 1999 have been incurred as part of normal IT operating costs.

     Management  believes  it has an  effective  program in place to resolve Y2K
issues without significant costs or disruption of operations. However, it is not
possible to anticipate all future  outcomes,  especially  when third parties are
involved. There could be circumstances that could adversely effect the Company's
results  of  operations,  liquidity  and  financial  condition.  The  Company is
developing  a  contingency  plan to  minimize  the effect of  non-compliance  on
business operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

     Not applicable.



                                       30
<PAGE>



Item 8. Financial Statements and Supplementary Data.

SELECTED QUARTERLY FINANCIAL DATA (unaudited)
(In thousands, except per share data)

                                      JAN 2       OCT 3      JUL 4       APR 4
QUARTERS ENDED                         1999        1998       1998        1998
                                       ----        ----       ----        ----
Total revenues                     $ 16,599    $ 20,417   $ 23,029    $ 24,341
Total costs & expenses               24,580      20,413     22,162      20,808
Net income (loss)                    (5,784)        126        636       2,341
Basic earnings (loss) per share    $  (0.18)   $   0.00   $   0.02    $   0.07
Diluted earnings (loss) per share  $  (0.18)   $   0.00   $   0.02    $   0.07

Common shares outstanding            32,259      32,112     31,994      31,881
Common shares outstanding 
  assuming dilution                  32,259      32,393     32,631      32,763


                                      JAN 3      SEP 27     JUN 28      MAR 29
QUARTERS ENDED                         1998        1997       1997        1997
                                       ----        ----       ----        ----
Total revenues                     $ 26,363    $ 24,294   $ 20,896    $ 20,008
Total costs & expenses               19,766      18,010     15,294      14,884
Net income                            4,196       4,064      3,210       2,902
Basic earnings per share           $   0.13    $   0.12   $   0.10    $   0.09
Diluted earnings per share         $   0.13    $   0.12   $   0.10    $   0.09

Common shares outstanding            31,810      32,661     31,920      30,804
Common shares outstanding
  assuming dilution                  32,918      33,472     33,163      32,992





                                       31
<PAGE>



PART III

Item 9.  Directors and Executive Officers of the Registrant.

     The  information  required by this item will be set forth under the caption
"Election of Directors" and "Executive  Officers" in the Proxy Statement for the
Annual Meeting of  Stockholders  to be held on June 8, 1999 to be filed with the
Securities and Exchange Commission, (the "Proxy Statement"), and is incorporated
herein by reference.

Item 10. Executive Compensation.

     The  information  required by this item will be set forth under the caption
"Executive  Compensation"  in the Proxy Statement and is incorporated  herein by
reference.

Item 11. 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 12. 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.



                                       32
<PAGE>


                                     PART IV


Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a)(1)   Financial Statements
                                                                            Page
                                                                            ----
            Report of Independent Certified Public
            Accountants                                                      F-2

            Balance Sheets as of January 2, 1999, and
            January 3, 1998                                                  F-3

            Statements of Operations for the fiscal years
            ended January 2, 1999, January 3, 1998,
            and December 28, 1996                                            F-4

            Statements of Changes in  Stockholders'  
            Equity for the fiscal years ended
            January 2, 1999, January 3, 1998, and
            December 28, 1996                                                F-5

            Statements of Cash Flows for the fiscal 
            years ended January 2, 1999, January 3, 1998,
            and December 28, 1996                                            F-6

            Notes to Financial Statements                                    F-7

(a)(2)   Financial Statement Schedules

            Schedule II-Valuation and Qualifying Accounts
            and Reserves.                                                   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
------   -----------

2(a)   Stock Purchase Agreement dated and effective as of January 1, 1996, among
       the Company  and David G. Shaw,  Marc G.  Langlois  and David G. Shaw and
       Lynn R. Shaw,



                                       33
<PAGE>

       as Trustees  of the David and Lynn Shaw  Charitable  Remainder  Unitrust,
       dated February 12, 1996, and John E. Madocks and Catalina. **

2(b)   Put and Call Option  Agreement by and among the  Company,  David G. Shaw,
       Marc G. Langlois and John E. Madocks. **

2(c)   Confidentiality and  Non-Competition  Agreement by and among the Company,
       David G. Shaw and Catalina. **

2(d)   Confidentiality and  Non-Competition  Agreement by and among the Company,
       Marc G. Langlois and Catalina. **

2(e)   Confidentiality and  Non-Competition  Agreement by and among the Company,
       John E. Madocks and Catalina. **

2(f)   Special Option  Agreement,  among the Company,  Catalina,  David G. Shaw,
       Marc G. Langlois and John E. Madocks. **

3(a)   Amended and Restated  Certificate  of  Incorporation  of the Company,  as
       amended,  incorporated  by  reference  to  Exhibit  3  to  the  Company's
       Quarterly Report on Form 10-Q for the Quarter ended June 29, 1996.

3(b)   By-laws of the Company.***

10(a)  1988 Stock Option  Plan,  incorporated  by reference to Exhibit  10(c) of
       Registration Statement 33-27112, effective March 28, 1989.

10(b)  1988 Restricted Stock Purchase Plan, incorporated by reference to Exhibit
       10(d) of Registration Statement 33-27112, effective March 28, 1989.

10(c)  Confidentiality   Agreement   between  the   Company   and   Heidelberger
       Druckmaschinen A.G., effective December 7, 1989 as amended,  incorporated
       by reference to Exhibit 10(i) of the Company's Annual Report on Form 10-K
       for the fiscal year ended December 31, 1989.

10(d)  Master Agreement  effective January 1, 1991, by and between  Heidelberger
       Druckmaschinen   Aktiengesellschaft  and  the  Company,  incorporated  by
       reference to the Company's Form 8-K, dated January 1, 1991.

                                       34
<PAGE>

10(e)  Technology License effective January 1, 1991, by and between Heidelberger
       Druckmaschinen   Aktiengesellschaft  and  the  Company,  incorporated  by
       reference to the Company's Form 8-K, dated January 1, 1991.

10(f)  Memorandum  of  Performance  No. 3 dated  April 27,  1993,  to the Master
       Agreement,  Technology License,  and Supply Agreement between the Company
       and  Heidelberger  Druckmaschinen  Aktiengesellschaft,   incorporated  by
       reference to the Company's  Quarterly Report on Form 10-Q for the Quarter
       Ended June 30, 1993.

10(g)  Modification  to Memorandum of Performance No. 3 dated April 27, 1993, to
       the Master Agreement,  Technology  License,  and Supply Agreement between
       the Company and Heidelberger Druckmaschinen Aktiengesellschaft.+

10(h)  Memorandum of  Understanding  No. 4 dated November 9, 1995, to the Master
       Agreement and Technology License and Supply Agreement between the Company
       and Heidelberger Druckmaschinen Aktiengesellschaft. ***(I)

10(i)  Lease relating to real property located at 9 Commercial St., Hudson,  NH.
       +++

10(j)  Lease relating to real property  located at 18-20 Hampshire Dr.,  Hudson,
       New Hampshire. +++

10(k)  Employment Agreement dated March 30, 1999 between the Company and Richard
       Williams.

10(l)  1991 Stock Option Plan. *

10(m)  1994 Stock Option Plan. +

10(n)  Non-Employee Director Stock Option Plan.

10(o)  1997 Interim Stock Option Plan. ++

10(p)  Memorandum of Understanding No. 5 dated March 7, 1997 between the Company
       and Heidelberger Druckmaschinen Aktiengesellschaft. ***(I)

10(q)  Amendment to Loan  Agreement  between the Company and Citizens  Bank, New
       Hampshire.

10(r)  Revolving Line of Credit  Promissory  Note in favor of Citizens Bank, New
       Hampshire.

10(s)  1998 Stock Incentive Plan ++++

10(t)  Employment  Agreement  by and between the Company and Robert W.  Hallman.
       +++++

                                       35
<PAGE>

11     Calculations of earnings per share

21     Subsidiaries of the Company.

23(a)  Consent of BDO Seidman LLP.

27     Financial Data Schedule (for SEC use only)

(a)    Exhibits

(b)    No Form 8-K's were filed during the quarter ended January 2, 1999.

(c)    See Item 13(a)(3) above.

(d)    See Item 13(a)(2) above.


----------
*      Previously  filed as an exhibit to the  Company's  Annual  report on Form
       10-K for the fiscal  year ended  December  31, 1991 and  incorporated  by
       reference thereto.

**     Previously  filed as an exhibit to the  Company's  Form 8-K for the event
       dated February 15, 1996 and incorporated by reference thereto.

***    Previously  filed as an  exhibit  with the  Company's  Form  10-K for the
       fiscal  year  ended  December  30,  1995 and  incorporated  by  reference
       thereto.

(I)    The SEC has granted the Company's request of confidential  treatment with
       respect to a portion of this exhibit.

+      Previously  filed as an exhibit to the  Company's  Annual  report on Form
       10-K for the fiscal  year ended  December  31, 1994 and  incorporated  by
       reference thereto.

++     Incorporated  by  reference  to the  exhibit  filed  with  the  Company's
       Quarterly report on Form 10-Q for the quarter ended September 27, 1997.

+++    Previously  filed as an exhibit filed with the Company's Annual Report on
       Form 10-K for the fiscal year ended December 28, 1996 and incorporated by
       reference thereto.

++++   Incorporated  by reference to the exhibit to the Company's April 23, 1998
       Proxy Statement.

+++++  Previously filed as an exhibit filed with the Company's  Quarterly report
       on Form 10-Q for the Quarter ended  October 3,  1998 and  incorporated by
       reference thereto.



                                       36
<PAGE>


                          INDEX TO FINANCIAL STATEMENTS


                                                                            Page

Report of Independent Certified Public Accountants                          F-2

Balance Sheets as of January 2, 1999 and
  January 3, 1998                                                           F-3

Statements of Operations for the fiscal years ended
  January 2, 1999, January 3, 1998, and
  December 28, 1996                                                         F-4

Statements of Changes in Stockholders' Equity                               
  for the fiscal years ended January 2, 1999,
  January 3, 1998, and December 28, 1996                                    F-5

Statements of Cash Flows for the fiscal years ended
  January 2, 1999, January 3, 1998, and
  December 28, 1996                                                         F-6

Notes to Financial Statements                                               F-7

Financial Statement Schedule:

Schedule II - Valuation and qualifying accounts
  and reserves                                                              FS-1



                                       F-1
<PAGE>


                              REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS


To the Board of Directors
Presstek, Inc.
Hudson, New Hampshire

We have audited the accompanying balance sheets of Presstek,  Inc. as of January
2, 1999 and January 3, 1998, and the related  statements of operations,  changes
in  stockholders'  equity,  and cash flows for the fiscal years ended January 2,
1999,  January 3, 1998 and December 28, 1996. 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  generally   accepted  auditing
standards.  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 January 2, 1999
and January 3, 1998,  and the results of its  operations  and its cash flows for
the fiscal years ended January 2, 1999,  January 3, 1998, and December 28, 1996,
in conformity with generally accepted accounting principles.

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 19, 1999, except for Note 14, as to which the date is March 31, 1999.


                                      F-2
<PAGE>



                                 PRESSTEK, INC.
                                 BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                January 2,     January 3,
                                                                      1999           1998
                              
                                                         (In thousands, except per share data)
<S>                                                              <C>            <C>      
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                      $   3,174      $   5,201
  Marketable securities                                             16,107          1,008
  Accounts receivable, net of allowance for losses
    of $2,536 in fiscal 1998; and $941 in fiscal 1997               20,638         26,401
  Inventories                                                        9,857         13,308
  Costs and estimated earnings in excess
    of billings on uncompleted contracts                               823          1,096
  Other current assets                                                 980            431
                                                                 ---------      ---------
          Total current assets                                      51,579         47,445
                                                                 ---------      ---------
PROPERTY, PLANT  AND EQUIPMENT:
  Land and land improvements                                         2,412          2,571
  Buildings                                                         16,776         15,424
  Machinery and equipment                                           33,354         29,758
  Furniture and fixtures                                             1,238            996
  Leasehold improvements                                             2,392          2,572
  Other                                                                 71             34
                                                                 ---------      ---------
          Total                                                     56,243         51,355
Less accumulated depreciation and amortization                      (9,850)        (6,392)
                                                                 ---------      ---------
          Property, plant and equipment, net                        46,393         44,963
                                                                 ---------      ---------
OTHER ASSETS:
  Goodwill, net                                                      5,996          5,820
  Patent application costs and license rights, net                   3,625          1,932
  Software development costs, net                                       91            304
  Other                                                                190              9
                                                                 ---------      ---------
Total other assets                                                   9,902          8,065
                                                                 ---------      ---------
TOTAL                                                            $ 107,874      $ 100,473
                                                                 =========      =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Note payable                                                   $    --        $   4,800
  Current portion of mortgage term loan                                522           --
  Accounts payable                                                   8,104          7,530
  Accrued expenses                                                   1,782          1,280
  Accrued salaries and employee benefits                             1,061            873
  Billings in excess of costs and estimated
    earnings on uncompleted contracts                                3,030           --
                                                                 ---------      ---------
          Total current liabilities                                 14,499         14,483
                                                                 ---------      ---------
MORTGAGE TERM LOAN                                                   5,922           --
                                                                 ---------      ---------
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 32,276,263 shares at January 2, 1999;
    31,866,554 shares at January 3, 1998                               323            319
Additional paid-in capital                                          67,296         63,157
Accumulated other comprehensive loss                                    --               (1)
Retained earnings                                                   19,834         22,515
                                                                 ---------      ---------
          Stockholders' equity                                      87,453         85,990
                                                                 ---------      ---------
TOTAL                                                            $ 107,874      $ 100,473
                                                                 =========      =========
</TABLE>


              See notes to financial statements


                                      F-3
<PAGE>


                                 PRESSTEK, INC.
                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                     For the Fiscal Years Ended
                                                January 2,    January 3,  December 28,
                                                  1999          1998          1996
                                                --------      --------      --------
                                                (In thousands, except per share data)
<S>                                             <C>           <C>           <C>     
REVENUES:                                                           
  Product sales                                 $ 70,962      $ 72,858      $ 33,569
  Royalties and fees from licensees               13,424        18,703        15,058
                                                --------      --------      --------
      Total revenues                              84,386        91,561        48,627
                                                --------      --------      --------

COSTS AND EXPENSES:
  Cost of products sold                           54,774        45,678        21,826
  Engineering and product delopment               16,488        11,246         8,894
  Sales and marketing                              5,867         4,522         2,587
  General and administrative                      10,834         6,507         4,740
                                                --------      --------      --------
      Total costs and expenses                    87,963        67,953        38,047
                                                --------      --------      --------
INCOME (LOSS) FROM OPERATIONS                     (3,577)       23,608        10,580
                                                --------      --------      --------

OTHER INCOME (EXPENSE):
  Dividend and interest, net                         633           379           786
  Other, net                                         263          (155)         (245)
                                                --------      --------      --------
      Total other income (expense), net              896           224           541
                                                --------      --------      --------
INCOME (LOSS) BEFORE INCOME TAXES                 (2,681)       23,832        11,121
PROVISION FOR INCOME TAXES                            --         9,460         4,000
                                                --------      --------      --------
NET INCOME (LOSS)                               $ (2,681)     $ 14,372      $  7,121
                                                ========      ========      ========
BASIC EARNINGS (LOSS) PER SHARE                 $  (0.08)     $   0.46      $   0.24
                                                ========      ========      ========
DILUTED EARNINGS (LOSS) PER SHARE               $  (0.08)     $   0.44      $   0.21
                                                ========      ========      ========
COMMON SHARES OUTSTANDING                         31,986        31,300        29,858
                                                ========      ========      ========
COMMON SHARES OUTSTANDING ASSUMING DILUTION       31,986        32,695        33,163
                                                ========      ========      ========
</TABLE>


                        See notes to financial statements


                                      F-4
<PAGE>


                                 Presstek, Inc.
                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                           For the Fiscal Years Ended
             January 2, 1999, January 3, 1998, and December 28, 1996


<TABLE>
<CAPTION>
                                                                                                         Accumulated
                                                                              Additional                    Other         Total
                                                         Common Stock           Paid-in      Retained   Comprehensive  Stockholders'
                                                     Shares       Amount        Capital      Earnings    Income (Loss)   Equity
                                                     ------       ------        -------      --------    -------------   ------
                                                                          (In thousands, except per share data)
<S>                                                  <C>         <C>           <C>           <C>          <C>           <C>     
BALANCE AT DECEMBER 30, 1995                         14,765      $    148      $ 21,560      $  1,022     ($     3)     $ 22,727
Comprehensive income
  Net income for the fiscal year                                                                7,121                      7,121
  Other comprehensive income (loss)
   Unrealized loss on marketable securities                                                                    (40)          (40)
                                                                                                                        --------
Comprehensive income for the fiscal year                                                                                    7,081
                                                                                                                        --------
Issuance of common stock relative to the
  exercise of incentive and non-qualified stock
  options at $2.15 - $26.375 per share                  344             3         3,580                                    3,583
Issuance of common stock relative to the
  private placements at $73.00 per share                283             3        20,206                                   20,209
Costs relative to the private placements                                            (34)                                     (34)
Tax benefit arising from stock option deductions         --            --         3,876            --           --         3,876
                                                     ------      --------      --------      --------     --------      --------
BALANCE AT DECEMBER 28, 1996                         15,392      $    154      $ 49,188      $  8,143     ($    43)     $ 57,442
Comprehensive income
  Net income for the fiscal year                                                               14,372                     14,372
  Other comprehensive income (loss)
   Unrealized gain on marketable securities                                                                     42            42
                                                                                                                        --------
Comprehensive income for the fiscal year                                                                                  14,414
                                                                                                                        --------
Issuance of common stock relative to the
  exercise of incentive and non-qualified stock
  options at $2.85 - $35.00 per share                   924            10         4,855                                    4,865
Two-for-one stock split effected in the form
  of a 100% stock dividend                           15,551           155          (155)                                      --
Tax benefit arising from stock option deductions         --            --         9,269            --           --         9,269
                                                     ------      --------      --------      --------     --------      --------
BALANCE AT JANUARY 3, 1998                           31,867      $    319      $ 63,157      $ 22,515     ($     1)     $ 85,990
Comprehensive loss
  Net loss for the fiscal year                                                                 (2,681)                    (2,681)
  Other comprehensive income (loss)
    Unrealized gain on marketable securities                                                                     1             1
                                                                                                                        --------
Comprehensive loss for the fiscal year                                                                                    (2,680)
                                                                                                                        --------
Issuance of  unregistered  shares of
  common stock relative to the acquisition of
    Heath Custom Press, Inc. 
       at $25.38 per share                               94             1         2,406                                    2,407
Issuance of common stock relative to the
  exercise of incentive and non-qualified stock
  options at $2.85 - $10.94 per share                   315             3         1,733            --           --         1,736
                                                     ------      --------      --------      --------     --------      --------
BALANCE AT JANUARY 2, 1999                           32,276      $    323      $ 67,296      $ 19,834     ($     0)     $ 87,453
                                                     ======      ========      ========      ========     ========      ========
</TABLE>


                       See notes to financials statements


                                      F-5

<PAGE>



                                 PRESSTEK, INC.
                            STATEMENTS OF CASH FLOWS
                           For the Fiscal Years Ended


<TABLE>
<CAPTION>
                                                                                January 2,         January 3,         December 28,
                                                                                  1999                1998                1996
                                                                                --------            --------            --------
                                                                                                 (In thousands)
<S>                                                                             <C>                 <C>                 <C>     
CASH FLOWS - OPERATING ACTIVITIES:
  Net income (loss)                                                             $ (2,681)           $ 14,372            $  7,121
  Adjustments to reconcile net income (loss)  to net
    cash provided by operating activities:
      Tax benefit arising from stock option deductions                                --               9,269               3,876
      Depreciation                                                                 4,070               2,214               1,254
      Amortization                                                                   999                 909                 785
      Provision for warranty and other costs                                         766               1,164                 616
      Provision for losses on accounts receivable                                  5,006               1,074                 113
      Other, net                                                                     (35)                (71)                107
  (Increase) decrease in:                                                           
      Accounts receivable                                                          1,238             (10,169)             (9,470)
      Inventories                                                                  4,109              (2,669)             (5,036)
      Costs and estimated earnings in excess of
        billings on uncompleted contracts                                            273                 530                (606)
      Other current assets                                                          (549)                424                (475)
  Increase (decrease) in:
      Accounts payable and accrued expenses                                         (611)             (1,538)              5,109
      Accrued salaries and employee benefits                                         110                 187                 169
      Billings in excess of costs and estimated
        earnings on uncompleted contracts                                          3,030              (1,355)                668
                                                                                --------            --------            --------
             Net cash provided by operating activities                            15,725              14,341               4,231
                                                                                --------            --------            --------
CASH FLOWS - INVESTING ACTIVITIES:
      Investment in subsidiary, net of cash acquired                                  --                  --              (7,456)
      Purchases of property, plant and equipment                                  (5,835)            (27,918)            (16,390)
      Proceeds from sale of land and equipment                                       442                 538                  66
      Proceeds from sale of certain net assets  
        of Heath Custom Press, Inc.                                                  732                  --                  --
      Increase in other assets                                                    (1,074)               (449)               (851)
      Sales and maturities of marketable securities                                1,000               5,493               3,500
      Purchases of marketable securities                                         (16,036)                 --              (6,956)
                                                                                --------            --------            --------
             Net cash (used for) investing activities                            (20,771)            (22,336)            (28,087)
                                                                                --------            --------            --------
CASH FLOWS - FINANCING ACTIVITIES:
      Net proceeds from sale of common stock                                       1,736               4,865              23,759
      Proceeds under mortgage term loan                                            6,900                  --                  --
      Repayments of mortgage term loan                                              (456)                 --                  --
      Net proceeds from revolving line of credit                                      --               4,800                  --
      Net payments on revolving line of credit                                    (4,800)                 --                  --
      Payment on Heath Custom Press, Inc.'s
        revolving line of credit                                                    (600)                 --                  --
                                                                                --------            --------            --------
             Net cash provided by financing activities                             2,780               9,665              23,759
                                                                                --------            --------            --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                  (2,266)              1,670                 (97)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD                                      5,201               3,531               3,628
  Cash acquired from Heath Custom Press, Inc.                                        239                  --                  --
                                                                                --------            --------            --------
CASH AND CASH EQUIVALENTS END OF PERIOD                                         $  3,174            $  5,201            $  3,531
                                                                                ========            ========            ========
SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION -
  Cash paid during the period for:
      Interest                                                                  $    225            $    171            $     --
                                                                                ========            ========            ========
      Income taxes                                                              $    250            $     90            $     45
                                                                                ========            ========            ========
NON-CASH INVESTING AND FINANCING ACTIVITY:
  Common stock issued and net assets acquired relating
    to the acquisition of Heath Custom Press, Inc.                              $  2,407            $     --            $     --
                                                                                ========            ========            ========
</TABLE>

                       See notes to financial statements



                                      F-6

<PAGE>

                                 PRESSTEK, INC.

                          NOTES TO FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Nature of Business -  Presstek,  Inc.  ("Presstek",  or "the  Company")  is
principally engaged in the development,  manufacture,  and sale of PEARL(R), its
patented, proprietary,  digital imaging system and process-free thermal ablation
printing plate technologies.  Presstek's  products and applications  incorporate
PEARL  technologies  and utilize PEARL  consumables  for  computer-to-plate  and
direct-to-press  applications.  PEARL's  thermal laser diode system  enables its
customers to produce high quality, full color lithographic printed materials for
the  printing and graphic  arts  industries.  The Company is also engaged in the
development, manufacture, and sale of vacuum deposition coating equipment at its
Delta V Technologies  Inc.  ("Delta V")  subsidiary.  Based in Tucson,  Arizona,
Delta  V  develops  processes,   materials  and  equipment  for  vacuum  coating
applications. Its equipment and process innovations are used in a broad range of
industries and applications  including  graphic arts,  capacitors,  electronics,
optics,  architectural  and decorative glass, flat panel displays and packaging.
See Note 2 of the financial statements.

     In January  1998,  the Company  acquired  100% of the stock of Heath Custom
Press, Inc.  ("Heath") of Seattle,  Washington.  On October 26, 1998 the Company
sold certain assets of Heath, which was engaged in the design and manufacture of
custom printing presses. See Note 2 of the financial statements.

     The  Company  operates  in two  reportable  business  segments,  the Direct
Imaging Products segment, and Delta V. See Note 8 of the financial statements.

     Principles of Consolidation - The financial statements for the fiscal years
ended  January 2, 1999,  January 3, 1998,  and  December  28,  1996  include the
accounts of the Company and its subsidiaries.  Significant intercompany accounts
and transactions have been eliminated.

     Fiscal  Year - The  Company  operates  and reports on a 52 / 53 week fiscal
year ending on the  Saturday  closest to December 31.  Accordingly,  fiscal 1998
ended January 2, 1999,  fiscal 1997 ended January 3, 1998, and fiscal 1996 ended
December 28, 1996. The 1998 and 1996 fiscal years each reflects 52 weeks,  while
the 1997 fiscal year reflects 53 weeks.

     Use of  Estimates  - The  Company  prepares  its  financial  statements  in
conformity  with  generally  accepted  accounting   principles.   This  requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the financial  statements  and the reported  amounts of revenues and
expenses  during the reporting  period.  Actual  results could differ from these
estimates. Many of the Company's estimates and assumptions used in the financial
statements  relate  to the  Company's  products,  which  are  subject  to  rapid
technological  change.  


                                      F-7
<PAGE>

It is  reasonably  possible  that  changes may occur in the near term that would
affect   management's   estimates  with  respect  to  the  carrying   values  of
inventories,  property  plant and  equipment,  goodwill,  patents,  and software
development costs.

     Revenue  Recognition  - The Company  records  revenues on product sales and
related royalties at the time of shipment. Certain fees and other reimbursements
are  recognized as revenue when the related  services have been performed or the
revenues otherwise earned.

     Revenues  from   fixed-price  and  modified   fixed-price   production  and
development  contracts are  recognized on the  percentage-of-completion  method,
measured by the  percentage of costs  incurred to date compared to the estimated
total of direct costs for each  contract.  As  contracts  can extend over one or
more accounting  periods,  revisions in costs and earnings  estimated during the
course of the work are reflected during the accounting period in which the facts
that required such revisions become known.

     Product  Warranties - The Company  warrants its products against defects in
material and workmanship for a period of one year.  Anticipated  future warranty
costs are accrued by a charge to expense as products are shipped and the related
revenue  recognized.  At January 2, 1999 and January 3, 1998,  accrued  expenses
included accrued warranty costs of $1,067,000 and $933,000.

     Inventories - Inventories  are valued at the lower of cost or market,  with
cost determined  using the first-in,  first-out  method.  At January 2, 1999 and
January 3, 1998, inventories consisted of the following:

                                                     1998             1997
                                                     ----             ----
                                                        (In thousands)

     Raw materials                                 $ 7,289          $ 7,698

     Work in process                                   690            3,840

     Finished goods                                  1,878            1,770
                                                   -------          -------

          Total                                    $ 9,857          $13,308
                                                   =======          =======

     Property, Plant and Equipment - Property, plant and equipment are stated at
cost  and are  depreciated  using a  straight-line  method  for  both  financial
reporting and for tax purposes over their estimated useful lives (ranging from 3
to 30 years).  Leasehold  improvements  are amortized over the life of the lease
for financial reporting purposes and a required longer period for tax purposes.

     Goodwill - The  excess of cost over the fair value of net assets  acquired,
which  relates  to the  Company's  acquisition  of  Delta V (Note  2),  is being
amortized  over a twenty year period using the straight line method.  At January
2, 1999 goodwill of $6,969,000 is stated net of total  accumulated  amortization
of $973,000. Amortization expense was $325,000 for the fiscal year ended January
2, 1999 and $324,000


                                      F-8
<PAGE>

for each of the fiscal years ended January 3, 1998, and December 28, 1996.

     Patent  Application  Costs and License  Rights - Patent  application  costs
represent  the  expense  of  preparing  and  filing  applications  to patent the
Company's  proprietary  technologies,  in addition to certain patent and license
rights  obtained  in the  acquisitions  of Delta V and  Heath.  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  expense  for the
fiscal years ended January 2, 1999,  January 3, 1998, and December 28, 1996, was
$466,000, $190,000, and $212,000, 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
which 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 1998 and 1997, the Company did
not incur  material  costs subject to  capitalization.  Through fiscal 1996, the
Company  incurred and capitalized  $895,000 of costs subject to  capitalization.
Amortization  of these costs  commenced in fiscal 1995 when the related  product
was released to customers.  Amortization  expense  reported for the fiscal years
1998,  1997,  and 1996  was  $110,000,  $376,000,  and  $250,000,  respectively.
Amortization expense is based upon the ratio that current gross revenues bear to
total estimated gross revenues, which was an amount greater than amortization on
a  straight-line  method over the  estimated  economic  life of the product from
three to five years.  Based upon current sales  estimates  software  costs,  are
expected to be fully amortized in less than one year.

     Non-Competition and  Confidentiality  Covenants - The consideration paid by
the  Company  to  the  selling   shareholders   of  Delta  V  with   respect  to
non-competition  and  confidentiality is being amortized over a four year period
using the straight line method. Amortization expense was $49,000 for each of the
fiscal years ended January 2, 1999, January 3, 1998, and December 28, 1996.

     Research  and  Development  Costs -  Research  and  development  costs  are
expensed as incurred for financial  reporting  purposes.  Such costs  aggregated
$16,488,000,  $11,246,000, and $8,894,000, for the fiscal years ended January 2,
1999, January 3, 1998, and December 28, 1996, respectively.

     Fair  Value  of  Financial  Instruments  -  The  carrying  values  of  cash
equivalents,  marketable  securities  available for sale,  accounts  receivable,
accounts payable and notes payable  approximate fair value due to the short-term
maturity  of these  instruments.  The  carrying  amounts of the  Company's  bank
borrowings under its revolving credit agreement  approximates fair value because
the interest rates are based on floating rates identified by reference to market
rates.  The fair value of the Company's  other long-term debt is estimated 


                                      F-9
<PAGE>

based on quoted  market  prices.  At  January  2,  1999,  the fair  value of the
Company's long term debt approximated carrying value.

     Cash  Equivalents,  and  Marketable  Securities - For purposes of reporting
cash flows, the Company considers all savings deposits, certificates of deposit,
and money market funds and deposits purchased with a maturity of three months or
less to be cash  equivalents.  At January 2, 1999, and January 3, 1998, cash and
cash  equivalents  consisted of cash balances on deposit and money market funds.
Marketable  securities  are  classified  as available for sale and are stated at
fair market value.  All unrealized  gains and losses,  if any, are recorded as a
separate  component  of  stockholders'  equity.  At January  2, 1999  marketable
securities  consisted of high-quality  debt securities and commercial  paper. At
January 3, 1998 marketable securities consisted of United States Treasury Notes.

     Concentration  of Credit Risk -  Financial  instruments  which  potentially
subject the Company to  concentrations  of credit risk consist primarily of cash
equivalents,  marketable securities 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. The Company
performs ongoing credit  evaluations of its customers and maintains reserves for
potential  credit losses.  Concentration of credit risk with respect to accounts
receivable  results  from a  significant  portion of the  Company's  receivables
concentrated with two major customers. See Note 8 of the financial statements.

     Reclassification   -  Certain  prior  fiscal  years'   accounts  have  been
reclassified  for  comparative  purposes to conform to the  presentation  in the
current fiscal year.

     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. No write downs,  were necessary for the fiscal years
ended January 2, 1999, January 3, 1998, and December 28, 1996.

     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.  SFAS 123  requires  companies  that  follow APB 25 to  provide  pro forma
disclosure of the effect of applying the optional fair value method.  See Note 7
of the financial statements.


                                      F-10
<PAGE>

     Basic and Diluted  Earnings  (Loss) per Share - Basic  earnings  (loss) per
share is computed by dividing net income (loss) by the weighted  average numbers
of shares of common stock outstanding during the period. Diluted earnings (loss)
per share is computed giving effect to all diluted  potential common shares that
were outstanding during the period.  Dilutive potential common shares consist of
the incremental  common shares issuable upon the exercise of stock options.  For
fiscal 1998,  potentially  dilutive  securities  that related to shares issuable
upon the  exercise of stock  options  granted by the Company were  excluded,  as
their effect was antidilutive. See Note 4 of the financial statements.

     Comprehensive   Income  -  The  Company  adopted   Statement  of  Financial
Accounting  Standards ("SFAS") No. 130 "Reporting  Comprehensive  Income" in the
first quarter of fiscal 1998.  SFAS No 130 sets  standards for the reporting and
display of  comprehensive  income,  its  components  and  accumulated  balances.
Comprehensive income is comprised of net income and all changes in stockholders'
equity except those due to  investments by owners and  distributions  to owners,
which  for  the  Company  includes   unrealized  gains  (losses)  on  marketable
securities.  The Company has  elected to  disclose  comprehensive  income in its
Statement of Changes in Stockholders' Equity.

     Effect  of  New  Accounting  Pronouncements  - The  American  Institute  of
Certified Public  Accountants has issued Statement of Position 98-5,  "Reporting
on the Costs of Start-Up  Activities"  ("SOP 98-5").  This SOP defines  start-up
activities  as those  one-time  activities  related to  opening a new  facility,
introducing a new product or service,  conducting  business in a new  territory,
conducting  business with a new class of customers,  initiating a new process in
an existing facility,  or commencing some new operation.  SOP 98-5 requires that
these  start-up  costs  be  expensed  as  incurred.  This SOP is  effective  for
financial  statements  for fiscal  years  beginning  after  December  15,  1998,
although  earlier  application is encouraged.  Management  does not believe that
adoption of SOP 98-5 will materially impact the results of operations, financial
position, and future financial statement disclosures.

     In June 1998 the Financial  Accounting Standards Board, issued Statement of
Financial Accounting  Standards No. 133; "Accounting for Derivative  Instruments
and Hedging  Activities,"  ("SFAS No. 133"). SFAS No. 133 requires  companies to
recognize all  derivatives  as either assets or  liabilities in the statement of
financial  position and measure those instruments at fair value. SFAS No. 133 is
effective for fiscal years  beginning  after June 15, 1999. The Company does not
presently enter into any transactions involving derivative financial instruments
and,  accordingly,  does not anticipate the new standard will have any effect on
its financial statements for the foreseeable future.

2.   BUSINESS ACQUISITIONS

     In January  1998,  the Company  acquired  100% of the stock of Heath Custom
Press, Inc. ("Heath"), of Seattle,  Washington.  Heath was engaged in the design
and  manufacture  of custom  printing  presses.  Heath was  purchased for 94,865
unregistered  shares  of the  Company's  common  stock.  The  purchase  price of
$2,407,000 has been allocated to assets acquired and  liabilities  assumed based
on the fair market value at the date of acquisition as


                                      F-11
<PAGE>

follows:  current assets,  $2,198,000;  patents,  $1,781,000;  long-term assets,
$186,000; other liabilities,  $1,758,000. The acquisition was accounted for as a
purchase and, accordingly,  the results of Heath's operations have been included
in the Company's  financial  statements for the fiscal year 1998. The results of
Heath's operations would not have had a material impact on the Company's results
of operations for fiscal 1997 and 1996, and were not material in 1998.

     In October 1998, the Company sold certain  assets of Heath for  $1,000,000,
which  approximated  book value.  The Company  retained  all rights to the Heath
patent.

     On February 15, 1996, the Company  acquired 90% of the  outstanding  common
stock (the "Purchased Shares") of Catalina Coatings,  Inc. which now operates as
Delta V, a subsidiary of the Company.  The  Purchased  Shares were acquired from
the selling  shareholders  pursuant to a Stock  Purchase  Agreement  (the "Stock
Purchase  Agreement")  dated and effective as of January 1, 1996.  The aggregate
consideration  paid by the Company pursuant to the Stock Purchase  Agreement was
$8,400,000,  of which $8,200,000 represented the purchase price of the Purchased
Shares  and  $200,000  represented  consideration  for the  non-competition  and
confidentiality covenants of the selling shareholders.

     Simultaneous with the closing of the acquisition;  the Company entered into
a Put and Call Option Agreement (the "Option  Agreement").  The Option Agreement
provides the Company  with the right,  at any time after  February 15, 2000,  to
acquire the  remaining  10% of the  outstanding  common  stock of Delta V for an
aggregate  consideration  of $2,000,000.  The Option Agreement also provides the
selling  shareholders of Delta V, and another  individual with the right, at any
time after  August 15,  2000,  to cause the  Company to purchase  the  remaining
shares for aggregate  consideration  of  $1,000,000.  The Option  Agreement will
terminate if Delta V consummates  an initial  public  offering of its securities
prior to February  15,  2000.  On December  28,  1998,  the Company  acquired an
additional 7% of the outstanding  common stock of Delta V for  consideration  of
$500,000  pursuant to the Option  Agreement.  The additional  purchase price was
recorded as goodwill.

     The  acquisition  was  accounted for as a purchase  and,  accordingly,  the
results of Delta V's operations have been included in the Company's fiscal 1998,
1997, and 1996 financial statements.

3.   MARKETABLE SECURITIES

     Marketable  Securities  are classified as available for sale and consist of
treasury  notes and of auction rate  securities and  commercial  paper,  and are
stated at fair value.

     Marketable securities as of January 2, 1999, of $16,107,000, will mature at
various dates in fiscal 1999. No aggregate net  unrealized  holding  losses were
recorded  at January 2, 1999.  At January 3, 1998,  there was an  aggregate  net
unrealized holding loss of $1,000, which was included as a separate component of
stockholders' equity in the accompanying balance sheet.


                                      F-12
<PAGE>

     For the fiscal years ended January 2, 1999,  January 3, 1998,  and December
28, 1996, the Company  received  proceeds from the sale or maturity of available
for sale securities of $1,000,000,  $5,494,000, and $3,500,000, and recorded net
realized losses of $9,135 in 1997. There were no net realized losses recorded in
1998 or 1996. In computing such realized  losses,  cost was determined using the
specific cost method.

4.   EARNINGS (LOSS) PER SHARE

     On May 30, 1997,  the Company's  Board of Directors  declared a two-for-one
stock  split  effected  in the form of a 100%  stock  dividend  during the third
quarter of fiscal 1997. The split resulted in the issuance of 15,549,862  shares
of common stock.  All  references to average  number of shares  outstanding  and
prices per share have been  restated  retroactively  to reflect  the split.  The
following  represents the  calculation of basic and diluted  earnings (loss) per
share for the fiscal years ended:

                                            January 3,  January 2,  December 28,
                                               1999         1997         1996
                                               ----         ----         ----
                                           (In thousands, except per share data)

Net income (loss) as reported               $  (2,681)     $14,372     $ 7,121
                                            =========      =======     =======

Weighted average shares outstanding
  for basic earnings (loss) per share          31,986       31,300      29,858

Effect of assumed conversion
  of stock options                               --          1,395       3,305
                                            ---------      -------     -------

Weighted average shares outstanding
  for diluted earnings (loss) per share        31,986       32,695      33,163
                                            =========      =======     =======

Basic earnings (loss) per share             $   (0.08)     $  0.46     $  0.24
                                            =========      =======     =======

Diluted earnings (loss) per share           $   (0.08)     $  0.44     $  0.21
                                            =========      =======     =======

     All stock options outstanding are excluded from the fiscal 1998 calculation
of diluted loss per share,  as their effect would be  anti-dilutive.  Options to
purchase 1,111,000 and 287,000 shares of common stock at exercise prices ranging
from $26.38 to $49.62 per share were outstanding during a portion of fiscal 1997
and  fiscal  1996,  respectively.   These  options  were  not  included  in  the
computation of diluted  earnings per share as the exercise prices of the options
were greater than the average market price of the common shares.  These options,
which expire between January 2, 2001 and December 22, 2003, were all outstanding
at the end of fiscal 1997 and 1996, respectively.

5.   INCOME TAXES

     The  Company  utilizes  an  asset  and  liability  approach  for  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 (b)  recognize the amount of 



                                      F-13
<PAGE>

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 components of the provision for income taxes for the fiscal years ended
January 2, 1999, January 3, 1998, and December 28, 1996, were as follows:

                                             1998        1997       1996
                                             ----        ----       ----
                                                    (In thousands)

     Current tax expense - State            $    --     $  191     $  124

     Charge in lieu of income taxes:
        Federal                                  --      7,740      3,360
        State                                    --      1,529        516
                                            -------     ------     ------

     Total provision                        $    --     $9,460     $4,000
                                            =======     ======     ======

     The Company did not record a provision for United  States  federal or state
income taxes or a charge in lieu of federal or state income taxes due to the net
operating  loss in fiscal 1998.  The charge in lieu of income taxes  included in
the fiscal 1997 provision for income taxes  represents  the tax benefit  arising
from stock option  deductions in that year and the  realization of net operating
loss carryforwards  resulting from such deductions for tax purposes.  The charge
in lieu of income taxes  included in the fiscal 1996  provision for income taxes
represents  the tax benefit  arising from stock option  deductions in that year.
The tax benefit  related to such stock option  deductions  has been  credited to
stockholder's equity.

     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.  Deferred  tax  assets  and
liabilities consisted of the following at January 2, 1999, and January 3, 1998:

                                                         1998         1997  
                                                         ----         ----
                                                           (In thousands)
     Deferred tax assets:
        Net operating loss carryforwards              $ 13,300      $  9,500
        Tax credits                                      2,200         2,050
        Warranty provisions and other accruals           3,000         1,100
                                                      --------      --------
           Gross deferred tax assets                    18,500        12,650
                                                      --------      --------

     Deferred tax liabilities:
        Amortizable and depreciable assets                 650           700
        Accumulated depreciation and amortization        5,000           200
                                                      --------      --------
           Gross deferred tax liabilities                5,650           900
                                                      --------      --------

                                                        12,850        11,750

     Less valuation allowance                          (12,800)      (11,700)
                                                      --------      --------

     Deferred tax asset - net                         $     50      $     50
                                                      ========      ========

     The $50,000  deferred  tax asset was  included in other  current  assets at
January  2,  1999  and  January  3,  1998.  The  valuation  allowance  increased
$1,100,000 and $3,700,000 in fiscal 1998 and 1997, respectively.


                                      F-14
<PAGE>


     The difference between income taxes at the United States federal income tax
rate and the effective income tax rate was as follows for the fiscal years ended
January 2, 1999, January 3, 1998 and December 28, 1996:

                                                      1998      1997      1996
                                                      ----      ----      ----

     Computed at federal statutory rate               (34)%      35%       34%
     Increase (decrease) resulting from:
        Expenses producing no current tax benefit      70%        3%        1%
        State tax, net of federal benefit              --         4%        4%
        Valuation allowance                            29%       --        --
        Deductions for tax purposes in excess of
        expenses for financial statement purposes     (65)%      (2)%      (3)%
                                                      ---       ---       ---
                Effective rate, net                     0%       40%       36%
                                                      ===       ===       ===

     As of January 2, 1999,  the Company had net  operating  loss  carryforwards
totaling  approximately  $38,000,000  resulting  principally  from  compensation
deductions  for tax purposes  relative to stock option plans.  To the extent net
operating losses resulting from stock option plan 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.
The  following is a breakdown of the net operating  losses and their  expiration
dates:

                                                Amount of Remaining
                                                  Net  Operating
               Expiration date                   Loss Carryforwards
               ---------------                   ------------------
                  2005                               $  2,240
                  2006                               $  5,020
                  2008                               $     50
                  2009                               $    500
                  2010                               $  8,750
                  2011                               $ 14,850
                  2012                               $  4,400
                  2013                               $  2,300

     In addition,  the Company has available tax credit carryforwards  (adjusted
to reflect provisions of the Tax Reform Act of 1986) of approximately $2,200,000
which are available to offset future income tax liabilities when incurred.

6.   RELATED PARTIES

     During fiscal 1998, 1997, and 1996, the Company recorded sales of equipment
and  consumables to Pitman Company of $13,728,000,  $7,579,000,  and $3,379,000,
respectively.  At January 2, 1999 and January 3, 1998,  the Company had accounts
receivable from Pitman


                                      F-15
<PAGE>

of $3,796,000 and $1,460,000, respectively. John Dreyer, who has been a director
of the Company since  February 1996, is Pitman's  President and Chief  Executive
Officer.

     On February 28, 1998,  the Company made a loan to Robert E. Verrando in the
amount of $200,000 at an interest  rate of 8% per annum,  with the principal and
accrued interest payable on demand. At January 2, 1999,  $213,333 was due to the
Company.  Mr.  Verrando was the  President  and Chief  Operating  Officer of the
Company from February 1996 to January 1999 when he retired from these positions.
He was appointed  Secretary of the Company in September  1998. He also remains a
director on the Company's Board of Directors, and a consultant to the Company.

     The Company  subleases certain of its office facilities as a tenant-at-will
from Mr.  Robert  Howard,  the Company's  Chairman  Emeritus.  Payments  totaled
$38,000  for the fiscal  year ended  January 2, 1999 and $36,000 for each of the
fiscal years ended  January 3, 1998 and December 28, 1996.  The Company paid Mr.
Howard $133,000,  $145,000, and $125,000 for consulting services provided to the
Company  during fiscal 1998,  1997,  and 1996,  respectively.  The Company had a
payable to Mr.  Howard of $12,000  for  consulting  services at January 2, 1999.
During  fiscal 1996,  the Company made  equipment  purchases  from Howtek,  Inc.
("Howtek") totaling $54,000. Mr. Howard is Chairman of the Board of Howtek.

7.   STOCKHOLDERS' EQUITY

     References  herein to shares,  options,  warrants  and the prices per share
have  been  restated  for all  stock  splits,  effected  in the  form  of  stock
dividends.

     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.

     Restricted  Stock Purchase Plan - On August 22, 1988 the Company  adopted a
Restricted  Stock  Purchase  Plan  ("the  Purchase  Plan").  The  Purchase  Plan
originally  authorizing  the sale of up to 125,000 shares of common stock to its
employees at a price to be determined by the Board of Directors, but in no event
to be less  than  $.01 per share or  greater  than 110% of the then fair  market
value. This plan expired August 21, 1998.

     Stock  Option  Plans - As of  January  3, 1999 the  Company  had four stock
option plans in effect.  The 1991 Stock Option Plan (the "1991 Plan"),  the 1994
Stock Option Plan (the "1994  Plan"),  the 1997  Interim  Stock Option Plan (the
"1997 Plan") and the 1998 Stock Incentive Plan (the "1998 Plan"). The 1988 Stock
Option Plan (the "1988 Plan")  expired on August 21, 1998. No future grants will
be issued under this plan,  however  20,368 shares remain  outstanding  and will
expire according to the specified expiration dates under the individual grants.

     The 1991 Plan and the 1994 Plan  provide 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.



                                      F-16
<PAGE>

Options granted under these plans may be either Incentive Stock Options ("ISOs")
or  Nonqualified  Options  ("NQOs").  Generally,  ISOs  may only be  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").
The 1997 Plan  provides  for the award of  options  to key  employees  and other
persons,  to purchase up to 250,000 shares of the Company's  common stock.  Only
NQOs may be granted under this Plan.

     Under the 1997,  1994 and 1991 Plans,  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
for 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  (other than Robert  Howard or Dr.  Lawrence  Howard) to receive  grants
under the Director  Plan.  The Director 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.


                                      F-17
<PAGE>


     The following table summarizes  information about stock options outstanding
at January 2, 1999:

<TABLE>
<CAPTION>
                                    OPTIONS OUTSTANDING                                           OPTIONS EXERCISABLE
                                    -------------------                                           -------------------
                             Outstanding       Weighted-Average                           Exercisable as
         Range of               as of             Remaining           Weighted-Average          of           Weighted-Average
     Exercise Prices            1/2/99        Contractual Years        Exercise Price         1/2/99         Exercise Price
     ---------------            ------        -----------------        --------------         ------         --------------
<S>                         <C>                     <C>                   <C>                <C>                 <C>    
 $3.55 -  $ 7.78              813,171               1.4                   $  7.49              800,484           $  7.49
                                                                                        
 $7.79 -  $10.00              442,315               2.9                   $  9.41              242,440           $  9.77
                                                                                        
 $10.01 - $13.50              143,850               2.6                   $ 11.33               61,100           $ 11.46
                                                                                        
 $13.51 - $14.00              911,700               3.7                   $ 13.75              318,800           $ 13.75
                                                                                        
 $14.01 - $44.75              190,000               3.4                   $ 21.96               97,500           $ 29.37
                            ---------                                                        ---------           
                            2,501,036               2.7                   $ 11.43            1,520,324           $ 10.73
                            =========                                                        =========           
                            
</TABLE>


     Information  concerning  all stock option  activity  under the 1988,  1991,
1994,  1997,  1998 and the Director  Plans for the fiscal years ended January 2,
1999, January 3, 1998, and December 28, 1996 is summarized as follows:

<TABLE>
<CAPTION>
                                                                                               Weighted
                                  Option                     Option Price                    Average Price
                                  Shares                       Per Share                      Per Share
                                  ------                       ---------                      ---------
<S>                             <C>                          <C>                              <C>      
Outstanding at
December 30, 1995                3,611,792                   $ 2.15 - $31.00                  $    6.65


Granted                            670,800                   $25.50 - $49.62                  $   38.80
Exercised                         (688,260)                  $2.15 -  $26.38                  $    5.21
Cancelled/Expired                   (1,000)                  $24.00 - $24.00                  $   24.00
                                ----------

Outstanding at
December 28, 1996                3,593,332                   $ 2.85 - $49.62                  $   12.92

Granted                            604,600                   $22.00 - $49.38                  $   29.70
Exercised                       (1,082,002)                  $2.85 -  $35.00                  $    4.50
Cancelled/Expired                  (83,250)                  $7.90 -  $44.75                  $   35.91
                                ----------

Outstanding at
January 3, 1998                  3,032,680                   $2.85 -  $49.62                  $   18.64

Granted                          1,503,000                   $7.19 -  $25.00                  $   13.40
Exercised                         (314,844)                  $2.85 -  $10.94                  $    5.51
Cancelled/Expired               (1,719,800)                  $4.85 -  $49.63                  $   26.96
                                ----------
Outstanding at
January 2, 1999                  2,501,036                   $3.55 -  $44.75                  $   11.43
                                ==========
</TABLE>


                                      F-18
<PAGE>

     The incentive  and  nonqualified  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 six years from dates of
grant and may be subject to earlier termination as provided in the Plans.

     In April 1998, the Company repriced grants  previously issued between April
10, 1995 and March 30, 1998 under its 1988,  1991,  1994, 1997 and  Non-Employee
Director Stock Option Plans. A total of 1,127,000  options with exercise  prices
ranging  from  $18.00 to $49.63 per share were  repriced to $13.75 or $14.75 per
share.  These options are reflected in the previous table as options granted and
cancelled for fiscal 1998.

     The proceeds to the Company from stock options  exercised during the fiscal
years ended  January 2, 1999,  January 3, 1998,  and  December  28, 1996 totaled
$1,736,000, $4,865,000, and $3,583,000, respectively.

     Statement  of  Financial   Accounting   Standards  No.  123  ("SFAS  123"),
"Accounting for Stock-Based  Compensation",  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. The Company has used the Black-Scholes  option-pricing model
to estimate the fair value of each stock option issued in 1998,  1997, and 1996.
The following  weighted  average  assumptions were used in 1998, 1997, and 1996,
respectively:  a risk-free  interest rate of 5.11%,  5.62% and 6.0%; an expected
option life of 4.09 years,  4.65 years, and 4.08 years;  expected  volatility of
72.92%, 65.84% and 68.31%, and no dividends paid.

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

                                       1998           1997           1996
                                       ----           ----           ----
                                     (In thousands, except per share data)

Net income (loss)
   As reported                       $ (2,681)       $ 14,372       $ 7,121
   Pro forma                         $ (9,036)       $  8,772       $   249
Basic earnings (loss)
per share
   As reported                       $   (.08)       $    .46       $   .24
   Pro forma                         $   (.28)       $    .28       $   .01

Diluted earnings (loss)                                            
per share                                                          
   As reported                       $   (.08)       $    .44       $   .21
   Pro forma                         $   (.28)       $    .27       $   .01
                                                                   

                                      F-19
<PAGE>

     The above pro forma's net income  (loss) and net income (loss) per share do
not  recognize  the  related  tax  benefits  in  fiscal  years  1997 and 1996 of
$1,972,000 and $2,470,000,  respectively,  as these deferred tax assets would be
fully  offset by a  valuation  allowance.  There was no related  tax benefit for
fiscal 1998.

     Other - During February 1996, the Company completed  private  placements of
an  aggregate  of  282,846  shares of its  common  stock for gross  proceeds  of
$20,208,758  to a  limited  number  of  domestic  individual  and  institutional
investors,  net of costs of  $33,500.  A  portion  of the  proceeds  was used to
acquire Delta V.

8.   Segment Information

     The  Company  adopted  SFAS No.  131,  "Disclosures  about  Segments  of an
Enterprise  and Related  Information"  for fiscal 1998 year-end  reporting.  The
statement  requires  disclosure  of  certain  financial  information  related to
operating  segments.  The  Company  has  determined  that  it  operates  in  two
reportable  segments,  the  Digital  Imaging  Products  segment and Delta V. The
Digital  Imaging  Products  segment is  primarily  engaged  in the  development,
manufacture  and sales of its  proprietary  digital imaging systems and printing
plate technologies for computer-to-plate and direct-to-press applications. Delta
V develops processes,  materials and equipment for vacuum coating  applications.
Its  equipment and process  innovations  are used in a broad range of industries
and  applications  including  graphic  arts,  capacitors,  electronics,  optics,
architectural and decorative glass, flat panel displays and packaging.

     The accounting  policies of the  reportable  segments are the same as those
described in Note 1, "Summary of Significant Accounting Policies." 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.

     A summary  of the  Company's  operations  by  segment  for the years  ended
January 2, 1999, January 3, 1998 and December 28, 1996 are as follows:

                                           Digital
                                      Imaging Products   Delta V        Total
                                      ----------------   -------        -----
     Year ended January 2, 1999                       (In thousands)
     --------------------------
      Revenues                          $  74,165      $  10,221      $  84,386
      Inter-segment sales                      --            857            857
      Income (loss) from operations        (2,319)        (1,258)        (3,577)
      Total assets                         93,744         14,130        107,874
      Depreciation and amortization         4,050          1,019          5,069
      Capital expenditures                  5,775             59          5,834

     Year ended January 3, 1998
     --------------------------
      Revenues                             89,792          1,769         91,561
      Inter-segment sales                      --          7,513          7,513 
      Income (loss) from operations        25,818         (2,210)        23,608
      Total assets                         85,634         14,839        100,473
      Depreciation and amortization         2,259            864          3,123
      Capital expenditures                 23,894          4,024         27,918
                                                                   

                                      F-20
<PAGE>

      Year ended December 28,1996
      ---------------------------
       Revenues                             46,677          1,950         48,627
       Inter-segment sales                      --          1,874          1,874
       Income (loss) from operations        11,051           (471)        10,580
       Total assets                         56,623         12,200         68,823
       Depreciation and amortization         1,506            532          2,038
       Capital expenditures                 13,306          3,084         16,390
                                                                    
For geographic  reporting,  revenues are attributed to the geographic  locations
based on the location of the Company's customer.

                                          1998          1997          1996
                                          ----         ------       -------
                                                   (in thousands)
     Geographic Revenues:
     United States                      $33,372       $11,448       $ 9,490
     Germany                             40,824        70,726        34,207
     All other                           10,190         9,387         4,930
                                        -------       -------       -------
                                        $84,386       $91,561       $48,627
                                        =======       =======       =======

     Revenues  generated under the Company's  agreements with Heidelberg and its
distributors totaled $42,123,000,  $73,747,000, and $35,696,000 for fiscal 1998,
1997, and 1996, respectively. (See Note 10.) Accounts receivable from Heidelberg
totaled  $10,860,000  and  $19,419,000,  respectively,  at January 2, 1999,  and
January 3, 1998.  Revenues  generated  under the Company's  agreements  with the
Pitman  Company  totaled  $13,728,000  in fiscal  1998.  At  January 2, 1999 the
Company had accounts  receivable  from Pitman of $3,796,000.  No other customers
represented  more than ten percent of the  Company's  revenues  in fiscal  1998,
1997, and 1996.

9.   COMMITMENTS AND CONTINGENCIES

     The  Company  leases  a  number  of  its  facilities  under  noncancellable
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 $513,000,  $542,000,  and $518,000 for fiscal
1998, 1997, and 1996, respectively.  As of January 2, 1999, future minimum lease
payments under these agreements were as follows:

                     1999                  $243,000
                     2000                   129,000
                                           --------
                     Total                 $372,000
                                           ========

     The Company has employment agreements with two key executive officers.  The
agreements provide for minimum salary levels that are subject to periodic review
by the Company's  Board of Directors.  The  employment  agreements  also contain
certain change in control provisions,  as defined,  which entitle each executive
to receive up to three times his five-year average annual compensation.

                                      F-21
<PAGE>

     The Company's  maximum  contingent  liability  under such  agreements as of
January 2, 1999 would be $1,313,000.

10.  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.

     The Heidelberg Agreements and amendments govern the Company's  relationship
with  Heidelberg  and  relate to the  integration  of the PEARL  Direct  Imaging
technology into various presses  manufactured by Heidelberg.  The manufacture of
components,  at specified rates, for such presses and the  commercialization  of
such presses are also covered.

     The  Heidelberg  Agreements  currently  expire in December  2011 subject to
certain early  termination  and extension  provisions.  Under these  agreements,
Heidelberg  agreed to pay royalties to the Company based on the net sales prices
of various  specified  types of Heidelberg  presses on which the Company's PEARL
Direct Imaging technology would be used. Pursuant to the Heidelberg  Agreements,
Heidelberg has been provided with certain  exclusive rights for use of the PEARL
Direct  Imaging  technology  for the  Quickmaster  DI format  size.  The  Master
Agreement has also been modified to provide Heidelberg with a fixed royalty rate
for the Company's PEARL Direct Imaging systems used on the Quickmaster DI.

     In March 1998, the Company and Heidelberg concluded  negotiations  relating
to  production  levels and  schedules  for fiscal  1998,  which  resulted in the
Company materially  reducing production levels of direct imaging systems used in
the  Quickmaster  DI press for fiscal  1998.  The Company  has not yet  received
orders from  Heidelberg  for fiscal 1999 in connection  with its direct  imaging
systems used on the Quickmaster DI.

11.  OTHER INFORMATION

     As previously  disclosed,  seven  federal class action  lawsuits were filed
against the Company and others,  all of which have been consolidated  before the
United  States  District  Court,  District  of New  Hampshire,  under the common
caption Bill Berke, et al. V. Presstek, Inc., et al. The plaintiffs have jointly
filed and served a Second Consolidated Amended Class Action Complaint naming the
Company,  certain of its present or former  officers and  directors  ("the Berke
Officer  and  Director  Defendants"),  and  other  parties  as  defendants.  The
plaintiffs allege, among other things, that the Company and/or the Berke Officer
and Director Defendants violated Section 10(b) ("Sect. 10(b)") of the Securities
Exchange  Act of 1934,  (the  "Exchange  Act")  and Rule  10b-5  ("Rule  10b-5")
promulgated  thereunder,  and  violated  New  Hampshire  law; and that the Berke
Officer and Director  Defendants  violated  Section  20(a)  ("Sect.  20(a)") and
Section 20A of the Exchange Act. The Complaint alleges, among other things, that
the Company  and/or the Berke Officer and Director  Defendants  issued false and
misleading reports:  failed to disclose material facts, including a misstatement
of earnings in the Company's  financial  statements  for the first quarter ended
March 30, 1996: misstated or failed to fully disclose the Company's supply


                                      F-22
<PAGE>

contracts with,  payments received from sales made by backlog of orders received
from, and delays in production by the Company's principal customer,  the alleged
circulation   of,  and  alleged  failure  to  correct  certain  analyst  reports
concerning  the Company  that  contained  alleged  misrepresentations  regarding
allegedly  inflated  financial  projections  and the alleged failure to properly
disclose the scope of an investigation by the Securities and Exchange Commission
("SEC").  Certain of the Berke  Officer and Director  Defendants  are alleged to
have sold the Company's  common stock at  artificially  inflated prices while in
possession  of material  non-public  information  concerning  the  Company.  The
plaintiffs seek  unspecified  compensatory  and punitive  damages,  attorney and
expert  fees  and  other  costs  and  expenses  incurred  by the  plaintiffs  in
connection with the action.

     As previously  disclosed,  on July 16, 1996,  Richard  Strauss  commenced a
derivative  suit on behalf of the  Company in the Court of Chancery of the State
of Delaware,  New Castle County,  against certain  officers and directors of the
Company ("the Strauss Officer and Director  Defendants").  The plaintiff alleges
that the Strauss Officer and Director Defendants breached their fiduciary duties
to the Company  and its public  stockholders  and wasted  corporate  assets,  by
making allegedly false and misleading  statements of fact or concealing material
facts concerning the viability of the Company's "key" patent and its proprietary
interest  in its PEARL  technology,  causing  the  Company  to fail to  properly
disclose  the scope of an  investigation  by the SEC, and causing the Company to
misstate its financial results for the first quarter of 1996. The plaintiff also
alleges  that  certain of the  Strauss  Officer  and  Director  Defendants  sold
securities  of the Company at inflated  prices while they were in  possession of
material non-public  information  concerning the Company.  The plaintiff alleges
that the actions of the  Strauss  Officer and  Director  Defendants  resulted in
breaches of Sect. 10(b) and Rule 10b-5, which resulted in other lawsuits,  being
commenced against the Company which will require the Company to expend resources
to defend. The plaintiff seeks to recover, on behalf of the Company, unspecified
damages  allegedly  sustained  by the  Company  as a result  of the  defendants'
alleged  breaches of fiduciary  duty,  disgorgement  of any profits derived from
their sale of the Company's  common stock, as well as other relief.  This action
had been stayed pending the outcome of the Berke action.

     As previously  disclosed,  on March 14, 1997, James P. Cassidy  commenced a
derivative suit on behalf of the Company in the United States District Court for
the District of New Hampshire  against,  among others,  certain of the Company's
officers and directors  (the  "Cassidy  Officer and Director  Defendants").  The
plaintiff  alleges  that the Cassidy  Officer and Director  Defendants  breached
their  fiduciary  duty to the  Company  and its public  shareholders  and wasted
corporate assets by making false and misleading statements of fact or concealing
material facts concerning the scope and viability of the Company's "key" patents
and its proprietary interest in its PEARL technology, and causing the Company to
issue  false and  misleading  reports  or  failure to  disclose  material  facts
including a misstatement of earnings in the Company's  financial  statements for
the year ended  December 30,  1995,  and for the first  quarter  ended March 30,
1996.  The  plaintiff  also  alleges  that  certain of the  Cassidy  Officer and
Director Defendants sold securities of the Company at inflated prices while they
were in possession of material  non-public  information  concerning the Company.
The plaintiff also alleges that the actions of the Cassidy  Officer and Director
Defendants  resulted in breaches of Sect. 10(b) and Rule 10b-5 which resulted in
other lawsuits being commenced against the


                                      F-23
<PAGE>

Company which will require the Company to expend  resources to defend,  and also
constituted  gross negligence and breaches of their  contractual  obligations to
the Company. The plaintiff seeks to recover on behalf of the Company unspecified
damages  allegedly  sustained  by the  Company  as a result  of the  defendants'
actions as alleged,  disgorgement  of any profits from the sale of the Company's
common stock,  as well as other relief against the  defendants.  By agreement of
the parties,  this action has been stayed pending the outcome of certain motions
made by the parties in the Berke action.

     As  previously  disclosed,  on  June  16,  1997,  Seena  Stevens  Silverman
commenced a purported  class action in the United States  District Court for the
District of New Hampshire  against the Company and certain of its present and/or
former officers and directors (the "Silverman Officer and Director Defendants"),
and other  parties.  The plaintiff  purports to bring this action on behalf of a
class of persons who sold put options in the common stock of the Company between
November 7, 1995 and June 20, 1996. The complaint  alleges,  among other things,
that the Company and/or the Silverman Officer and Director  Defendants  violated
Sect.  10(b) and Rule  10b-5,  and  violated  New  Hampshire  law;  and that the
Silverman  Officer and Director  Defendants  violated Sect. 20(a). The plaintiff
alleges that the defendants defrauded the putative class members by manipulating
the price and supply of the Company's common stock, issuing false and misleading
statements  regarding the nature of the Company's  proprietary PEARL technology,
failing to disclose  the true depth and target of an  investigation  by the SEC,
and making  misleading  statements  regarding the Company's  claims to its PEARL
technology and its contract with the Company's principal customer. The plaintiff
also alleges that certain of the Silverman Officer and Director  Defendants sold
securities  of the Company at inflated  prices while they were in  possession of
material non-public  information  concerning the Company. The plaintiff seeks to
recover unspecified  compensatory and punitive damages on behalf of the putative
class, as well other relief.

     To date,  the  Company  has not been  required to file its answers to these
claimants.  The Company  expects that it will file its answer to the claims this
year.

     The Company  intends to  vigorously  defend the  foregoing  investor  class
actions.  However, the outcome of any litigation is subject to uncertainty and a
successful  claim  against  the  Company  in any of such  actions  could  have a
material adverse effect on the Company. (See note 14).

12.  CREDIT FACILITIES

     In December 1998, the Company  renewed its agreement with Citizens Bank New
Hampshire  ("Citizens")  for a  revolving  line of credit  loan under  which the
Company may borrow a maximum of $10,000,000 for working capital requirements and
general corporate  purposes.  Borrowings are secured by substantially all of the
Company's  assets and are  guaranteed by the Company's  subsidiary,  Delta V and
secured by its  assets.  Interest  on the line of credit is payable at the LIBOR
rate plus 1.50% (7.12% at January 2, 1999).  The loan  agreement  terminates  on
July 31, 2000, at which date, the entire  principal and accrued  interest is due
and payable.  As of January 2, 1999 the Company had $10,000,000  available under
the line of credit loan agreement.

                                      F-24
<PAGE>

     On February 6, 1998, the Company obtained a ten-year  mortgage term loan in
the principal amount of $6,900,000 from Citizens. Borrowings are secured by land
and buildings  with a cost of  approximate  $17,000,000.  The loan 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% (7.62% at January 2, 1999) 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 shall 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 February 6, 2008.  As of January 2, 1999,  aggregate  debt
maturities  were as follows:  $522,000 in fiscal 1999;  $590,000 in fiscal 2000;
$603,000 in fiscal 2001; $648,000 in fiscal 2002; $695,000 in fiscal 2003.

     Under the terms of the  revolving  credit  agreement  and the mortgage term
loan, the Company is required to meet certain financial covenants on a quarterly
and annual basis.  At January 2, 1999, the Company was in violation of a certain
financial  covenant,  which has been waived by the bank  through  April 3, 1999.
Citizens has agreed to modify the financial covenants currently contained in the
loan agreement, through the term of the revolving line of credit loan agreement.

13.  FOURTH QUARTER ADJUSTMENTS

     The Company  recorded the following  adjustments in the fourth quarter:  an
allowance of $1,300,000  provided to a major supplier as a result of a change in
requirements;  an allowance of $1,600,000 for inventory obsolescence as a result
of the planned  introduction of the Company's next generation laser  technology;
and $2,200,000 for certain  disputed and  uncollectible  accounts related to its
Digital Imaging Products operations.

14.  SUBSEQUENT EVENT

     On March 30, 1999 the United States  District Court for the District of New
Hampshire  issued orders  dismissing  several of the claims brought  against the
Company and others in the class  action  lawsuits  referred to in Note 10 of the
financial statements.

     The Company intends to vigorously  defend the remaining claims in the class
action.  However,  the outcome of any litigation is subject to uncertainty and a
successful  claim  against  the  Company  in any of such  actions  could  have a
material adverse effect on the Company.







                                      F-25
<PAGE>


                                   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.

Dated: April 1, 1999                       By:       /s/ Robert W. Hallman 
                                                     -----------------------
                                                     Robert W. Hallman
                                                     Chief Executive Officer

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

<TABLE>
<CAPTION>
         Signature                            Title                                  Date
         ---------                            -----                                  ----
<S>                                  <C>                                         <C> 
/s/ Richard A. Williams              Chairman of the Board                       April 2, 1999
---------------------------
Richard A. Williams

/s/ Robert W. Hallman                Chief Executive Officer,                    April 2, 1999
---------------------------          President, and Director
Robert W. Hallman                    (Principal Executive Officer)

/s/ Robert Howard                    Director                                    April 2, 1999
---------------------------
Robert Howard

/s/ Dr. Lawrence Howard              Director                                    April 2, 1999
---------------------------
Dr. Lawrence Howard

/s/ Robert E. Verrando               Director                                    April 2, 1999
---------------------------
Robert E. Verrando

/s/ Harold N. Sparks                 Director                                    April 2, 1999
---------------------------
Harold N. Sparks

/s/ Bert DePamphilis                 Director                                    April 2, 1999
---------------------------
Bert DePamphilis

/s/ John W. Dreyer                   Director                                    April 2, 1999
---------------------------
John W. Dreyer

/s/ John B. Evans                    Director                                    April 2, 1999
---------------------------
John B. Evans

/s/ Neil Rossen                      Chief Financial Officer                     April 2, 1999
---------------------------          (Principal Financial and
Neil Rossen                          Accounting Officer)     
                                     
</TABLE>


                                       37
<PAGE>


<TABLE>
<CAPTION>

                                                            PRESSTEK, INC.

                                                              SCHEDULE II
                                                   VALUATION AND QUALIFYING ACCOUNTS
                                                            (In thousands)


                                                                                                       Charges         
                                             Balance at        Charged to         Charged to             Add             Balance at
  Fiscal                                     Beginning of      Costs and         Other Account         (Deduct)             End of
   Year             Description              Fiscal Year       Expenses            Describe            Describe          Fiscal Year
   -----            -----------              -----------       ---------        --------------         --------          -----------
<S>                                             <C>             <C>               <C>                  <C>                 <C>
1996           Allowance for losses on                                           
                 accounts receivable            $   80          $  115            $    --             $   (11)(1)          $  184
                                                ======          ======            =======              ======              ======
               Warranty reserve                    601             216                 --                (303)(2)             514
                                                ======          ======            =======              ======              ======
               Equipment replacement                                                                                   
                 reserve                           291              --                 --                (291)(3)              --   
                                                ======          ======            =======              ======              ======
                                                                                                                       
                                                                                                                       
1997           Allowance for losses on                                                                                 
                 accounts receivable               184           1,074                 --                (317)(1)             941
                                                ======          ======            =======              ======              ======
               Warranty reserve                    514           1,135                 --                (716)(2)             933
                                                ======          ======            =======              ======              ======
               Equipment replacement                                                                                   
                 reserve                            --              --                 --                  -- (3)              --
                                                ======          ======            =======              ======              ======
                                                                                                                       
                                                                                                                       
1998          Allowance for losses on                                                                                 
                 accounts receivable               941           5,006                169(4)          $(3,580)(1)          $2,536
                                                ======          ======            =======              ======              ======
               Warranty reserve                    933             766                 --                (632)(2)           1,067
                                                ======          ======            =======              ======              ======
               Equipment replacement                                                                                   
                 reserve                            --                                 --                     (3)
                                                ======          ======            =======              ======              ======

</TABLE>

(1)  Allowance for losses

(2)  Warranty expenditures

(3)  Equipment replacement

(4)  Heath Custom Press, Inc. acquisition


                                      FS-1