##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|   |  |                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 or
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended January 3,
    2004                                                   
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 or
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to                                                 

Commission File No. 0-17541



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Presstek, Inc.

(Exact name of registrant as specified in its
charter)


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

55 Executive Drive, Hudson, New Hampshire
03051-4903

(Address of principal executive offices
including zip code)


Registrants telephone number, including
area code:

(603) 595-7000


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

None


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

Common Stock, $.01 par value


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.          No o

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

The aggregate market value of the
registrants common stock held by non-affiliates of the
registrant as of June 28, 2003 was approximately
$189,000,000.

As of February 27, 2004, there were
34,252,425 shares of the registrants common stock
outstanding.

Documents Incorporated by Reference:

Parts of the definitive Proxy Statement (which is
expected to be filed within 120 days after the
Companys fiscal year end) for the registrants Annual
Meeting of Stockholders to be held on June 8, 2004 are
incorporated by reference into Part II and Part III of this
Form 10-K.



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TABLE OF CONTENTS



|                                                   |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                            
|                                                   | Item 1. Business                                                                             
|                                                   | Item 2. Properties                                                                           
|                                                   | Item 3. Legal Proceedings                                                                    
|                                                   | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                           
|                                                   | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                                                   | Item 6. Selected Financial Data                                                              
|                                                   | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                   | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                                                   | Item 8. Financial Statements and Supplementary Data                                          
|                                                   | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|                                                   | Item 9A. Controls and Procedures                                                             
|PART III                                          
|                                                   | Item 10. Directors and Executive Officers of the Registrant                                  
|                                                   | Item 11. Executive Compensation                                                              
|                                                   | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                                   | Item 13. Certain Relationships and Related Transactions                                      
|                                                   | Item 14. Principal Accountant Fees and Services                                              
|PART IV                                           
|                                                   | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|                                                   | Item 15(b) Reports on Form 8-K                                                               
|                                                   | Item 15(c) See Item 15(a)(3) above.                                                          
|                                                   | Item 15(d) See Item 15(a)(2) above.                                                          
|SIGNATURES                                        
|INDEX TO FINANCIAL STATEMENTS                     
|REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
|EMPLOYMENT AGREEMENT EDWARD J. MARINO             
|EMPLOYMENT AGREEMENT MOOSA E. MOOSA               
|AMENDMENT TO EMPLOYMENT AGREEMENT MOOSA E. MOOSA  
|SUBSIDIARIES                                      
|CONSENT OF BDO SEIDMAN, LLP                       
|CONSENT OF CEO                                    
|CONSENT OF CFO                                    
|CONSENT OF CEO SECTION 906                        
|CONSENT OF CFO SECTION 906                        



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PART I






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

General

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

Our patented DI thermal laser diode product
family enables customers to produce high quality, full-color
lithographic printed materials more quickly and cost effectively
than conventional methods. Pressteks patented DI, CTP and
plate products eliminate photographic darkrooms, film, and toxic
chemical processing, which results in reduced printing cycle
time and lowers the effective cost of production for commercial
printers. Presstek solutions make it easier for printers to meet
increasing customer demand for shorter print runs, faster
turnaround times and improved cost competitiveness, with an
environmentally friendly process that avoids the chemicals
associated with plate development.

Our DI technologies are marketed to leading press
manufacturers to be incorporated into their direct imaging
presses, and are also used in our Dimension® series of CTP
systems. Our patented ProFire® laser imaging system, and
our recently introduced ProFire Excel imaging system, represent
the next generation technology which can be adapted to many DI
presses and CTP devices. Pressteks Dimension CTP systems
incorporate the ProFire® system and use our chemistry free
printing plates, Applause® and Anthem®.

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

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

Business Overview

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

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

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


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

Information about our business segments, major
customers and geographic areas are included in Note 11 to the
Companys financial statements appearing elsewhere herein.

Presstek was incorporated in Delaware in 1987.
Pressteks headquarters are located at 55 Executive Drive,
Hudson, New Hampshire, 03051. Our general telephone number is
603-595-7000, and our web site can be found at
www.presstek.com.

Pressteks DI Technology

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

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

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

The ProFire Excel laser imaging system, our next
generation thermal imaging platform, is designed to bring
improved productivity, higher quality and reduced cost to DI and
thermal CTP applications. The foundation of ProFire Excel is a
single Image Data Board replacing the nine separate boards
utilized in the current version of

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ProFire. The Image Data Board controls 16-micron
diodes and features our patented Image Plus technology. Among
the advantages of Image Plus is a new imaging mode that
substantially increases image quality by reducing the spot size
from 21x22 microns to 15x16 microns. The smaller footprint and
compact design of ProFire Excel open up new options for the next
generation of direct imaging presses and CTP applications.
Products incorporating ProFire Excel are expected to be
introduced in May 2004.


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

The Dimension CTP Product Line

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

In September 2003 we introduced a new OEM
computer-to-plate imaging system, the Vector 52 thermal
platesetter. The Vector 52 is a two-page imaging device
incorporating Pressteks ProFire direct imaging technology,
designed for short-run, small format printing. With a direct
path from digital files to completed metal plates, Vectors
thermal imaging technology maximizes efficiency by eliminating
the steps, chemicals and materials associated with film-based
imaging.

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

DI and CTP Printing Plates

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

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

The Anthem plate is the first in what we believe
will be a family of plates for wet offset lithography. Anthem
plates for CTP feature Pressteks patented polymer-ceramic
technology and combine ablative imaging and chemical-free
cleaning with run lengths of up to 100,000 impressions. The
Anthem plate runs with a wide range of fountain chemistry and
inks and can be imaged on other thermal CTP systems. The product
durability is built in as part of the manufacturing process,
providing consistent performance and wide latitude.
Anthems market includes a broad base of installed
conventional wet offset presses, currently the largest segment
of the printing

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industry. We believe this wet offset plate
product has broad market potential due to the compatibility with
a wide variety of print conditions that Anthem enjoys. There can
be no assurance, however, that printers currently equipped with
conventional wet offset presses will purchase CTP systems that
use Anthem plates.


The Applause plate is a new process-free plate
product. This plate is designed for use on both on-press and
off-press applications, with run lengths up to 100,000
impressions. We believe Applause is unique in that it is a truly
no-process plate. Unlike other digital plate products, Applause
requires no intermediate steps between imaging and printing.
Other benefits of Applause include excellent ink/water latitude,
high resolution, and compatibility with the existing press
chemistries. Applause is expected to be certified for
third-party, non-proprietary thermal platesetters upon
completion of ongoing qualification testing.

The Freedom plate is the latest chemistry-free
plate product, introduced in September 2003. The unique
surface structure of the plate results in fast make-ready,
greater ink/water latitude and excellent durability. In
addition, Freedom plates accommodate a wide range of industry
standard inks and fountain solutions. Like Pressteks
Anthem plate, Freedom requires only a simple wash with water
before printing. Unlike other Presstek plate products, however,
the Freedom plate is designed as a non-ablative, short-run plate
that requires less power to image. Freedom plates deliver the
performance characteristics and stability of conventional
aluminum plates.

Presstek continues to develop thermal consumable
plate products that can be imaged by both its own DI systems as
well as high-energy laser-based CTP and other computer-to-plate
systems offered by leading manufacturers. There can be no
assurance, however, that we will be able to successfully
commercialize products that incorporate this technology.

Semiconductor Laser Diode Products

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

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

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

Manufacturing

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

Pressteks DI and CTP systems are
manufactured at our 165,000-square-foot facility located in
Hudson, New Hampshire. We use a number of outside vendors who
supply components and sub-assemblies which are integrated into
completed systems  either direct imaging systems used in
DI presses such as the Ryobi 3404DI, and the Heidelberg
Quickmaster DI, or CTP imaging systems, such as the Dimension.
These systems use semiconductor laser diode devices built to our
specifications and currently supplied by Lasertel. We believe
there are other sources available to manufacture the laser
diodes to specification, if required in the future.

Our PEARLdry Plus and Applause plate products are
also manufactured at our New Hampshire facility using equipment
that includes a thin film vacuum deposition coater, plate
converting and finishing equipment, and an atmospheric coater.
Our Anthem and Freedom thermal plates are currently manufactured
by a third party

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under a supply agreement. We may enter into
manufacturing agreements with other third parties as we
vertically integrate the manufacturing of our digital plate
products. We believe there currently are other sources available
to manufacture these consumable products.


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

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

Marketing, Distribution and Customer
Support

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

For our direct distribution strategy, we have
established a worldwide distribution network through which we
market and sell CTP equipment and PEARLdry Plus, Applause and
Anthem thermal plate products. The network currently includes
over 30 independent graphic arts dealers in 18 countries,
including two national distributors, the Pitman Company and
xpedx Graphic Systems, and several regional dealers in the
United States. To supplement our direct distribution partners we
also market and sell DI consumable products through our
Presstek.com web site.

We also have OEM agreements or reseller
relationships with Ryobi Limited (Ryobi), Koenig
& Bauer, AG (KBA) and Kodak Polychrome Graphics
(KPG) with respect to the Ryobi 3404DI, the 46
Karat, the KPG DirectPress 5034 DI, and related consumables,
respectively. These agreements permit the OEM resellers and
their dealers to sell DI-based equipment and consumable products
under their own labels. We also have an OEM agreement with A.B.
Dick and its dealers to market and sell the Vector 52
platesetter and the Freedom plate under its own label. In
March 2003, we agreed with Xerox Corporation
(Xerox) to terminate our distribution agreement with
respect to its DocuColor DI presses and related consumables. We
continue to provide consumables and make service available
through our distribution channel for the current installed base
of Xerox DocuColor DI presses.

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

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

Business Strategy and Strategic
Relationships

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

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

Presstek and KBA, an international supplier of
printing presses of Germany, have an agreement under which KBA
markets and sells the 46 Karat press, an A3 format size
four-color sheet-fed DI press, in certain geographic markets.
The 46 Karat delivers fully automated plate advancing, imaging,
ink presetting, and printing, using PEARLdry Plus spooled
plates. KBA also manufactures and markets a digital offset
press, the 74 Karat, which uses Pressteks direct imaging
and PEARLdry plates, and related intellectual property under
license. PEARLdry Plus plates for the 46 Karat are marketed
directly by KBA and through Pressteks European distributor
network.

We also developed a long-term relationship with
Heidelberger Druckmaschinen AG (Heidelberg), one of
the worlds largest manufacturers of printing presses and
printing equipment, based in Germany. This relationship was
formalized with the signing of a Master Agreement, Supply
Agreement, and a Technology License (the Heidelberg
Agreements) in January 1991, which covered the
integration of the DI technology into various presses
manufactured by Heidelberg. Under the Heidelberg Agreements,
Heidelberg is required to pay royalties to Presstek based on the
net sales prices of various specified types of Heidelberg
presses on which our DI technology is used. The manufacture of
components, at specified rates, for these presses and the
commercialization of such presses are also covered by the
Heidelberg Agreements. Heidelberg also has been provided with
certain rights for use of the DI technology for the Quickmaster
DI format size press. The Heidelberg Agreements expire in
December 2011, subject to certain early termination and
extension provisions.

In July 2003, we entered into OEM
consumables supply agreements with Heidelberg and Heidelberg USA
that provide us with certain preferred supplier rights, which
vary based on territory, time period and sales volume. Under the
terms of the OEM agreements, which include minimum volume
commitments from Heidelberg and Heidelberg USA, we will
manufacture and supply Heidelberg branded consumable plate
products for the Heidelberg Quickmaster DI press. Shipments to
Heidelberg of the branded consumable product began in
August 2003.

While our alliance with Heidelberg has been an
important one, there are substantial risks associated with this
relationship. Unlike our distribution relationships with
companies such as Ryobi, we have no distribution rights to the
Quickmaster DI, and must rely on Heidelberg to sell this press.
We currently have no orders from Heidelberg for direct imaging
kits used in the Quickmaster DI. Heidelberg has indicated, as a
result of the global economic slowdown, that it has an inventory
of direct imaging kits on hand to support its production
requirements for six months. We believe that orders for direct
imaging kits could resume sometime late in fiscal 2004, however,
there can be no assurance that any orders will be received.
Sales to Heidelberg and its distributors represented
approximately 21%, 36%, and 42% of revenue for fiscal 2003, 2002
and 2001 respectively. As a result of our expanded strategic
partnerships and distribution channels, our sales to Heidelberg
comprise a less significant share of total sales for fiscal
2003. The loss of Heidelberg as a customer, however, would have
a material adverse effect on our business, results of operations
and financial condition.

We also have an agreement with Kodak-Polychrome
Graphics (KPG), a leading supplier of digital,
conventional and business solutions for the graphic arts
industry, granting KPG certain rights to market, sell and
service a direct digital imaging press and related consumables
in the United States and Canada. The KPG DirectPress 5034 DI
solution is a two-page, four-color Ryobi platform DI press which
is enabled by Pressteks ProFire imaging and thermal plate
technology. This new highly automated DI solution is
manufactured to KPG specifications and is designed to provide
high quality offset printing.

We entered into an agreement in
September 2003 with A.B. Dick Company (A.B.
Dick), a leading worldwide supplier of equipment and
supplies for document creation to the graphic arts and printing
industry, to provide a new OEM computer-to-plate system to A.B.
Dick. The new system includes the new two-page Vector
platesetter, which is manufactured by Presstek and incorporates
Pressteks digital imaging technology, and the

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new chemistry-free Freedom plate. This new CTP
system will bring the benefits of chemistry-free metal-based CTP
to the instant and small commercial printer in the two-page and
duplicator market, which has, until now, been primarily using
chemically developed polyester plates and traditional metal
plate solutions.


Presstek and Xerox entered into a supply and
distribution agreement in 2000 to supply a series of three
Presstek enabled DI presses and related consumables. The Xerox
agreement covered four and five color versions of a B3 format
sheet-fed press, and an A3 format size four-color sheet-fed
press marketed by Xerox as the DocuColor DI presses. In
March 2003, Presstek and Xerox terminated their supply and
distribution agreement for these presses. Presstek continues to
provide consumables and make service available for the current
installed base of Xerox DocuColor DI presses. The revenue
generated from the sale of these presses was not material in
fiscal 2002 or fiscal 2003, and as a result, the termination of
this agreement is not expected to have a material adverse effect
on our business, results of operations and financial condition.

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

Competition

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

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

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

We anticipate competition from printing plate
companies that manufacture, or have the potential to manufacture
digital thermal plates. Such companies include, among others,
Agfa-Gevaert N.V., KPG, and Fuji Photo Film Co., Ltd. Heidelberg
is marketing a competitive plate product as an alternative to
Pressteks PEARLdry for the Quickmaster DI. The
introduction of a competitive plate could reduce the revenue
generated by Presstek under its agreements with Heidelberg,
including the OEM consumables supply agreements entered into in
July 2003. It could also lead to downward pricing pressure
on our full line of spooled consumable products, which could
have a material adverse effect on our business, results of
operations and financial condition.

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

7



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##### Table of Contents



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

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

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

Patents, Trademarks and Proprietary
Rights

As of January 3, 2004, Presstek and its
subsidiaries have in force 120 U.S. patents, (including 4 design
patents), 185 foreign patents (including 20 design patents), and
had received notices of allowance for 20 additional patents
(consisting of 3 U.S. and 17 foreign patents). These patents,
which expire from 2008 through 2023, are all believed to be
material to our business. We have applied for and are pursuing
applications for 9 additional U.S. patents and 57 foreign
patents. We have registered, or applied to register, certain
trademarks in the US and other countries, including Presstek,
DI, Dimension, ProFire, Anthem, Applause, and PEARLdry. We
anticipate that we will apply for additional patents,
trademarks, and copyrights, as deemed appropriate. There can be
no assurance as to the issuance of any such patents or
trademarks or the breadth or degree of protection that our
patents, trademarks or copyrights may afford us.

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

In September 2003, Presstek filed an action
against Fuji Photo Film Corporation, Ltd., in the District Court
of Mannheim, Germany for patent infringement. In this action,
Presstek alleges that Fuji has manufactured and distributed a
product that violates a Presstek European Patent. Presstek seeks
an order from the court that Fuji refrain from offering the
infringing product for sale, from using the infringing material
or introducing it for the named purposes, or from possessing
such infringing material.

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

8



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##### Table of Contents



Research and Development

Research and product development expenses,
related to our continued development of products incorporating
DI technologies, including our semiconductor laser diodes, were
$7.1 million, $9.3 million and $11.7 million in
fiscal 2003, 2002 and 2001 respectively. These research and
development expenditures are primarily related to the Digital
Imaging Products segment.

Backlog

As of February 27, 2004, Presstek and
Lasertel had a backlog of products and royalties under contract
aggregating approximately $12.6 million compared to a
backlog of approximately $11.3 million as of March 21,
2003. Substantially all backlog of products as of
February 27, 2004 is expected to ship in 2004.

Employees

As of February 27, 2004, Presstek and its
Lasertel subsidiary had 230 employees. Of these 230 employees,
25 are engaged primarily in engineering, research and
development; 56 are engaged in sales, marketing and customer
support; 115 are engaged primarily in manufacturing,
manufacturing engineering and quality control; and 34 are
engaged primarily in corporate management, administration and
finance. None of our employees is represented by a labor union.
We consider the relationship with our employees to be good.

Investor Information

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

Glossary

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



|                        |  |                                                                                                                                                                       
|----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A1 (8-page)             |  | a printing term referring to a standard paper
    size capable of printing eight 8.5 x 11 pages on a
    sheet of paper                                             
|                       
|A2 (4-page)             |  | a printing term referring to a standard paper
    size capable of printing four 8.5 x 11 pages on a
    sheet of paper                                              
|                       
|A3/ B3 (2-page)         |  | a printing term referring to a standard paper
    size capable of printing two 8.5 x 11 pages on a
    sheet of paper                                               
|                       
|Ablation                |  | a controlled detachment/vaporization caused by a
    thermal event, this process is used during the imaging of
    Pressteks PEARL and Anthem consumables            
|                       
|Anthem®                 |  | Pressteks line of wet offset digital plates
    with a unique polymer-ceramic construction                                                                           
|                       
|Applause                |  | Pressteks new process-free wet offset
    digital plate                                                                                                              
|                       
|Computer-to-plate (CTP) |  | a general term referring to the exposure of
    lithographic plate material from a digital database, off-press                                                        
|                       
|Direct Imaging (DI®)    |  | Pressteks registered trademark for digital
    imaging systems that allow image carriers (film and plates) to
    be imaged from a digital database, on and off-press
|                       
|Dots per inch (dpi)     |  | a measurement of the resolving power or the
    addressability of an imaging device                                                                                   

9



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|                                           |  |                                                                                                                                                                                                                                                             
|------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Heidelberg                                 |  | Heidelberger Druckmaschinen AG, one of the
    worlds largest printing press manufacturers, headquartered
    in Heidelberg, Germany                                                                                                                       
|                                          
|Infrared                                   |  | light lying outside of the visible spectrum
    beyond its red-end, characterized by longer wavelengths; used in
    our thermal imaging process                                                                                                            
|                                          
|KBA                                        |  | Koenig & Bauer, AG, one of the worlds
    largest printing press manufacturers, headquartered in Wurzburg,
    Germany                                                                                                                                     
|                                          
|KPG                                        |  | Kodak Polychrome Graphics, a leading supplier of
    digital, conventional and business solutions for the graphic
    arts industry, headquartered in Norwalk, Connecticut                                                                                  
|                                          
|Lithography                                |  | printing from a single plane surface under the
    principle that the image area carries ink and the non-image area
    does not, and that ink and water do not mix                                                                                         
|                                          
|Off-press                                  |  | making a printing plate from either an analog or
    digital source independent of the press on which it will be used                                                                                                                                       
|                                          
|On-press                                   |  | the use of Pressteks direct imaging
    technologies to make a plate directly from a digital file on the
    press                                                                                                                                         
|                                          
|PEARL®                                     |  | the name associated with Pressteks first
    generation laser imaging technologies and related products and
    consumables                                                                                                                                
|                                          
|ProFire® and ProFire Excel imaging systems |  | the Presstek components required to convert a
    conventional printing press into a direct imaging press,
    including laser diode arrays, computers, electronics                                                                                         
|                                          
|Dimension®                                 |  | Pressteks product line of CTP off-press
    platemaking equipment                                                                                                                                                                                          
|                                          
|Platemaking                                |  | the process of applying a printable image to a
    printing plate                                                                                                                                                                                           
|                                          
|Prepress                                   |  | graphic arts operations and methodologies that
    occur prior to the printing process; typically these include
    photography, scanning, image assembly, color correction,
    exposure of image carriers (film and/or plate), proofing and
    processing
|                                          
|Quickmaster DI                             |  | the second generation of direct imaging,
    waterless presses, highly automated with roll-fed PEARLdry Plus
    plate material, a joint development effort between Heidelberg
    and Presstek                                                             
|                                          
|Ryobi                                      |  | Ryobi Limited of Japan, a printing press
    manufacturer headquartered in Japan.                                                                                                                                                                           
|                                          
|Ryobi 3404DI                               |  | an A3 format size four-color sheet-fed press,
    incorporating Pressteks dual plate cylinder concept and
    PEARLdry Plus spooled plates, a joint development effort between
    Ryobi and Presstek                                                      
|                                          
|Semiconductor laser diode                  |  | a high-powered, infrared imaging technology
    employed in the DI imaging systems                                                                                                                                                                          
|                                          
|Short-run markets/printing                 |  | a graphic arts classification used to denote an
    emerging trend for lower print quantities                                                                                                                                                               
|                                          
|Thermal                                    |  | a method of digitally exposing a material via the
    heat generated from a laser beam                                                                                                                                                                      

10



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






|        |           
|------- | ----------
|Item 2. | Properties

Pressteks operations are conducted
primarily in two locations.

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

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

These properties are secured by a five-year
credit facility totaling $50.0 million. These properties were
built for an aggregate cost of approximately $25.6 million.

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






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

In September 2003, Presstek filed an action
against Fuji Photo Film Corporation, Ltd., in the District Court
of Mannheim, Germany for patent infringement. In this action,
Presstek alleges that Fuji has manufactured and distributed a
product that violates Presstek European Patent 0 644 047
registered under number DE 694 17 129 with the German Patent and
Trademark Office. Presstek seeks an order from the court that
Fuji refrain from offering the infringing product for sale, from
using the infringing material or introducing it for the named
purposes, or from possessing such infringing material.

In August 2003, the Company was served with a
purported securities class action lawsuit filed on June 2,
2003 in the United States District Court for the Districts of
New Hampshire against the Company and two of its former
officers, captioned James B. Zouras v. Robert W. Hallman,
et. al.  (Civ. Action No. 3-240 M). On December 15,
2003, an amended class action complaint (the
Complaint), which superseded the original complaint,
was filed with the court. The Complaint is captioned In re
Presstek, Inc. Securities Litigation (Civ. Action No.
3-240 M) and names as defendants the Company and two of its
former officers. The Complaint, which seeks unspecified damages,
allegedly was filed on behalf of all purchasers of the
Companys common stock during the period December 10,
1999 to August 7, 2001 and generally alleges, among other
things, that during such period, the defendants made
misstatements and omissions to the investing public relating to
an arbitration proceeding commenced in 1999 and concluded in
2001 with one of the Companys customers, and also relating
to production issues and projected sales of certain of the
Companys products. Presstek, along with the other named
defendants, has filed a motion to dismiss the litigation in its
entirety, which is currently pending with the court. Although
the Company believes this matter lacks merit and intends to
vigorously defend against it, the litigation process is
inherently uncertain and there can be no guarantee as to the
ultimate outcome of this matter.

In December 1999, PPG, Inc. brought suit
against Delta V Technologies, Inc. (Delta V), a
subsidiary of the Company, and Presstek. The suit alleged that
Delta V sold to PPG certain vacuum coating equipment that did
not meet certain product specifications. PPG sought damages in
excess of $7.0 million. PPG sought to hold Presstek liable
for the alleged breach of contract by its subsidiary, Delta V,
on a theory of indirect liability. Presstek and Delta V answered
PPGs complaint. Delta V asserted a counterclaim against
PPG for PPGs failure to make the final installment payment
in excess of $400,000 for Delta Vs work. In
November 2002, the U.S.

11



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##### Table of Contents



District Court granted summary judgment in favor
of Presstek, because, as a matter of law, PPG was unable to
demonstrate any grounds upon which to hold Presstek liable for
any alleged breach of contract by Delta V. In August 2003,
PPG and Delta V reached a settlement in this matter and the suit
was dismissed with prejudice.







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

Not Applicable




PART II






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

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

|                                  |  |      |      |     |  |   |      | 
|--------------------------------- |  | ---- | ---- | --- |  | - | ---- | 
|Fiscal Year Ended January 3, 2004 |  | High |      | Low
|                                  |  |      |      |    
|First quarter                     |  | $    | 5.72 |     |  | $ | 4.15 | 
|Second quarter                    |  |      | 6.75 |     |  |   | 4.20 | 
|Third quarter                     |  |      | 8.78 |     |  |   | 5.86 | 
|Fourth quarter                    |  |      | 8.46 |     |  |   | 7.02 | 

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

On February 27, 2004 there were 2,898
holders of record of our common stock. The closing price of our
common stock was $10.16 per share on February 27, 2004.

Dividend Policy

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

Securities Authorized for Issuance Under
Equity Compensation Plans

We also have securities authorized for issuance
under equity compensation plans. Information concerning
securities authorized for issuance under our equity compensation
plans will be set forth under the caption Equity
Compensation Plan Information in our definitive proxy that
we expect to file with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended
January 3, 2004, and such information is incorporated
herein by reference.






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

The following selected financial data of the
Company has been derived from the financial statements of the
Company, appearing elsewhere herein (except for the statements
of operations data for the fiscal years ended December 30,
2000 and January 1, 2000 and the balance sheet data at
December 29, 2001, December 30, 2000 and January 1,
2000, which are not included in such financial statements).

12



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##### Table of Contents



SELECTED FINANCIAL DATA

Statements of Operations

(In thousands, except per share data)


|                                                                 |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |        |  
|---------------------------------------------------------------- | ---------------------------------------------------------- | -------------------------- | ------ | ------- | - | ------- | ------ | ------- | - | ------ | ------- | ------ | - | - | ------ | ------ | - | - | ------- | ------ | -
|                                                                 |                                                            |                           
|                                                                 |                                                            | For the Fiscal Years Ended
|                                                                 |                                                            |                           
|                                                                 |                                                            | Jan 3,                     |        | Dec 28, |   | Dec 29, |        | Dec 30, |   | Jan 1,
|                                                                 |                                                            | 2004                       |        | 2002    |   | 2001    |        | 2000    |   | 2000  
|                                                                 |                                                            |                            |        |         |   |         |        |         |   |       
|Revenue:                                                         |                                                            | $                          | 87,232 |         |   | $       | 83,453 |         |   | $      | 102,303 |        |   | $ | 87,294 |        |   | $ | 54,964  |       
|                                                                 |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       
|Costs and Expenses:                                              |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       
|                                                                 | Cost of products sold (1)                                  |                            |        | 51,151  |   |         |        | 54,639  |   |        |         | 64,395 |   |   |        | 46,747 |   |   |         | 33,326 |  
|                                                                 | Research and product development                           |                            |        | 7,061   |   |         |        | 9,303   |   |        |         | 11,719 |   |   |        | 15,897 |   |   |         | 17,190 |  
|                                                                 | Sales, marketing and customer support                      |                            |        | 12,272  |   |         |        | 10,767  |   |        |         | 13,311 |   |   |        | 9,856  |   |   |         | 6,139  |  
|                                                                 | General and administrative (2)                             |                            |        | 9,363   |   |         |        | 10,212  |   |        |         | 15,495 |   |   |        | 9,392  |   |   |         | 6,282  |  
|                                                                 | Special charges (1)                                        |                            |        | 550     |   |         |        | 5,961   |   |        |         |       |   |   |        |       |   |   |         |       |  
|                                                                 | Provision for settlement of shareholder
    litigation (3) |                            |        |        |   |         |        |        |   |        |         |       |   |   |        |       |   |   |         | 23,200 |  
|                                                                 |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       
|Total costs and expenses                                         |                                                            |                            | 80,397 |         |   |         | 90,882 |         |   |        | 104,920 |        |   |   | 81,892 |        |   |   | 86,137  |       
|                                                                 |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       
|Income Loss From Operations                                      |                                                            |                            | 6,835  |         |   |         | (7,429 | )       |   |        | (2,617  | )      |   |   | 5,402  |        |   |   | (31,173 | )     
|                                                                 |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       
|Other Income (Expense):                                          |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       
|                                                                 | Interest, net                                              |                            |        | (376    | ) |         |        | (872    | ) |        |         | (1,136 | ) |   |        | (99    | ) |   |         | 501    |  
|                                                                 | Other, net                                                 |                            |        | 209     |   |         |        | 21      |   |        |         | (63    | ) |   |        | 147    |   |   |         | 38     |  
|                                                                 |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       
|Other income (expense), net                                      |                                                            |                            | (167   | )       |   |         | (851   | )       |   |        | (1,199  | )      |   |   | 48     |        |   |   | 539     |       
|                                                                 |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       
|Income (Loss) From Continuing Operations
    Before Income Taxes |                                                            |                            | 6,668  |         |   |         | (8,280 | )       |   |        | (3,816  | )      |   |   | 5,450  |        |   |   | (30,634 | )     
|Provision for Income Taxes                                       |                                                            |                            |       |         |   |         |       |         |   |        |        |        |   |   | 150    |        |   |   |        |       
|                                                                 |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       
|Income (Loss) From
    Continuing Operations                     |                                                            |                            | 6,668  |         |   |         | (8,280 | )       |   |        | (3,816  | )      |   |   | 5,300  |        |   |   | (30,634 | )     
|Discontinued Operations:(4)                                      |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       
|                                                                 | Income (loss) from
    discontinued Operations             |                            |        | 1,429   |   |         |        |        |   |        |         |       |   |   |        | 600    |   |   |         | (448   | )
|                                                                 | Loss on disposal of discontinued Operations                |                            |        |        |   |         |        |        |   |        |         |       |   |   |        |       |   |   |         | (8,534 | )
|                                                                 |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       
|Income (Loss) From
    Discontinued Operations                   |                                                            |                            | 1,429  |         |   |         |       |         |   |        |        |        |   |   | 600    |        |   |   | (8,982  | )     
|                                                                 |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       
|Net Income (Loss)                                                |                                                            | $                          | 8,097  |         |   | $       | (8,280 | )       |   | $      | (3,816  | )      |   | $ | 5,900  |        |   | $ | (39,616 | )     
|                                                                 |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       
|Earnings (Loss) Per Share 
    Basic:                           |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       
|                                                                 | From continuing operations                                 |                            | $      | 0.20    |   |         | $      | (0.24   | ) |        | $       | (0.11  | ) |   | $      | 0.16   |   |   | $       | (0.95  | )
|                                                                 | From discontinued operations                               |                            | $      | 0.04    |   |         | $      | 0.00    |   |        | $       | 0.00   |   |   | $      | 0.02   |   |   | $       | (0.28  | )
|                                                                 |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       
|Earnings (Loss) Per Share
     Basic                            |                                                            | $                          | 0.24   |         |   | $       | (0.24  | )       |   | $      | (0.11   | )      |   | $ | 0.18   |        |   | $ | (1.23   | )     
|                                                                 |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       
|Earnings (Loss) Per Share 
    Diluted:                         |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       
|                                                                 | From continuing operations                                 |                            | $      | 0.20    |   |         | $      | (0.24   | ) |        | $       | (0.11  | ) |   | $      | 0.15   |   |   | $       | (0.95  | )
|                                                                 | From discontinued operations                               |                            | $      | 0.04    |   |         | $      | 0.00    |   |        | $       | 0.00   |   |   | $      | 0.02   |   |   | $       | (0.28  | )
|                                                                 |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       
|Earnings (Loss) Per Share
     Diluted                          |                                                            | $                          | 0.24   |         |   | $       | (0.24  | )       |   | $      | (0.11   | )      |   | $ | 0.17   |        |   | $ | (1.23   | )     
|                                                                 |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       
|Weighted Average Common Shares                                   |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       
|                                                                 | Outstanding  Basic                                        |                            |        | 34,167  |   |         |        | 34,124  |   |        |         | 34,096 |   |   |        | 32,826 |   |   |         | 32,336 |  
|                                                                 |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       
|Weighted Average Common Shares                                   |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       
|                                                                 | Outstanding  Diluted                                      |                            |        | 34,400  |   |         |        | 34,124  |   |        |         | 34,096 |   |   |        | 35,320 |   |   |         | 32,336 |  
|                                                                 |                                                            |                            |        |         |   |         |        |         |   |        |         |        |   |   |        |        |   |   |         |       

|                                             |  |        |         |         |  |         |         |         |  |        |         |  |  |   |         |  |  |   |        | 
|-------------------------------------------- |  | ------ | ------- | ------- |  | ------- | ------- | ------- |  | ------ | ------- |  |  | - | ------- |  |  | - | ------ | 
|                                             |  | Jan 3, |         | Dec 28, |  | Dec 29, |         | Dec 30, |  | Jan 1,
|                                             |  | 2004   |         | 2002    |  | 2001    |         | 2000    |  | 2000  
|Balance Sheet Data as of:                    |  |        |         |         |  |         |         |         |  |       
|(In thousands)                               |  |        |         |         |  |         |         |         |  |       
|Working capital                              |  | $      | 42,512  |         |  | $       | 28,572  |         |  | $      | 26,741  |  |  | $ | 32,287  |  |  | $ | 25,373 | 
|Total assets                                 |  |        | 106,528 |         |  |         | 101,796 |         |  |        | 106,844 |  |  |   | 115,902 |  |  |   | 94,633 | 
|Long-term debt, including short-term portion |  |        | 14,464  |         |  |         | 16,707  |         |  |        | 16,398  |  |  |   | 18,470  |  |  |   | 9,854  | 
|Other long-term liabilities (3)              |  |        |        |         |  |         |        |         |  |        |        |  |  |   |        |  |  |   | 22,950 | 
|Stockholders equity                         |  |        | 80,183  |         |  |         | 71,766  |         |  |        | 79,985  |  |  |   | 83,143  |  |  |   | 49,855 | 



---

|    |                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Relates to repositioning activities and workforce
    reductions recorded in June 2002 and in May 2003.
    Included in 2002 was $3.7 million in cost of sales for
    inventory write-downs and other charges related to discontinued
    programs.



|    |                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Includes a $2.1 million write-off recorded
    in fiscal 2001 for pre-payments made as a result of a
    suppliers bankruptcy petition in 2002.                                     
|   
|(3) | Provision for the settlements with the plaintiffs
    in the class actions and related derivative suits filed in 1996.                                                               
|   
|(4) | Relates to the operations of Delta V
    Technologies, Inc., which were shutdown in fiscal 1999. See Note
    2 to the companys financial statements appearing elsewhere
    herein.

13



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##### Table of Contents








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

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

Overview

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

Our patented DI thermal laser diode product
family enables customers to produce high quality, full-color
lithographic printed materials more quickly and cost effectively
than conventional methods. Pressteks patented DI, CTP and
plate products eliminate photographic darkrooms, film, and toxic
chemical processing, which results in reduced printing cycle
time, lowers the effective cost of production for commercial
printers. Presstek solutions make it easier for printers to meet
increasing customer demand for shorter print runs, faster
turnaround times and improved cost competitiveness, with an
environmentally friendly process that avoids the chemicals
associated with plate development.

Our DI technologies are marketed to leading press
manufacturers to be incorporated into their direct imaging
presses, and used in our Dimension® series of CTP systems.
Our patented ProFire® laser imaging system, and our
recently introduced ProFire Excel imaging system, represent the
next generation technology which can be adapted to many DI
presses and CTP devices. Pressteks Dimension CTP systems
incorporate the ProFire® system and use our chemistry-free
printing plates, Applause® and Anthem®.

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

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

We generate revenue through four main sources:
the sale of our equipment, including DI presses, CTP devices,
and imaging kits incorporated by leading press manufacturers
into direct imaging presses for the graphic arts industry; the
sale of high-powered laser diodes for the industrial and defense
industries; the sale of our proprietary consumables; and license
agreements with manufacturers that incorporate our technology
into their products. Our business strategy is centered on
maximizing the sale of consumable products, and therefore our
business efforts focus on the sale of consumable burning
engines such as our DI presses and CTP devices. We rely on
partnerships with press manufacturers such as Ryobi, Heidelberg
and KBA to manufacture presses that use our proprietary
consumables. We also rely on distribution partners, such as KPG
and A.B. Dick, to sell and distribute press and CTP systems and
the related proprietary consumable products.

Historically we have been reliant on Heidelberg
for a material share of our revenue. In fiscal 2002, we
initiated a process to evaluate our resources and strategically
re-focus the business. During this re-alignment, we

14



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concluded to reposition and rescale our
resources, and implemented cost savings programs in fiscal 2002
and 2003 to return to profitability. We expanded our strategic
relationships with other press manufacturers and distributors
such as Ryobi, KBA, and KPG to develop and distribute presses
that incorporate our imaging technology and use our proprietary
consumables, so as to lessen our reliance on any one partner. We
established a relationship with A.B. Dick to sell Presstek CTP
devices and consumables under their brand name. We are working
with other CTP manufacturers to qualify our consumables on their
systems. We believe this shift in strategy fundamentally
enhances Pressteks ability to expand and control its
business.


Our revenue for fiscal 2003 was negatively
impacted by the continued global economic slowdown, and
specifically by the weakness in the graphic arts industry. This
economic slowdown has led to a reduction in spending for capital
equipment, such as presses and CTP systems that utilize DI
technology. In addition, revenue from our Quickmaster DI
platform decreased by $10.8 million in 2003 as a result of
equipment and consumable inventory adjustments made by
Heidelberg. Offsetting this revenue decline was an increase in
revenue of $12.5 million in 2003 from Pressteks new
technology business, which consists of all product lines not
related to the Quickmaster DI platform.

We operate and report on a 52- or 53-week fiscal
year, ending on the Saturday closest to December 31.
Accordingly, the financial statements include the 53-week fiscal
year ended January 3, 2004 (fiscal 2003), and
the 52-week fiscal years ended December 28, 2002
(fiscal 2002) and December 29, 2001
(fiscal 2001).

RESULTS OF OPERATIONS



| |                                   
| | ----------------------------------
| | Fiscal 2003 versus Fiscal
    2002

Revenue

Revenue for fiscal 2003 of $87.2 million
consisted of product sales, customer support revenue, royalties
and license fees. Revenue for fiscal 2003 increased
$3.8 million or 5% as compared to $83.5 million for
fiscal 2002.

Product sales for the Digital Imaging Products
segment, including equipment and consumables, were
$82.8 million for fiscal 2003, an increase of
$3.9 million or 5%, as compared to $79.0 million for
fiscal 2002. This increase in product sales was due primarily to
volume increases in our CTP Dimension products and press
products. These increases were partially offset by volume
decreases of direct imaging kits sold to Heidelberg for use in
the Quickmaster DI and decreased press shipments to Xerox, as
well as volume decreases in the sale of our consumable products.

The revenue generated from the sale of consumable
products was $51.8 million for fiscal 2003, a decrease of
$1.4 million or 3%, as compared to $53.2 million for
fiscal 2002. This decrease in revenue from consumables is
primarily the result of volume decreases of our Quickmaster DI
consumables, as well as price reductions on sales of these
consumables through select dealers in our European distribution
channel. Consumable product revenue includes sales under the
Companys agreements with Heidelberg and its distributors
of $15.7 million and $21.8 million for fiscal 2003 and
2002, respectively.

Revenue generated from services related to
customer support, including installation and service contract
revenue, was $2.0 million or 2% of revenue for fiscal 2003,
an increase of $371,000, as compared to $1.6 million or 2%
of revenue for fiscal 2002. This increase is due primarily to an
increase in the sale of service maintenance agreements related
to our CTP Dimension products.

Royalties and license fees for fiscal 2003 were
$2.7 million, a decrease of $1.8 million or 40%, as
compared to royalties and license fees of $4.5 million for
fiscal 2002, primarily as a result of decreased shipments to
Heidelberg of direct imaging kits used in the Quickmaster DI.
Heidelberg has indicated, that as a result of the global
economic slowdown, it has an inventory of direct imaging kits on
hand to support its production requirements. We currently
believe that orders from Heidelberg for direct imaging kits will
resume sometime late in fiscal 2004, however, there can be no
assurance that any orders will be received at this time.

Revenue generated under the Companys
agreements with Heidelberg and its distributors was
$18.3 million for fiscal 2003, a decrease of
$11.9 million or 39%, as compared to $30.2 million for
fiscal 2002. Revenue from Heidelberg represented 21% and 36% of
total revenue for fiscal 2003 and 2002, respectively.

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Revenue generated under the Companys
agreements with KBA and its distributors was $9.0 million
for fiscal 2003, an increase of $5.6 million or 165%, as
compared to $3.4 million for fiscal 2002. Revenue from KBA
represented 10% and 4% of total revenue for fiscal 2003 and
2002, respectively. These increases are primarily the result of
increased [press] sales to KBA.

In July 2003, we entered into OEM consumable
supply agreements with Heidelberg and Heidelberg USA that
provide us with certain preferred supplier rights, which vary
based on territory, time period and sales volume. Under the
terms of the OEM agreements, which include minimum volume
commitments from Heidelberg and Heidelberg USA, we will
manufacture and supply Heidelberg branded consumable plate
products for the Heidelberg Quickmaster DI press. Shipments to
Heidelberg of the branded consumable product began in
August 2003.

We currently have no orders from Heidelberg for
direct imaging kits used in the Quickmaster DI. Heidelberg has
indicated, that as a result of the global economic slowdown, it
has an inventory of direct imaging kits on hand to support its
production requirements for six months. We believe that orders
for direct imaging kits will resume sometime late in fiscal
2004, however, there can be no assurance that any orders will be
received.

In March 2003, we expanded the product
offerings to select dealers in our European distribution channel
to include the sale of Quickmaster DI consumables. In connection
with this offering, we reduced pricing on our full line of
spooled consumables distributed through this distribution
channel by up to 20%. While the expected lost revenue resulting
from the price reduction may be offset by increased revenue from
increased volume of spooled consumable sales derived from
additional presses installed and increased usage of spooled
consumables, there can be no assurance that this expected lost
revenue will be offset. In addition, market conditions may
require us to expand the regions in which we offer reduced
prices, or to further reduce our spooled consumable prices,
which could further reduce our revenues in 2004 and beyond. This
could have a material adverse effect on our business, results of
operations and financial position.

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

Revenue for the Lasertel segment was
$1.7 million for fiscal 2003, and primarily related to the
sale of products for defense industry applications. Product
sales to external customers for fiscal 2002 were not material.

Cost
of Products Sold

Cost of products sold consists of the costs of
material, labor and overhead, shipping and handling costs and
warranty expenses. Cost of products sold for the Digital Imaging
Products segment was $48.2 million or 56% of revenue for
fiscal 2003, a decrease of $708,000 or 1% as compared to $48.9
million or 59% of revenue for fiscal 2002. Included in cost of
products sold for the Digital Imaging Products segment for
fiscal 2002 was a charge of $3.0 million, $2.0 million for
inventory write-downs and $1.0 million for other charges
associated with discontinued programs recorded in fiscal 2002 as
part of the 2002 restructuring.

Gross margin as a percentage of total revenue for
the Digital Imaging Products segment was 44% for fiscal 2003, as
compared to 41% for fiscal 2002. The gross margin increase for
fiscal 2003 was primarily the result of a decrease in inventory
write-downs and other charges associated with discontinued
programs, and reduced warranty costs. In fiscal 2003 and 2002,
we recorded net warranty costs of $1.2 million and
$1.9 million, respectively, primarily related to the
Dimension platesetter product. Also in fiscal 2002, gross margin
was

16



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##### Table of Contents



unfavorably impacted by the charge related to
inventory write-downs and other charges for discontinued
programs noted above.


Cost of products sold for the Lasertel segment
was $3.0 million for fiscal 2003, a decrease of
$2.8 million or 48%, as compared to $5.8 million for
fiscal 2002. The decrease in manufacturing costs was primarily
the result of yield improvements in 2003, as well as a reduction
in inventory write-downs for discontinued programs as a result
of a $688,000 charge recorded in the second quarter of fiscal
2002.

Research
and Product Development

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

Research and product development expenses for the
Digital Imaging Products segment were $6.3 million or 7% of
revenue, a decrease of $2.8 million, as compared to
$9.1 million or 11% of revenue for fiscal 2002. This
decrease relates primarily to a reduction in the number of
development programs which resulted in reduced expenditures in
salaries and benefits, parts and supplies, and professional and
contractor services. Pressteks product development cycle
centers around major industry trade shows, and as a result, our
research and product development expenses vary in accordance
with our product development cycle.

Research and product development expenses for the
Lasertel segment were $801,000 for fiscal 2003, an increase of
$591,000, as compared to $210,000 for fiscal 2002. This increase
relates primarily to additional research and product development
activities undertaken in the industrial markets.

Sales,
Marketing and Customer Support

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

Sales, marketing and customer support expenses
for the Digital Imaging Products segment were $11.9 million
or 14% of revenue for fiscal 2003, an increase of
$1.4 million, as compared to $10.6 million, or 13% of
fiscal 2002 revenue. This increase is primarily the result of an
increase in salaries and related benefits, as well as
professional fees associated with promotional activities
directed at product distribution, offset in part by reduced
travel and related expenses for customer support activities.

Sales and marketing expenses for the Lasertel
segment were $362,000 for fiscal 2003, an increase of $153,000
as compared to $209,000 for fiscal 2002. This increase relates
primarily to increased professional services related to
marketing and promotional activities, as well as increased
travel and trade show expenses.

General
and Administrative

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

General and administrative expenses for the
Digital Imaging Products segment were $8.4 million or 10%
of revenue, a decrease of $466,000, as compared to
$8.8 million or 11% of revenue for fiscal 2002. This
decrease relates primarily to decreased legal fees as a result
of the resolution of patent litigation with Creo Products, Inc.,
as well as decreases in salaries and benefits as a result of a
decrease in head count in the second quarter of fiscal 2003.

General and administrative expenses for the
Lasertel segment were $980,000 for fiscal 2003, a decrease of
$382,000, as compared to $1.4 million for fiscal 2002. This
decrease relates primarily to the reduction of professional
services and fees.

17



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##### Table of Contents



Special
Charges and Discontinued Programs

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

As a result of these actions, we recorded a
charge of $3.7 million to cost of products sold in fiscal
2002. This included $2.7 million for inventory write-downs and
$1.0 million for other charges related to discontinued
programs, $3.0 million of which was recorded by the Digital
Imaging Products segment, and $688,000 by the Lasertel segment.

In addition, the Digital Imaging Products segment
recorded special charges of $6.0 million in fiscal 2002.
The special charges included $850,000 related to severance and
fringe benefit costs associated with the reduction of
approximately 50 employees, primarily in manufacturing and
research and development, $1.9 million related to the
write-down of equipment and lease termination costs as a result
of the Hampshire Drive consolidation, $1.6 million related
primarily to other asset write-downs and costs associated with
the repositioning, and $1.5 million related to executive
contractual obligations, as a result of a separation agreement
with Robert W. Hallman, former President and Chief Executive
Officer of Presstek and the resignation agreement with Richard
A. Williams, former Chief Scientific Officer of Presstek. Under
the terms of the separation agreement with Mr. Hallman,
effective April 30, 2002, Presstek agreed to pay
Mr. Hallman a separation payment equal to three times his
current then annual salary, payable bi-weekly over
36 months, until May 2005. Under the terms of the
resignation agreement with Mr. Williams, effective
January 8, 2003, Presstek agreed to pay Mr. Williams a
severance payment equal to $200,000 in 2003 and $100,000 in
2004, payable bi-weekly, until December 2004.

In the second quarter of fiscal 2003, we recorded
special charges of $550,000 related to severance and fringe
benefit costs associated with the reduction of approximately
43 employees, primarily in manufacturing, research and
development and administration in April 2003, of which $471,000
was recorded by the Digital Imaging Products segment and $79,000
by the Lasertel segment.

We paid $2.7 million in fiscal 2003 as a
result of the forgoing repositioning actions, and anticipate the
remaining payments related to the discontinued programs and
special charges will be completed by May 2005. For more
detail, see Note 12 to the Companys financial statements
appearing elsewhere herein.

Discontinued
Operations

During the third quarter of fiscal 2003, we filed
a joint motion for dismissal from a lawsuit that PPG, Inc.
(PPG) brought against our subsidiary Delta V
Technologies, Inc., (Delta V) whose operations were
discontinued in fiscal 1999. As a result of the dismissal, we
reversed all previously recorded liabilities associated with
this discontinued operation in the third quarter of fiscal 2003,
resulting in income of $1.4 million from discontinued
operations in fiscal 2003.

Other
Income (Expense), net

Other income (expense), net consists primarily of
net interest expense, and other miscellaneous expenses. Interest
expense, net was $376,000 for fiscal 2003, a decrease of
$496,000 as compared to $872,000 for fiscal 2002.

Interest income was $331,000 for fiscal 2003, an
increase of $145,000 as compared to $186,000 for fiscal 2002,
primarily as a result of increased cash balances available for
investment. Interest expense was $707,000 for fiscal 2003, a
decrease of $351,000 as compared to $1.1 million for fiscal
2002, primarily as a result of lower average debt balances and
lower interest rates on borrowings.

18



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##### Table of Contents



Provision
for Income Taxes

We did not record a provision for federal or
state income taxes in fiscal 2003, due to the utilization of net
operating loss carryforwards. We did not record a provision for
federal or state income taxes in fiscal 2002, due to net
operating losses incurred in the period.

Income
(Loss) from Continuing Operations

As a result of the foregoing, we had income from
continuing operations of $6.7 million for fiscal 2003, as
compared to a loss from continuing operations of
$8.3 million for fiscal 2002.

RESULTS OF OPERATIONS



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

Revenue

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

Product sales, including equipment and
consumables, were $79.0 million for fiscal 2002, a decrease
of $15.0 million or 16%, as compared to $94.1 million
for fiscal 2001. This decrease in product sales was due
primarily to volume decreases of DocuColor 400 DI press
shipments to Xerox. Product sales also decreased due to volume
and price decreases of direct imaging kits sold to Heidelberg
for use in the Quickmaster DI and to Ryobi for use in the Ryobi
3404DI. These decreases were partially offset by volume
increases of 46 Karat press shipments to KBA, as well as volume
increases in our consumable products.

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

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

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

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

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

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Cost
of Products Sold

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

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

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

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

Research
and Product Development

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

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

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

Sales,
Marketing and Customer Support

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

Sales, marketing and customer support expenses
for the Digital Imaging Products segment were $10.6 million
or 13% of revenue for fiscal 2002, a decrease of
$2.0 million, as compared to $12.6 million, or 12% of
fiscal 2001 revenue. This decrease is primarily the result of
focusing our business on the marketing and commercializa-

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tion of our DI technology, and resulted in
reduced salaries and benefits and related travel costs, as a
result of headcount reductions in the first six months of fiscal
2002.


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

General
and Administrative

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

General and administrative expenses for the
Digital Imaging Products segment were $8.8 million or 11%
of revenue, a decrease of $4.3 million, as compared to
$13.1 million or 13% of revenue for fiscal 2001. This
decrease relates primarily to decreases in legal fees as a
result of settlement of our arbitration proceedings with
Heidelberg in July 2001, and the courts rendering a
decision in our patent litigation with Creo in
September 2002. Also in 2001, we recorded a
$2.1 million write-off for prepayments made to Adast, a
supplier of B3 size sheet-fed presses. Adast joined in a
bankruptcy petition filed by its creditors in February 2002
and in February 2003, the company reorganized under new
ownership. Although the company has subsequently reorganized, we
do not expect to be able to successfully recover any of these
pre-payments.

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

Special
Charges and Discontinued Programs

In fiscal 2002, we initiated various
repositioning activities to reduce costs. As a result of the
repositioning programs, we recorded a charge of $3.7 million to
cost of products sold in fiscal 2002, of which $3.0 million
was recorded by the Digital Imaging Products segment, and
$688,000 by the Lasertel segment. In addition, the Digital
Imaging Products segment recorded $6.0 million in special
charges in fiscal 2002. These charges included inventory,
equipment and other asset write-downs, severance and fringe
benefit costs, and executive and other contractual obligations.

Other
Income (Expense), net

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

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

Provision
for Income Taxes

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

Net
Income (Loss)

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

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Liquidity and Capital Resources

We finance our operating and capital investment
requirements primarily through cash flows from operations and
borrowings. At January 3, 2004, we had cash and cash
equivalents of $28.2 million and working capital of
$42.5 million as compared to cash and cash equivalents of
$17.6 million and working capital of $28.6 million at
December 28, 2002. The increase in cash and cash
equivalents of $10.6 million for fiscal 2003 was primarily
due to net cash provided by operating activities, offset by cash
of $1.3 million used to purchase capital equipment and
$1.9 million used to reduce long term debt.

Net cash provided by operating activities of
continuing operations was $13.9 million for the fiscal year
ended January 3, 2004. The primary sources of cash from
continuing operating activities was net income of
$6.7 million adjusted by special charges and discontinued
programs of $2.0 million including $550,000 in special charges
as a result of head count reductions, non-cash charges of
depreciation, amortization, and other charges of
$11.5 million including $550,000 in special charges as a
result of head count reductions, and a decrease in working
capital of $6.3 million. Working capital changes primarily
included decreases in inventories and accounts receivable of
$1.2 million and $1.4 million, respectively, as well
as an increase in accounts payable of $1.4 million and a
decrease in accrued expenses of $3.5 million. The increase
in accounts payable is primarily the result of raw material
purchases payable at the end of fiscal 2003. The decrease in
accrued expenses is primarily related to payments made as a
result of discontinued programs of $1.5 million and
severance and fringe benefit payments of $1.0 million.

Net cash used in investing activities of
$1.3 million for the fiscal year ended January 3, 2004
consisted primarily of additions to property, plant and
equipment, net of proceeds from the sale of equipment.

Net cash used in financing activities for the
fiscal year ended January 3, 2004 totaled
$1.9 million, and consisted primarily of payments made on
our mortgage term loans and equipment lease line of credit
facilities, net of proceeds received as a result of refinancing
these credit facilities.

In October 2003, we replaced our existing
credit facilities, entering into a $50.0 million senior
secured credit facility jointly with two lenders. This new
credit facility includes a $35.0 million revolving line of
credit (the Revolver) and a $15.0 million term
loan (the Term Loan). These credit facilities are
secured by all our assets, and bear interest, at our election,
at either the Prime rate or the LIBOR rate, plus an applicable
margin based on certain financials ratios, ranging from a
minimum of 0.25% to a maximum of 2.5%.

The Revolver is a five-year loan, expiring in
September 2008, under which we may borrow a maximum of
$35.0 million, reduced by the amount of all letters of
credit outstanding. Advances under the Revolver may be used to
finance working capital requirements, capital expenditures, and
future acquisitions as permitted under the loan agreement. At
March 3, 2004, we had $35.0 million available under
the revolving line of credit loan, reduced by $5.5 million
outstanding under standby letters of credit.

The Term Loan is a five-year loan in the amount
of $15.0 million. Under the Term Loan, principal and
interest payments will be made in nineteen quarterly
installments of $535,714 plus interest, with a final payment of
all remaining principal, and accrued and unpaid interest due on
September 30, 2008. At March 3, 2004, the effective
interest rate was $2.35%. Proceeds from the Term Loan were used
to re-finance all debt outstanding under our previous credit
facilities.

Under the terms of the Revolver and Term Loan, we
are required to meet various financial covenants on a quarterly
and annual basis, including maximum funded debt to EBITDA and
minimum fixed charge coverage covenants. As of January 3,
2004, we were in compliance with all financial covenants.

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We have future contractual payment obligations
through 2010 that primarily relate to debt, royalty obligations,
executive contractual obligations and operating leases. The
following table represents our future commitments at
January 3, 2004:

|                                  |                               |       |        |                  |  |           |       |           |  |           |       |        |  |   |       |       |  |   |   |   | 
|--------------------------------- | ----------------------------- | ----- | ------ | ---------------- |  | --------- | ----- | --------- |  | --------- | ----- | ------ |  | - | ----- | ----- |  | - | - | - | 
|                                  |                               |       |        |                  |  |           |       |           |  | More Than
|                                  |                               | Total |        | Less Than 1 Year |  | 1-3 Years |       | 3-5 Years |  | 5 Years  
|                                  |                               |       |        |                  |  |           |       |           |  |          
|Credit facilities                 |                               | $     | 14,464 |                  |  | $         | 2,143 |           |  | $         | 6,429 |        |  | $ | 5,892 |       |  | $ |  |  
|Royalty obligation                |                               |       | 11,147 |                  |  |           | 1,200 |           |  |           | 9,947 |        |  |   |      |       |  |   |  |  
|Executive contractual obligations |                               |       | 2,999  |                  |  |           | 1,338 |           |  |           | 1,661 |        |  |   |      |       |  |   |  |  
|Operating leases                  |                               |       | 186    |                  |  |           | 107   |           |  |           | 79    |        |  |   |      |       |  |   |  |  
|                                  |                               |       |        |                  |  |           |       |           |  |           |       |        |  |   |       |       |  |   |   |  
|                                  | Total contractual obligations |       | $      | 28,796           |  |           | $     | 4,788     |  |           | $     | 18,116 |  |   | $     | 5,892 |  |   | $ |  | 
|                                  |                               |       |        |                  |  |           |       |           |  |           |       |        |  |   |       |       |  |   |   |  

Our anticipated capital expenditures for fiscal
2004 are approximately $2.4 million, of which
$1.6 million relates primarily to the purchase of capital
equipment to be used in the production of our DI and CTP
equipment and consumable products.

Heidelberg is marketing a competitive plate
product as an alternative to Pressteks PEARLdry for the
Quickmaster DI. The introduction of a competitive plate could
reduce the revenue generated by Presstek under its agreements
with Heidelberg, including the OEM consumables supply agreements
entered into in July 2003. It could also lead to downward
pricing pressure on our full line of spooled consumable
products, which could have a material adverse effect on our
business, results of operations and financial condition.

We believe that existing funds, cash flows from
operations, and cash available under our Revolver should be
sufficient to satisfy working capital requirements and capital
expenditures through the next twelve months. There can be no
assurance, however, that we will not require additional
financing, or that such additional financing, if needed, will be
available on acceptable terms.



| |                    
| | -------------------
| | Effect of Inflation

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



| |                                     
| | ------------------------------------
| | Net Operating Loss
    Carryforwards

As of January 3, 2004, we had net operating
loss carryforwards totaling approximately $89.1 million, of
which $55.8 million resulted from stock option compensation
deductions for tax purposes and $33.3 million resulted from
operating losses. To the extent net operating losses resulting
from stock option compensation deductions become realizable, the
benefit will be credited directly to additional paid in capital.
The amount of the net operating loss carryforwards that may be
utilized in any future period may be subject to certain
limitations, based upon changes in the ownership of our common
stock.

Critical Accounting Policies and
Estimates



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

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

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



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

Presstek recognizes revenue when persuasive
evidence of an agreement exists, delivery has occurred or
services have been rendered, the price to the customer is fixed
or determinable, and collection is reasonably assured, and no
further services are required.

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



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

Presstek evaluates its accounts receivable on an
ongoing basis and establishes an allowance for doubtful accounts
based on specific customer circumstances and on its historical
rate of write-offs. We include any accounts receivable balances
that are determined to be uncollectible, along with a general
reserve, in an overall allowance for doubtful accounts. After
reasonable attempts to collect a receivable have failed, the
receivable is written off against the allowance. We believe the
allowance for doubtful accounts as of January 3, 2004 is
adequate, however, actual write-offs might exceed the recorded
allowance.



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

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



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

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



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

Long-lived assets, such as intangible assets and
property and equipment, are required to be evaluated for
impairment annually, or more frequently 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.



| |                                         
| | ----------------------------------------
| | Recently Issued Accounting
    Standards

In January 2003, the Emerging Issues Task
Force (EITF) issued EITF Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables(EITF 00-21).EITF 00-21
addresses certain aspects of the

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accounting by a vendor for arrangements under
which it will perform multiple revenue generating activities;
specifically, how to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting
and how arrangement consideration should be measured and
allocated to the separate units of accounting in the
arrangement. EITF 00-21 does not change otherwise applicable
revenue recognition criteria. EITF 00-21 is effective for
revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The adoption of EITF 00-21 did not
have a material effect on our financial statements.


In January 2003, the Financial Accounting
Standards Board (FASB), issued Interpretation
No. 46, Consolidation of Variable Interest Entities,
an Interpretation of Accounting Research Bulletin No. 51,
(FIN No. 46) which requires all variable
interest entities (VIEs) to be consolidated by the
primary beneficiary. The primary beneficiary is the entity that
holds the majority of the beneficial interests in the VIE. In
addition, the interpretation expands disclosure requirements for
both variable interest entities that are consolidated, as well
as VIEs from which the entity is the holder of a significant
amount of the beneficial interests, but not the majority. The
disclosure requirements of this interpretation are effective for
all financial statements issued after January 31, 2003. The
consolidation requirements of this interpretation are effective
for all periods beginning after June 15, 2003. We do not
have any VIEs, therefore the adoption of this interpretation did
not have any effect on our results of operations or financial
condition.

In April 2003, the FASB issued Statement of
Financial Accounting Standards, (SFAS),
No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. SFAS No. 149
amends and clarifies the accounting for derivative instruments,
including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No, 133,
Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 149 is generally effective for
contracts entered into or modified after June 29, 2003 and
for hedging relationships designated after June 29, 2003.
The adoption of this statement did not have a material effect on
our results of operations or financial condition.

In May 2003, the FASB issued SFAS
No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. SFAS
No. 150 requires that certain financial instruments, which
under previous guidance were accounted for as equity, must now
be accounted for as liabilities. The financial instruments
affected include mandatorily redeemable stock, certain financial
instruments that require or may require the issuer to buy back
some of its shares in exchange for cash or other assets and
certain obligations that can be settled with shares of stock.
SFAS No. 150 is effective for all financial instruments
entered into or modified after May 31, 2003 and must be
applied to existing financial instruments effective
June 29, 2003. The adoption of this statement did not have
a material effect on our results of operations or financial
condition.

In December 2003, the FASB issued SFAS
No. 132, Employers Disclosures about Pensions
and Other Postretirement Benefits (revised 2003). This
statement revises employers disclosures about pension
plans and other postretirement benefit plans. We adopted the
additional disclosure requirements of this statement as of
January 4, 2003.

RISK FACTORS

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

Certain statements contained in this Annual
Report on Form 10-K constitute forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including statements regarding
our expectations for our financial and operating performance in
2004 and beyond, the adequacy of internal cash and working
capital for our operations, our ability to supply sufficient
product for anticipated demand, production delays associated
with this demand, availability of component materials,
managements plans and goals with regard to our shipping
and production capabilities, including the adequacy of our
facilities for present and expected future operations, the
availability of alternative suppliers and manufacturers, timing
of product roll-out and acceptance by the market, manufacturing
constraints or difficulties, the introduction of competitive
products into the market place, managements plans and
goals for our Lasertel subsidiary, the ability of Lasertel to
generate positive cash flows in the near term, expectations for
the Companys Lasertel subsidiary, including its ability to
produce commercially competitive laser products, the strength of
our various strategic partnerships both on manufacturing and
distribution, our ability to secure other strategic alliances
and relationships, our

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expectations regarding Pressteks strategy
for growth, including statements regarding the Companys
expectations for continued product mix improvement, the
Companys expectations regarding the balance, independence
and control of its business, the resulting and expected effects
and benefits from the Companys transformation efforts, the
Companys expectation regarding the strength and
improvement of the Companys fundamentals, including
management of its financial controls, the Companys
expectations relating to the Heidelberg overstock position, our
expectations and plans regarding market penetration, including
the strength and scope of our distribution channels and our
expectations regarding sales of DI presses or CTP devices, the
expansion of our products and technology, the status of the
Companys technology leadership, the commercialization and
marketing of the Companys technology, our expectations
regarding the sale of our products and use of our technology,
our current plans for product development and the expected
market acceptance of recently introduced products and the likely
acceptance of planned future products, the expected growth in
market share, our expectations regarding performance of
existing, planned and recently introduced products, the effects,
market acceptance, or pricing of competitive products, including
the possibility of a competitive plate product being introduced
by a strategic partner, the placement of orders for direct
imaging kits, our expectations regarding reductions in warranty
costs, statements regarding the profitability of process-free
CTP, the adequacy of our intellectual property protections and
our ability to protect and enforce our intellectual property
rights, and the expected effect of adopting recently issued
accounting standards, among others. Such forward-looking
statements involve a number of known and unknown risks,
uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different
from any future results, performance or achievements expressed
or implied by such forward-looking statements. Such factors that
could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere in this
report. The words looking forward, looking
ahead, believe(s), should,
plan, expect(s), project(s),
anticipate(s), may, likely,
potential, opportunity and similar
expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date, the statements were
made and readers are advised to consider such forward-looking
statements in light of the risks set forth below. Presstek
undertakes no obligation to update any forward-looking
statements contained in this Annual Report on Form 10-K.


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

We are substantially dependent on
Heidelberg for a material portion of our revenue and the loss of
Heidelberg as a customer or a significant reduction in revenue
from sales to Heidelberg would adversely affect our business.We have had an important long-term
relationship with Heidelberg. Since entering into our strategic
alliance with Heidelberg, our sales of products to Heidelberg
have constituted a material portion of our total revenue. For
our 2003, 2002 and 2001 fiscal years our sales to Heidelberg
accounted for approximately 21%, 36% and 42%, respectively of
our total revenue. There can be no assurance that our
relationship with Heidelberg will continue. The loss of
Heidelberg as a customer, or a material decrease in the revenue
we receive from direct imaging kit sales or consumable sales to
Heidelberg, would have a material adverse affect on our
business, results of operations and financial condition.
Heidelberg is marketing a competitive plate product, as an
alternative to Pressteks PEARLdry for the Quickmaster DI.
The introduction of a competitive plate could reduce the revenue
generated by Presstek under its agreements with Heidelberg,
including the OEM agreements entered into in July 2003. It
could also lead to downward pricing pressure on our full line of
spooled consumable products, which could have a material adverse
effect on our business, results of operations or financial
condition.

We currently have no orders from Heidelberg for
direct imaging kits used in the Quickmaster DI. Heidelberg has
recently indicated, as a result of the global economic slowdown,
that it has an inventory of direct imaging kits on hand to
support its production requirements for six months. We believe
that orders for direct imaging kits will resume sometime late in
fiscal 2004, however, there can be no assurance that any orders
will be received.

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

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Heidelberg in the future, including disputes
involving patents, there can be no assurance that any disputes
that do arise will be resolved in our favor.


We are substantially dependent on our
strategic alliances and manufacturing and distribution
relationships to develop and grow our business and the loss or
failure of one or more of our strategic partners could
significantly harm our business.Our strategy to date has been, in
part, to enter into strategic alliances with major companies in
the graphic arts industry and other markets. This strategy has
included, among other things, licensing our intellectual
property, developing specialized products based on our
proprietary technologies and manufacturing imaging systems for
inclusion in other manufacturers products. Our strategy
has also involved identifying strategic manufacturing and
distribution partners to aid in developing new market channels
for our products. This strategy led to the development of our
relationship with Heidelberg. It also led to the development of
relationships with other strategic partners, including KBA,
Ryobi and KPG. We are dependent on many of these partners for
future sales of both existing and planned products. This
dependency means that the timetable for finalizing development,
commercialization and distribution of both existing and planned
products is dependent upon the needs and circumstances of our
strategic partners. We have experienced and will continue to
experience technical difficulties from time to time, which may
prevent us from meeting certain production and distribution
targets. Any delay in meeting production and distribution
targets with our strategic partners may harm our relationships
with them and may cause them to terminate their relationship
with us. Our strategic partners may not develop markets for our
products at the pace or in the manner we expect, which may have
an adverse effect on our business. They may also terminate their
relationships with us for circumstances beyond our control,
including factors unique to their business or their business
decisions. In addition, we may mutually agree with one of our
partners to terminate our relationship with them for a variety
of reasons. For example, in March 2003, we agreed with
Xerox to terminate our supply and distribution agreement with
them for DocuColor DI presses. As a result, Xerox will no longer
sell the DocuColor 233 DI-4, the DocuColor 400 DI-4 and the
DocuColor DI-5 presses and related consumables. While we do not
believe the termination of our relationship with Xerox will have
a material adverse impact on our business, we cannot assure you
that the termination of any of our other relationships with our
strategic partners will not have an adverse impact on our
business.

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

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

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

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

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


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

In March 2003, we expanded our product
offerings to select dealers in our European distribution channel
to include the sale of Quickmaster DI consumables. In connection
with this offering, we reduced pricing on our full line of
spooled consumables distributed through this distribution
channel by up to 20%. While the expected lost revenue resulting
from the price reduction may be offset by increased revenue from
increased volume of spooled consumable sales derived from
additional presses installed and increased usage of spooled
consumables, there can be no assurance that the expected lost
revenue will be offset. In addition, market conditions may
require us to expand the regions in which we offer reduced
prices, or to further reduce our spooled consumable prices,
which could further reduce our revenues in 2004 and beyond. This
could have a material adverse effect on our business, results of
operations and financial position.

Our growth strategy may include licenses or
acquisitions of technologies or businesses, which entail a
number of risks.As part of our
strategy to grow our business, we may pursue licenses of
technologies from third parties or acquisitions of complementary
products lines or companies, and such transactions entail a
number of risks. We may expend significant costs in
investigating and pursuing such transactions, and such
transactions may not be consummated. If such transactions are
consummated, we may not be successful in integrating the
acquired technology or business into our existing business to
achieve the desired synergies. Integrating acquired technologies
or businesses may also require a substantial commitment of our
managements time and attention. We may expend significant
funds to acquire such technologies or businesses, and we may
incur unforeseen liabilities in connection with any acquisition
of a technology or business. Any of the foregoing risks could
result in a material adverse effect on our business, results of
operations and financial conditions.

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

We have a history of losses, could incur
substantial losses in the future, and may not maintain
profitability.We have incurred
substantial net losses from continuing operations in three of
the past five fiscal years. We incurred net losses from
continuing operations of approximately $8.3 million for
fiscal 2002, $3.8 million for fiscal 2001, and
$30.6 million for fiscal 1999. As of January 3, 2004
we had an accumulated

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deficit of approximately $18 million. We may need
to generate significant increases in revenues to maintain
profitability, and we may not be able to do so. If our revenues
grow more slowly than we anticipate, due to potential
competitive pricing pressures, or if our operating expenses
increase more than we expect or cannot be reduced in the event
of lower revenues, our business will be materially adversely
affected. Even if we maintain profitability in the future on a
quarterly or annual basis, we may not be able to sustain or
increase such profitability. Failure to sustain profitability
may adversely affect the market price of our common stock.


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



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

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

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

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

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market acceptance or become commercially
successful. If our new product offerings do not achieve
anticipated market acceptance, we may not achieve anticipated
revenue.


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

If the United States and global economies
slow down, the demand for our products could decrease and our
revenues might be hurt.The demand
for our products is affected by various factors, many of which
are beyond our control. For example, general economic conditions
may not recover as quickly as forecasted, and may affect or
delay the overall capital spending by businesses and consumers,
particularly for capital equipment such as presses. We believe
that, concurrently with the most recent economic slowdown in the
U.S. and abroad, and the decrease in capital equipment spending
over the past three years, there has been a decrease in spending
and spending projections on capital equipment that could impact
the demand for our products. If, as a result of general economic
uncertainty or otherwise, companies reduce their product
spending levels, such a decrease in spending could substantially
reduce demand for our products, substantially harm our business,
and have a material adverse effect on our business, results of
operations and financial condition.

The expansion of Lasertel into areas other
than the production of laser diodes for our printing business
may be unsuccessful.Lasertel,
which was formed for the purpose of supplying us with laser
diodes, has also explored other markets for its laser
technology. These efforts to develop other markets were scaled
back, in part, in June 2001, as we announced a
repositioning of Lasertel in order to reduce its costs and focus
its efforts on supplying us with high quality laser diodes.
While the plans to market its laser products to the
telecommunications industry were delayed, Lasertel has developed
laser products for the defense industry and has continued its
plans to develop laser prototypes for qualification in the
defense and industrial industries. There can be no assurance
that these products or prototypes will gain acceptance in these
industries and likewise, there can be no assurance that these
products will be commercially successful. Our executive team has
limited experience in the telecommunications, defense and
industrial industries and there can be no assurance that
Lasertel will be able to successfully exploit any opportunities
that may arise.

Lasertel may require additional working
capital infusions from us, which may have a material adverse
effect on our business.Our
subsidiary, Lasertel, was established to help us meet our demand
for laser diodes. Lasertel has required and may continue to
require a significant amount of capital investment by Presstek
in order to fund its operations. For the fiscal year ended
January 3, 2004, Lasertel recorded a net loss of
$5.1 million. Lasertel continues to require us to advance
cash and resources in order to ensure its continued operation.
Lasertel has only had sales to a limited number of third parties
to date, and any loss of such customers or significant reduction
in their purchases from Lasertel could increase its reliance
upon us for capital and resources. Lasertels capital and
working capital needs may exceed our ability to provide such
funds, requiring us to borrow against our credit facilities or
seek to obtain outside financing for Lasertels operations.
This could have a material adverse effect on our business,
results of operations and financial condition.

Our success is dependent on our ability to
maintain and protect our proprietary rights.Our future success will depend, in
large part, upon our intellectual property rights, including
patents, trademarks, trade secrets, proprietary know-how, source
codes and continuing technological innovation. We have been
issued a number of U.S. and foreign patents and we intend to
register for additional patents where we deem appropriate. We
also hold seven registered trademarks and we may register
additional trademarks where we deem appropriate. There can be no
assurance, however, as to the issuance of any additional patents
or trademarks or the breadth or

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degree of protection that our patents, trademarks
or other intellectual property may afford us. The steps we have
taken to protect our intellectual property may not adequately
prevent misappropriation or ensure that others will not develop
competitive technologies or products. Further, the laws of
certain territories in which our products are or may be
developed, manufactured or sold, may not protect our products
and intellectual property rights to the same extent as the laws
of the United States.


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

In September 2003, Presstek filed an action
against Fuji Photo Film Corporation, Ltd., in the District Court
of Mannheim, Germany for patent infringement. In this action,
Presstek alleges that Fuji has manufactured and distributed a
product that violates Presstek European Patent 0 644 047
registered under number DE 694 17 129 with the German Patent and
Trademark Office. Presstek seeks an order from the court that
Fuji refrain from offering the infringing product for sale, from
using the infringing material or introducing it for the named
purposes, or from possessing such infringing material.

We may take legal action to determine the
validity and scope of third party rights or to defend against
any allegations of infringement. In the course of pursuing or
defending any of these actions we could incur significant costs
and diversion of our resources. Due to the competitive nature of
our industry, it is unlikely that we could increase our product
prices to cover such costs. There can be no assurance that we
will have the financial or other resources necessary to
successfully defend a patent infringement or proprietary rights
violation action. Moreover, we may be unable, for financial or
other reasons, to enforce our rights under any patents we may
own. As an example of the cost and uncertainty of patent
litigation, in August 1999 Creo filed an action in the
United States District Court for the District of Delaware
against us seeking a declaration that Creos products do
not and will not infringe any valid and enforceable claims of
any of our patents in question. We counterclaimed against Creo
for patent infringement of certain of our patents. The matter
went to trial in June 2001, and in September 2001, the
court affirmed the validity and enforceability of our on-press
imaging patents, but held that the current Creo DOP System did
not infringe on our patents. Creo appealed the courts
decision that our patents were valid and enforceable, and we
cross-appealed the finding of non-infringement by the current
Creo DOP System. On September 17, 2002, the United States
Court of Appeals for the Federal Circuit affirmed the lower
courts decision that our patents are valid and
enforceable, but that they are not infringed by the current Creo
DOP System. We incurred higher than expected legal expenses in
fiscal 2002 and fiscal 2001 due to this litigation. Any similar
litigation in the future is expected to be costly, yield
uncertain results and could have an adverse impact on our
business, results of operations and financial condition.

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

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

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

We also anticipate competition from plate
manufacturing companies that manufacture printing plates, or
have the potential to manufacture digital thermal plates. These
companies include Agfa Gevaert N.V., KPG and Fuji Photo Film
Co., Ltd. Heidelberg is marketing a competitive plate product as
an alternative to Pressteks PEARLdry for the Quickmaster
DI. The introduction of a competitive plate could reduce the
revenue generated by Presstek under its relationship with
Heidelberg, and could have a material adverse effect on our
business, results of operations and financial condition.

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

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

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



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

We must respond to changing technology and
industry standards in a timely and cost-effective manner. We may
not be successful in effectively using new technologies,
developing new products or enhancing our existing products and
technology on a timely basis. Our new technologies or
enhancements may not achieve market

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acceptance. Our pursuit of new technologies may
require substantial time and expense. We may need to license new
technologies to respond to technological change. These licenses
may not be available to us on terms that we can accept. Finally,
we may not succeed in adapting our products to new technologies
as they emerge.


Ongoing litigation could have an adverse
impact on our business.From time
to time in the ordinary course of our business, we may be
subject to lawsuits. On September 16, 2003, Presstek filed
an action against Fuji Photo Film Corporation, Ltd. in the
District Court of Mannheim, Germany for patent infringement,
alleging a disputed value tentatively estimated at 1,000,000.00
euros. In this action, Presstek alleges that Fuji has
manufactured and distributed a product that violates Presstek
European Patent 0 644 047, registered under number DE 694 17 129
with the German Patent and Trademark Office. Presstek seeks an
order from the court that Fuji refrain from offering the
infringing product for sale, from using the infringing material
or introducing it for the named purposes, or from possessing
such infringing material. Also, in August 2003, the Company
was served with a lawsuit filed on June 2, 2003 in the
United States District Court for the District of New Hampshire
against the Company and two of its former officers, captioned
James B. Zouras v. Robert Hallman et al. The lawsuit
allegedly was filed on behalf of all purchasers of the
Companys common stock between December 10, 1999 and
July 16, 2001 and alleges, among other things, that
misstatements were made to the investing public regarding an
arbitration proceeding commenced in 1999 and concluded in 2001
with one of the Companys customers. The complaint does not
specify the amount of any damages being claimed. The Company
disputes all material allegations of the complaint and intends
to vigorously defend the litigation.

The loss or unavailability of our key
personnel would have a material adverse effect on our business.The success of Presstek is largely
dependent on the personal efforts of our senior management team.
We have recently entered into three-year employment agreements
with Ed Marino, our President and Chief Executive Officer, and
Moosa E. Moosa, our Chief Financial Officer. The loss or
interruption of the services of Mr. Marino or
Mr. Moosa could have an adverse effect on our business and
prospects.

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

Our stock price has been and could continue
to be extremely volatile.The
market price of our common stock has been subject to significant
fluctuations. The securities markets, and the Nasdaq National
Market in particular, have experienced, and are likely to
experience in the future, significant price and volume
fluctuations that could adversely affect the market price of our
common stock without regard to our operating performance. In
addition, the trading price of our common stock could be subject
to significant fluctuations in response to:



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

These factors may materially and adversely affect
our stock price, regardless of our operating performance.






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

We are exposed to market risk from changes in
interest rates primarily as a result of our borrowing
activities, and to a lesser extent, our investing activities.
Our long-term borrowings are in variable rate instruments, with
interest rates tied to either the prime rate or the London
Interbank Offered Rate (LIBOR). A 100 basis point
change in these rates would have an impact of approximately
$150,000 on our annual interest expense, assuming consistent
levels of floating rate debt with those held as of the end of
fiscal 2003. In the fourth quarter of fiscal 2003, we entered
into interest rate floors and caps to manage net exposure to
interest rate fluctuations related to our borrowings.

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






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

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






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

Not applicable






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

(a) Evaluation of Disclosure Controls and
Procedures

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

(b) Changes in Internal Controls

There were no significant changes in
Pressteks internal controls or in other factors that could
significantly affect Pressteks controls in the quarter
ended January 3, 2004 that has materially affected, or is
reasonably likely to affect, our internal control over financial
reporting.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The policies comprising the Companys code
of ethics are set forth in the Companys Code of Business
Conduct and Ethics. These policies satisfy the SECs
requirements for a code of ethics, and apply to all
directors, officers and employees. The Code of Business Conduct
and Ethics can be found on the Companys website at
www.presstek.com.

The remaining information required by this item
will be set forth under the captions Election of
Directors, Board of Directors Meetings and
Committees, Board of Directors and Committee
Independence, Executive Officers and
Section 16(a) Beneficial Ownership Reporting
Compliance in the definitive proxy statement that the
Company expects to file with the Securities Exchange Commission
within 120 days of the fiscal year

34



---



##### Table of Contents



ended January 3, 2004 for the Annual Meeting
of Stockholders to be held on June 8, 2004 (the Proxy
Statement) and such information is incorporated herein by
reference.







|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

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






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

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






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

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






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

The information required by this item will be set
forth under the captions Ratification of Selection of
Auditors and Policy on Audit Committee Pre-Approval
of Audit and Permissible Non-Audit Services of Independent
Auditors in the Proxy Statement, and is incorporated
herein by reference.




PART IV






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

|       |  |                                                                                                                                                             |  |     
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|       |  |                                                                                                                                                             |  | Page
|       |  |                                                                                                                                                             |  |     
|(a)(1) |  | Financial Statements                                                                                                                                        |  |     
|       |  | Report of Independent Certified
    Public Accountants                                                                                                      |  | F-2 
|       |  | Balance Sheets as of January 3, 2004 and
    December 28, 2002                                                                                              |  | F-3 
|       |  | Statements of Operations for the fiscal years
    ended January 3, 2004, December 28, 2002, and
    December 29, 2001                                       |  | F-4 
|       |  | Statements of Changes in Stockholders
    Equity for the fiscal years ended January 3, 2004,
    December 28, 2002, and December 29, 2001                  |  | F-5 
|       |  | Statements of Cash Flows for the fiscal years
    ended January 3, 2004, December 28, 2002, and
    December 29, 2001                                       |  | F-6 
|       |  | Notes to Financial Statements                                                                                                                               |  | F-7 
|(a)(2) |  | Financial Statement Schedule                                                                                                                                |  |     
|       |  | Schedule II  Valuation and
    Qualifying Accounts                                                                                                         |  | FS-1
|       |  | All other schedules are omitted because they are
    not applicable, or the required information is shown in the
    financial statements or notes thereto. |  |     
|(a)(3) |  | Exhibits                                                                                                                                                    |  |     

35



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | (a)         |  | Amended and Restated Certificate of Incorporation
    of Presstek, Inc., as amended. (Previously filed as Exhibit 3 to
    Pressteks Quarterly Report on Form 10-Q for the Quarter
    ended June 29, 1996, hereby incorporated by reference.)                                                                                                                                                    
|        | 3  | (b)         |  | By-laws of Presstek, Inc. (Previously filed as an
    exhibit with Pressteks Form 10-K for the fiscal year ended
    December 30, 1995, filed March 29, 1996, hereby incorporated by
    reference.)                                                                                                                                                                                              
|        | 10 | (a)         |  | Confidentiality Agreement between Presstek, Inc.
    and Heidelberger Druckmaschinen A.G., effective December 7, 1989
    as amended. (Previously filed as Exhibit 10(i) of
    Pressteks Annual Report on Form 10-K for the fiscal year
    ended December 31, 1989, hereby incorporated by reference.)                                                                                          
|        | 10 | (b)         |  | Master Agreement effective January 1, 1991, by
    and between Heidelberger Druckmaschinen Aktiengesellschaft and
    Presstek, Inc. (Previously filed as an exhibit to
    Pressteks Form 8-K, dated January 1, 1991, hereby
    incorporated by reference.)                                                                                                                                     
|        | 10 | (c)         |  | Technology License effective January 1, 1991, by
    and between Heidelberger Druckmaschinen Aktiengesellschaft and
    Presstek, Inc. (Previously filed as an exhibit to
    Pressteks Form 8-K, dated January 1, 1991, hereby
    incorporated by reference.)                                                                                                                                   
|        | 10 | (d)         |  | Memorandum of Performance No. 3 dated April 27,
    1993, to the Master Agreement, Technology License, and Supply
    Agreement between Presstek, Inc. and Heidelberger Druckmaschinen
    Aktiengesellschaft. (Previously filed as an exhibit to
    Pressteks Quarterly Report on Form 10-Q for the quarter
    ended June 30, 1993, hereby incorporated by reference.)                         
|        | 10 | (e)         |  | Modification to Memorandum of Performance No. 3
    dated April 27, 1993, to the Master Agreement, Technology
    License, and Supply Agreement between Presstek, Inc. and
    Heidelberger Druckmaschinen Aktiengesellschaft. (Previously
    filed as an exhibit to Pressteks Annual report on Form
    10-K for the fiscal year ended December 31, 1994, hereby
    incorporated by reference.)
|        | 10 | (f)*        |  | Memorandum of Understanding No. 4 dated November
    9, 1995, to the Master Agreement and Technology License and
    Supply Agreement between Presstek, Inc. and Heidelberger
    Druckmaschinen Aktiengesellschaft. (Previously filed as Exhibit
    10.k to Pressteks Form 10-K for the fiscal year ended
    December 30, 1995, filed March 29, 1996, hereby incorporated by
    reference.)   
|        | 10 | (g)**       |  | 1991 Stock Option Plan. (Previously filed as an
    exhibit to Pressteks Annual report on Form 10-K for the
    fiscal year ended December 31, 1991, hereby incorporated by
    reference.)                                                                                                                                                                                                       
|        | 10 | (h)**       |  | 1994 Stock Option Plan. (Previously filed as an
    exhibit to Pressteks Annual report on Form 10-K for the
    fiscal year ended December 31, 1994, hereby incorporated by
    reference.)                                                                                                                                                                                                       
|        | 10 | (i)**       |  | Non-Employee Director Stock Option Plan.
    (Previously filed as Exhibit 10.0 to Pressteks Form 10-K
    for the fiscal year ended January 2, 1999, filed March 2, 1999,
    hereby incorporated by reference.)                                                                                                                                                                                  
|        | 10 | (j)**       |  | 1997 Interim Stock Option Plan. (Previously filed
    as Exhibit 10.1 to Pressteks Quarterly report on Form 10-Q
    for the quarter ended September 27, 1997, filed November 7,
    1997, hereby incorporated by reference.)                                                                                                                                                                     
|        | 10 | (k)**       |  | 1998 Stock Incentive Plan. (Previously filed as
    Exhibit A to Pressteks April 23, 1998 Proxy Statement,
    filed April 24, 1998, hereby incorporated by reference.)                                                                                                                                                                                                                           
|        | 10 | (l)*        |  | Memorandum of Understanding No. 5 dated March 7,
    1997 between Presstek, Inc. and Heidelberger Druckmaschinen
    Aktiengesellschaft. (Previously filed as Exhibit 10(T) to
    Pressteks Annual Report on Form 10-K for the fiscal year
    ended December 28, 1996 filed March 31, 1997, hereby
    incorporated by reference.)                                                              
|        | 10 | (m)*        |  | Master Supply and Distribution Agreement by and
    between Presstek, Inc. and Xerox Corporation dated September 22,
    2000. (Previously filed as Exhibit 10.1 to Pressteks
    Quarterly Report on Form 10-Q for the quarter ended September
    30, 2000, filed November 14, 2000, hereby incorporated by
    reference.)                                                                     
|        | 10 | (n)         |  | Amended Master Supply and Distribution Agreement
    by and between Presstek, Inc. and Xerox Corporation dated May
    11, 2001. (Previously filed as Exhibit 10.1 to Pressteks
    Quarterly Report on Form 10-Q for the quarter ended June 30,
    2001, filed August 14, 2001, hereby incorporated by reference.)                                                                              

36



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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | (o)*        |  | Agreement between Presstek, Inc. and Adamovski
    Strojírny a.s. dated as of April 24, 2001. (Previously
    filed as Exhibit 10.2 to Pressteks Quarterly Report on
    Form 10-Q for the quarter ended June 30, 2001, filed August 14,
    2001 hereby incorporated by reference.)                                                                                                                                                  
|        | 10 | (p)*        |  | Settlement Agreement made as of July 13, 2001 by
    and between Heidelberger Druckmaschinen Aktiengesellschaft and
    Presstek, Inc. (Previously filed as Exhibit 10.3 to
    Pressteks Quarterly Report on Form 10-Q for the quarter
    ended September 29, 2001, filed November 13, 2001, hereby
    incorporated by reference.)                                                                                                 
|        | 10 | (q)*        |  | Letter Agreement dated September 19, 2001 between
    Xerox Corporation and Presstek, Inc. amending the Amended Master
    Supply and Distribution Agreement by and among, Presstek, Inc.
    and Xerox Corporation dated May 11, 2001. (Previously filed as
    Exhibit 10.1 to Pressteks Quarterly Report on Form 10-Q
    for the quarter ended September 29, 2001, filed November 13,
    2001, hereby incorporated by reference.)
|        | 10 | (r)**       |  | Resignation Agreement and General Release by and
    between Presstek, Inc. and Neil M. Rossen, dated November 14,
    2001 and effective as of December 31, 2001. (Previously filed as
    Exhibit 10.1 to Pressteks Quarterly Report on Form 10-Q
    for the quarter ended March 30, 2002, filed May 14, 2002, hereby
    incorporated by reference.)                                                                              
|        | 10 | (s)**       |  | Separation Agreement by and between Presstek,
    Inc. and Robert W. Hallman dated as of April 26, 2002, and
    effective as of April 30, 2002. (Previously filed as Exhibit
    10.1 to Pressteks Quarterly Report on Form 10-Q for the
    quarter ended June 29, 2002, filed August 13, 2002, hereby
    incorporated by reference.)                                                                                              
|        | 10 | (t)*        |  | Agreement for Manufacture & Sale of Sun
    Press between Presstek, Inc. and Ryobi Limited, dated as
    of April 5, 2002. (Previously filed as Exhibit 10.4 to
    Pressteks Quarterly Report on Form 10-Q for the quarter
    ended June 29, 2002, filed on August 13, 2002, hereby
    incorporated by reference.)                                                                                                               
|        | 10 | (u)**       |  | 2002 Employee Stock Purchase Plan of Presstek,
    Inc. (Previously filed as Exhibit 4.3 to Pressteks
    Registration Statement on Form S-8 filed with the Commission on
    August 9, 2002, hereby incorporated by reference.)                                                                                                                                                                                                      
|        | 10 | (v)**       |  | Description of Pressteks Non-Employee
    Director Compensation Arrangements approved by Pressteks
    Board of Directors on July 17, 2002 and amended by
    Pressteks Board of Directors on December 17, 2002.
    (Previously filed as Exhibit 10(hh) to Pressteks Form 10-K
    for the fiscal year ended December 28, 2002, filed March 28,
    2003, hereby incorporated by reference.)                                      
|        | 10 | (w)**       |  | Retirement Agreement by and between Presstek,
    Inc. and Richard A. Williams dated January 7, 2003. (Previously
    filed as Exhibit 10(ll) to Pressteks Form 10-K for the
    fiscal year ended December 28, 2002, filed March 28, 2003,
    hereby incorporated by reference.)                                                                                                                                                    
|        | 10 | (x)         |  | Distribution Agreement by and between Presstek,
    Inc. and Kodak Polychrome Graphics LLC dated March 18, 2003.
    (Previously filed as Exhibit 10.1 to Pressteks Quarterly
    Report on Form 10-Q for the quarter ended March 29, 2003, filed
    May 13, 2003, hereby incorporated by reference.)                                                                                                                                
|        | 10 | (y)         |  | Restated Amended Master Supply and Distribution
    Agreement by and between Presstek, Inc. and Xerox Corporation
    dated March 18, 2003. (Previously filed as Exhibit 10.1 to
    Pressteks Quarterly Report on Form 10-Q for the quarter
    ended March 29, 2003, filed May 13, 2003, hereby incorporated by
    reference.)                                                                                                     
|        | 10 | (z)**       |  | 2003 Stock Option and Incentive Plan of Presstek,
    Inc. (Previously filed as Exhibit 10.1 to Pressteks
    Quarterly Report on Form 10-Q for the quarter ended June 28,
    2003, filed August 12, 2003, hereby incorporated by reference.)                                                                                                                                                                                        
|        | 10 | (aa)*       |  | OEM Consumables Supply Agreement by and between
    Presstek, Inc. and Heidelberg Druckmaschinen, AG., dated July 1,
    2003. (Previously filed as Exhibit 10.1 to Pressteks
    Quarterly Report on Form 10-Q for the quarter ended September
    27, 2003, filed November 12, 2003, hereby incorporated by
    reference.)                                                                                                         
|        | 10 | (bb)*       |  | OEM Consumables Supply Agreement by and between
    Presstek, Inc. and Heidelberg U.S.A., Inc. dated July 1, 2003.
    (Previously filed as Exhibit 10.2 to Pressteks Quarterly
    Report on Form 10-Q for the quarter ended September 27, 2003,
    filed November 12, 2003, hereby incorporated by reference.)                                                                                                                     

37



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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                   
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | (cc)        |  | Credit Agreement by and among Presstek, Inc.,
    Lasertel Inc., Citizens Bank New Hampshire and Keybank National
    Association dated October 15, 2003. (Previously filed as Exhibit
    10.3 to Pressteks Quarterly Report on Form 10-Q for the
    quarter ended September 27, 2003, filed November 12, 2003,
    hereby incorporated by reference.)                                                         
|        | 10 | (dd)        |  | Revolving Note dated October 15, 2003 made by
    Presstek, Inc. in favor of Citizens Bank New Hampshire.
    (Previously filed as Exhibit 10.4 to Pressteks Quarterly
    Report on Form 10-Q for the quarter ended September 27, 2003,
    filed November 12, 2003, hereby incorporated by reference.)                                                                                                         
|        | 10 | (ee)        |  | Revolving Note dated October 15, 2003 made by
    Presstek, Inc. in favor of Keybank National Association.
    (Previously filed as Exhibit 10.5 to Pressteks Quarterly
    Report on Form 10-Q for the quarter ended September 27, 2003,
    filed November 12, 2003, hereby incorporated by reference.)                                                                                                        
|        | 10 | (ff)        |  | Term Note dated October 15, 2003 made by
    Presstek, Inc. in favor of Citizens Bank New Hampshire.
    (Previously filed as Exhibit 10.6 to Pressteks Quarterly
    Report on Form 10-Q for the quarter ended September 27, 2003,
    filed November 12, 2003, hereby incorporated by reference.)                                                                                                              
|        | 10 | (gg)        |  | Term Note dated October 15, 2003 made by
    Presstek, Inc. in favor of Keybank National Association.
    (Previously filed as Exhibit 10.7 to Pressteks Quarterly
    Report on Form 10-Q for the quarter ended September 27, 2003,
    filed November 12, 2003, hereby incorporated by reference.)                                                                                                             
|        | 10 | (hh)        |  | Swing Line Note dated October 15, 2003 made by
    Presstek, Inc. in favor of Citizens Bank New Hampshire.
    (Previously filed as Exhibit 10.8 to Pressteks Quarterly
    Report on Form 10-Q for the quarter ended September 27, 2003,
    filed November 12, 2003, hereby incorporated by reference.)                                                                                                        
|        | 10 | (ii)        |  | Security Agreement by and between Presstek, Inc.
    and Citizens Bank New Hampshire dated October 15, 2003.
    (Previously filed as Exhibit 10.9 to Pressteks Quarterly
    Report on Form 10-Q for the quarter ended September 27, 2003,
    filed November 12, 2003, hereby incorporated by reference.)                                                                                                      
|        | 10 | (jj)        |  | Security Agreement by and between Lasertel, Inc.
    and Citizens Bank New Hampshire dated October 15, 2003.
    (Previously filed as Exhibit 10.10 to Pressteks Quarterly
    Report on Form 10-Q for the quarter ended September 27, 2003,
    filed November 12, 2003, hereby incorporated by reference.)                                                                                                     
|        | 10 | (kk)        |  | Security Agreement (Intellectual Property) by and
    between Presstek, Inc. and Citizens Bank New Hampshire dated
    October 15, 2003. (Previously filed as Exhibit 10.11 to
    Pressteks Quarterly Report on Form 10-Q for the quarter
    ended September 27, 2003, filed November 12, 2003, hereby
    incorporated by reference.)                                                                         
|        | 10 | (ll)        |  | Security Agreement (Intellectual Property) by and
    between Lasertel, Inc. and Citizens Bank New Hampshire dated
    October 15, 2003. (Previously filed as Exhibit 10.12 to
    Pressteks Quarterly Report on Form 10-Q for the quarter
    ended September 27, 2003, filed November 12, 2003, hereby
    incorporated by reference.)                                                                         
|        | 10 | (mm)        |  | Mortgage and Security Agreement between Presstek,
    Inc. and Citizens Bank New Hampshire dated October 15, 2003.
    (Previously filed as Exhibit 10.13 to Pressteks Quarterly
    Report on Form 10-Q for the quarter ended September 27, 2003,
    filed November 12, 2003, hereby incorporated by reference.)                                                                                               
|        | 10 | (nn)        |  | Deed of Trust, Assignment of Rents, Security
    Agreement and Fixture Filing by and among Presstek, Inc., First
    American Title Insurance Company and Citizens Bank New Hampshire
    dated October 15, 2003. (Previously filed as Exhibit 10.14 to
    Pressteks Quarterly Report on Form 10-Q for the quarter
    ended September 27, 2003, filed November 12, 2003, hereby
    incorporated by reference.)
|        | 10 | (oo)**      |  | Employment Agreement by and between Presstek,
    Inc. and Edward J. Marino dated November 19, 2003 (filed
    herewith.)                                                                                                                                                                                                                                                                                         
|        | 10 | (pp)**      |  | Employment Agreement by and between Presstek,
    Inc. and Moosa E. Moosa dated December 31, 2003 (filed
    herewith.)                                                                                                                                                                                                                                                                                           
|        | 10 | (qq)        |  | Amendment to Employment Agreement by and between
    Pressteck, Inc. and Moosa E. Moosa dated January 10, 2004
    (filed herewith.)                                                                                                                                                                                                                                                                              
|        | 21 |             |  | Subsidiaries of the Presstek, Inc. (filed
    herewith.)                                                                                                                                                                                                                                                                                                                                                          

38



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##### Table of Contents



|        |      |             |  |                                                                                                                                                     
|------- | ---- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 23   | (a)         |  | Consent of BDO Seidman, LLP (filed herewith.)                                                                                                       
|        | 32.1 |             |  | Certification Pursuant to 18 U.S.C. Section 1350,
    as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002 (furnished herewith.)
|        | 32.2 |             |  | Certification Pursuant to 18 U.S.C. Section 1350,
    as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002 (furnished herewith.)



---



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



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






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

None






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






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

39



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##### Table of Contents






SIGNATURES

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



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



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

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

Dated: March 18, 2004

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

|                                                       |  |                                                                                                     |  |                |  | 
|------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                                       |  |                                                                                                     |  |               
|Signature                                              |  | Title                                                                                               |  | Date          
|                                                       |  |                                                                                                     |  |               
|                                                      
|/s/ RICHARD A. WILLIAMSRichard A. Williams             |  | Chairman of the Board                                                                               |  | March 18, 2004
|                                                      
|/s/ EDWARD J. MARINOEdward J. Marino                   |  | Chief Executive Officer, President, and Director
    (Principal Executive Officer)                  |  | March 18, 2004
|                                                      
|/s/ MOOSA E. MOOSAMoosa E. Moosa                       |  | Vice President of Finance, Chief Financial
    Officer (Principal Financial and Accounting Officer) |  | March 18, 2004
|                                                      
|/s/ DR. LAWRENCE HOWARDDr. Lawrence Howard             |  | Director                                                                                            |  | March 18, 2004
|                                                      
|/s/ JOHN W. DREYERJohn W. Dreyer                       |  | Director                                                                                            |  | March 18, 2004
|                                                      
|/s/ JOHN B. EVANSJohn B. Evans                         |  | Director                                                                                            |  | March 18, 2004
|                                                      
|/s/ DANIEL S. EBENSTEIN, ESQ.Daniel S. Ebenstein, Esq. |  | Director                                                                                            |  | March 18, 2004
|                                                      
|/s/ MICHAEL D. MOFFITTMichael D. Moffitt               |  | Director                                                                                            |  | March 18, 2004
|                                                      
|/s/ DONALD C. WAITE IIIDonald C. Waite III             |  | Director                                                                                            |  | March 18, 2004
|                                                      
|/s/ BARBARA A. PELLOWBarbara A. Pellow                 |  | Director                                                                                            |  | March 18, 2004
|                                                      
|/s/ STEVEN N. RAPPAPORTSteven N. Rappaport             |  | Director                                                                                            |  | March 18, 2004

40



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##### Table of Contents






INDEX TO FINANCIAL STATEMENTS

|                                                                                                                                           |  |      |      | 
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ---- | 
|                                                                                                                                           |  | Page
|                                                                                                                                           |  |     
|Report of Independent Certified
    Public Accountants                                                                                     |  |      | F-2  | 
|Balance Sheets as of January 3, 2004 and
    December 28, 2002                                                                             |  |      | F-3  | 
|Statements of Operations for the fiscal years
    ended January 3, 2004, December 28, 2002, and
    December 29, 2001                      |  |      | F-4  | 
|Statements of Changes in Stockholders
    Equity for the fiscal years ended January 3, 2004,
    December 28, 2002, and December 29, 2001 |  |      | F-5  | 
|Statements of Cash Flows for the fiscal years
    ended January 3, 2004, December 28, 2002, and
    December 29, 2001                      |  |      | F-6  | 
|Notes to Financial Statements                                                                                                              |  |      | F-7  | 
|Financial Statement Schedule:                                                                                                              |  |      |      | 
|Schedule II  Valuation and Qualifying
    Accounts and Reserves                                                                           |  |      | FS-1 | 

F-1



---



##### Table of Contents






REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS

To the Board of Directors and Stockholders

Presstek, Inc.


Hudson, New Hampshire


We have audited the accompanying balance sheets
of Presstek, Inc. as of January 3, 2004 and
December 28, 2002, and the related statements of
operations, changes in stockholders equity, and cash flows
for the fiscal years ended January 3, 2004,
December 28, 2002 and December 29, 2001. We have also
audited the financial statement schedule listed in the
accompanying index. These financial statements and schedule are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.

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

In our opinion, the financial statements referred
to above present fairly in all material respects, the financial
position of Presstek, Inc. at January 3, 2004 and
December 28, 2002, and the results of its operations and
its cash flows for the fiscal years ended January 3, 2004,
December 28, 2002 and December 29, 2001, in conformity
with accounting principles generally accepted in the United
States of America.

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



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

New York, New York

February 25, 2004


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##### Table of Contents



PRESSTEK, INC.

BALANCE SHEETS

(In thousands, except share and per share data)


|                                                        |                                                                                                                                                                             |                            |        |         |        |         |        |         |        |         | 
|------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | ------- | ------ | ------- | ------ | ------- | ------ | ------- | 
|                                                        |                                                                                                                                                                             | Jan 3,                     |        | Dec 28,
|                                                        |                                                                                                                                                                             | 2004                       |        | 2002   
|                                                        |                                                                                                                                                                             |                            |        |        
|ASSETS                                                  |                                                                                                                                                                             |                            |        |         |        |         |        |        
|CURRENT ASSETS:                                         |                                                                                                                                                                             |                            |        |         |        |         |        |        
|                                                        | Cash and cash equivalents                                                                                                                                                   |                            | $      | 28,196  |        |         | $      | 17,563  |       
|                                                        | Accounts receivable, net of allowance for losses
    of $1,892 and $2,167 in fiscal 2003 and 2002, respectively                                                             |                            |        | 14,922  |        |         |        | 15,108  |       
|                                                        | Inventories                                                                                                                                                                 |                            |        | 12,354  |        |         |        | 11,715  |       
|                                                        | Other current assets                                                                                                                                                        |                            |        | 1,064   |        |         |        | 554     |       
|                                                        |                                                                                                                                                                             |                            |        |         |        |         |        |        
|                                                        |                                                                                                                                                                             | Total current assets       |        |         | 56,536 |         |        |         | 44,940 |        
|                                                        |                                                                                                                                                                             |                            |        |         |        |         |        |        
|PROPERTY, PLANT AND EQUIPMENT, NET                      |                                                                                                                                                                             |                            | 45,732 |         |        |         | 52,291 |        
|OTHER ASSETS:                                           |                                                                                                                                                                             |                            |        |         |        |         |        |        
|                                                        | Patent application costs and license
    rights, net                                                                                                                        |                            |        | 3,419   |        |         |        | 4,409   |       
|                                                        | Other                                                                                                                                                                       |                            |        | 841     |        |         |        | 156     |       
|                                                        |                                                                                                                                                                             |                            |        |         |        |         |        |        
|                                                        |                                                                                                                                                                             | Total other assets         |        |         | 4,260  |         |        |         | 4,565  |        
|                                                        |                                                                                                                                                                             |                            |        |         |        |         |        |        
|                                                        |                                                                                                                                                                             |                            | TOTAL  |         | $      | 106,528 |        |         | $      | 101,796 | 
|                                                        |                                                                                                                                                                             |                            |        |         |        |         |        |        
|                                                       
|LIABILITIES AND STOCKHOLDERS
    EQUITY                |                                                                                                                                                                             |                            |        |         |        |         |        |        
|CURRENT LIABILITIES:                                    |                                                                                                                                                                             |                            |        |         |        |         |        |        
|                                                        | Current portion of long-term debt                                                                                                                                           |                            | $      | 2,143   |        |         | $      | 3,045   |       
|                                                        | Accounts payable                                                                                                                                                            |                            |        | 4,750   |        |         |        | 3,331   |       
|                                                        | Accrued expenses                                                                                                                                                            |                            |        | 7,131   |        |         |        | 9,992   |       
|                                                        |                                                                                                                                                                             |                            |        |         |        |         |        |        
|                                                        |                                                                                                                                                                             | Total current liabilities  |        |         | 14,024 |         |        |         | 16,368 |        
|                                                        |                                                                                                                                                                             |                            |        |         |        |         |        |        
|LONG-TERM DEBT, NET OF CURRENT
    PORTION              |                                                                                                                                                                             |                            | 12,321 |         |        |         | 13,662 |        
|COMMITMENTS AND CONTINGENCIES
    STOCKHOLDERS EQUITY: |                                                                                                                                                                             |                            |        |         |        |         |        |        
|                                                        | Preferred stock, $.01 par value; authorized
    1,000,000 shares, no shares issued or outstanding                                                                           |                            |        |        |        |         |        |        |       
|                                                        | Common stock, $.01 par value; authorized
    75,000,000 shares, issued and outstanding 34,202,175 shares at
    January 3, 2004, 34,125,481 shares at
    December 28, 2002 |                            |        | 342     |        |         |        | 341     |       
|                                                        | Additional paid-in capital                                                                                                                                                  |                            |        | 97,769  |        |         |        | 97,403  |       
|                                                        | Comprehensive loss                                                                                                                                                          |                            |        | (47     | )      |         |        |        |       
|                                                        | Accumulated deficit                                                                                                                                                         |                            |        | (17,881 | )      |         |        | (25,978 | )     
|                                                        |                                                                                                                                                                             |                            |        |         |        |         |        |        
|                                                        |                                                                                                                                                                             | Total stockholders equity |        |         | 80,183 |         |        |         | 71,766 |        
|                                                        |                                                                                                                                                                             |                            |        |         |        |         |        |        
|                                                        |                                                                                                                                                                             |                            | TOTAL  |         | $      | 106,528 |        |         | $      | 101,796 | 
|                                                        |                                                                                                                                                                             |                            |        |         |        |         |        |        

See accompanying notes to financial statements

F-3



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##### Table of Contents



PRESSTEK, INC.

STATEMENTS OF OPERATIONS

(In thousands, except per share data)


|                                                                 |                                       |                            |        |         |        |         |        |        |        |   |        |        |         |  
|---------------------------------------------------------------- | ------------------------------------- | -------------------------- | ------ | ------- | ------ | ------- | ------ | ------ | ------ | - | ------ | ------ | ------- | -
|                                                                 |                                       |                           
|                                                                 |                                       | For the Fiscal Years Ended
|                                                                 |                                       |                           
|                                                                 |                                       | Jan 3,                     |        | Dec 28, |        | Dec 29,
|                                                                 |                                       | 2004                       |        | 2002    |        | 2001   
|                                                                 |                                       |                            |        |         |        |        
|REVENUE:                                                         |                                       |                            |        |         |        |         |        |        |        |   |        |       
|                                                                 | Product sales                         |                            | $      | 84,543  |        |         | $      | 78,988 |        |   | $      | 94,114 |        
|                                                                 | Royalties and fees from licensees     |                            |        | 2,689   |        |         |        | 4,465  |        |   |        | 8,189  |        
|                                                                 |                                       |                            |        |         |        |         |        |        |        |   |        |       
|                                                                 |                                       | Total revenue              |        |         | 87,232 |         |        |        | 83,453 |   |        |        | 102,303 |  
|                                                                 |                                       |                            |        |         |        |         |        |        |        |   |        |       
|COSTS AND EXPENSES:                                              |                                       |                            |        |         |        |         |        |        |        |   |        |       
|                                                                 | Cost of products sold                 |                            |        | 51,151  |        |         |        | 54,639 |        |   |        | 64,395 |        
|                                                                 | Research and product development      |                            |        | 7,061   |        |         |        | 9,303  |        |   |        | 11,719 |        
|                                                                 | Sales, marketing and customer support |                            |        | 12,272  |        |         |        | 10,767 |        |   |        | 13,311 |        
|                                                                 | General and administrative            |                            |        | 9,363   |        |         |        | 10,212 |        |   |        | 15,495 |        
|                                                                 | Special charges                       |                            |        | 550     |        |         |        | 5,961  |        |   |        |       |        
|                                                                 |                                       |                            |        |         |        |         |        |        |        |   |        |       
|                                                                 |                                       | Total costs and expenses   |        |         | 80,397 |         |        |        | 90,882 |   |        |        | 104,920 |  
|                                                                 |                                       |                            |        |         |        |         |        |        |        |   |        |       
|INCOME
    (LOSS) FROM OPERATIONS                                |                                       |                            | 6,835  |         |        |         | (7,429 | )      |        |   | (2,617 | )     
|                                                                 |                                       |                            |        |         |        |         |        |        |        |   |        |       
|OTHER INCOME (EXPENSE):                                          |                                       |                            |        |         |        |         |        |        |        |   |        |       
|                                                                 | Interest, net                         |                            |        | (376    | )      |         |        | (872   | )      |   |        | (1,136 | )      
|                                                                 | Other, net                            |                            |        | 209     |        |         |        | 21     |        |   |        | (63    | )      
|                                                                 |                                       |                            |        |         |        |         |        |        |        |   |        |       
|                                                                 |                                       | Total other expense, net   |        |         | (167   | )       |        |        | (851   | ) |        |        | (1,199  | )
|                                                                 |                                       |                            |        |         |        |         |        |        |        |   |        |       
|INCOME (LOSS) FROM CONTINUING OPERATIONS
    BEFORE INCOME TAXES |                                       |                            | 6,668  |         |        |         | (8,280 | )      |        |   | (3,816 | )     
|PROVISION FOR INCOME TAXES                                       |                                       |                            |       |         |        |         |       |        |        |   |       |       
|                                                                 |                                       |                            |        |         |        |         |        |        |        |   |        |       
|INCOME (LOSS) FROM
    CONTINUING OPERATIONS                     |                                       |                            | 6,668  |         |        |         | (8,280 | )      |        |   | (3,816 | )     
|                                                                 |                                       |                            |        |         |        |         |        |        |        |   |        |       
|DISCONTINUED OPERATIONS:                                         |                                       |                            |        |         |        |         |        |        |        |   |        |       
|                                                                 | Income from discontinued operations   |                            |        | 1,429   |        |         |        |       |        |   |        |       |        
|                                                                 |                                       |                            |        |         |        |         |        |        |        |   |        |       
|INCOME FROM
    DISCONTINUED OPERATIONS                          |                                       |                            | 1,429  |         |        |         |       |        |        |   |       |       
|                                                                 |                                       |                            |        |         |        |         |        |        |        |   |        |       
|NET INCOME (LOSS)                                                |                                       | $                          | 8,097  |         |        | $       | (8,280 | )      |        | $ | (3,816 | )     
|                                                                 |                                       |                            |        |         |        |         |        |        |        |   |        |       
|EARNINGS (LOSS) PER SHARE 
    BASIC:                           |                                       |                            |        |         |        |         |        |        |        |   |        |       
|                                                                 | From continuing operations            |                            | $      | 0.20    |        |         | $      | (0.24  | )      |   | $      | (0.11  | )      
|                                                                 | From discontinued operations          |                            | $      | 0.04    |        |         | $      | 0.00   |        |   | $      | 0.00   |        
|                                                                 |                                       |                            |        |         |        |         |        |        |        |   |        |       
|EARNINGS (LOSS) PER SHARE
     BASIC                            |                                       | $                          | 0.24   |         |        | $       | (0.24  | )      |        | $ | (0.11  | )     
|                                                                 |                                       |                            |        |         |        |         |        |        |        |   |        |       
|EARNINGS (LOSS) PER SHARE 
    DILUTED:                         |                                       |                            |        |         |        |         |        |        |        |   |        |       
|                                                                 | From continuing operations            |                            | $      | 0.20    |        |         | $      | (0.24  | )      |   | $      | (0.11  | )      
|                                                                 | From discontinued operations          |                            | $      | 0.04    |        |         | $      | 0.00   |        |   | $      | 0.00   |        
|                                                                 |                                       |                            |        |         |        |         |        |        |        |   |        |       
|EARNINGS (LOSS) PER SHARE
     DILUTED                          |                                       | $                          | 0.24   |         |        | $       | (0.24  | )      |        | $ | (0.11  | )     
|                                                                 |                                       |                            |        |         |        |         |        |        |        |   |        |       
|WEIGHTED AVERAGE                                                 |                                       |                            |        |         |        |         |        |        |        |   |        |       
|COMMON SHARES OUTSTANDING
     BASIC                            |                                       |                            | 34,167 |         |        |         | 34,124 |        |        |   | 34,096 |       
|                                                                 |                                       |                            |        |         |        |         |        |        |        |   |        |       
|WEIGHTED AVERAGE                                                 |                                       |                            |        |         |        |         |        |        |        |   |        |       
|COMMON SHARES OUTSTANDING
     DILUTED                          |                                       |                            | 34,400 |         |        |         | 34,124 |        |        |   | 34,096 |       
|                                                                 |                                       |                            |        |         |        |         |        |        |        |   |        |       

See accompanying notes to financial statements

F-4



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##### Table of Contents



PRESSTEK, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY

(In thousands)


|                                  |                             |                                                                                     |        |            |   |             |     |               |   |               |        |        |   |   |         |       |   |   |     |   |     |   |        |       |     |  
|--------------------------------- | --------------------------- | ----------------------------------------------------------------------------------- | ------ | ---------- | - | ----------- | --- | ------------- | - | ------------- | ------ | ------ | - | - | ------- | ----- | - | - | --- | - | --- | - | ------ | ----- | --- | -
|                                  |                             |                                                                                    
|                                  |                             | For the Fiscal Year Ended January 3, 2004, December 28, 2002, and December 29, 2001
|                                  |                             |                                                                                    
|                                  |                             |                                                                                     |        |            |   | Accumulated |     |              
|                                  |                             | Common Stock                                                                        |        | Additional |   | Retained    |     | Other         |   | Total        
|                                  |                             |                                                                                     |        | Paid-in    |   | Earnings    |     | Comprehensive |   | Stockholders
|                                  |                             | Shares                                                                              |        | Amount     |   | Capital     |     | (Deficit)     |   | Income (Loss) |        | Equity
|                                  |                             |                                                                                     |        |            |   |             |     |               |   |               |        |       
|BALANCE AT DECEMBER 30, 2000      |                             |                                                                                     | 34,028 |            |   | $           | 340 |               |   | $             | 96,685 |        |   | $ | (13,882 | )     |   | $ |    |   |     | $ | 83,143 |      
|Net loss for the year             |                             |                                                                                     |       |            |   |             |    |               |   |               |       |        |   |   | (3,816  | )     |   |   |    |   |     |   | (3,816 | )    
|Stock option exercises            |                             |                                                                                     | 88     |            |   |             | 1   |               |   |               | 657    |        |   |   |        |       |   |   |    |   |     |   | 658    |      
|                                  |                             |                                                                                     |        |            |   |             |     |               |   |               |        |        |   |   |         |       |   |   |     |   |     |   |        |      
|BALANCE AT DECEMBER 29, 2001      |                             |                                                                                     | 34,116 |            |   |             | 341 |               |   |               | 97,342 |        |   |   | (17,698 | )     |   |   |    |   |     |   | 79,985 |      
|Net loss for the year             |                             |                                                                                     |        |            |   |             |     |               |   |               |        |        |   |   | (8,280  | )     |   |   |    |   |     |   | (8,280 | )    
|Stock option exercises            |                             |                                                                                     | 9      |            |   |             |    |               |   |               | 61     |        |   |   |        |       |   |   |    |   |     |   | 61     |      
|                                  |                             |                                                                                     |        |            |   |             |     |               |   |               |        |        |   |   |         |       |   |   |     |   |     |   |        |      
|BALANCE AT DECEMBER 28, 2002      |                             |                                                                                     | 34,125 |            |   |             | 341 |               |   |               | 97,403 |        |   |   | (25,978 | )     |   |   |    |   |     |   | 71,766 |      
|Comprehensive Income:             |                             |                                                                                     |        |            |   |             |     |               |   |               |        |        |   |   |         |       |   |   |     |   |     |   |        |      
|                                  | Net income for the year     |                                                                                     |        |           |   |             |     |              |   |               |        |       |   |   |         | 8,097 |   |   |     |  |     |   |        | 8,097 |    
|                                  | Other comprehensive income: |                                                                                     |        |            |   |             |     |               |   |               |        |        |   |   |         |       |   |   |     |   |     |   |        |       |    
|                                  |                             | Unrealized loss                                                                     |        |            |  |             |     |               |  |               |        |        |  |   |         |       |  |   |     |   | (47 | ) |        |       | (47 | )
|                                  |                             |                                                                                     |        |            |   |             |     |               |   |               |        |        |   |   |         |       |   |   |     |   |     |   |        |      
|Comprehensive income for the year |                             |                                                                                     |        |            |   |             |     |               |   |               |        |        |   |   |         |       |   |   |     |   |     |   | 8,050  |      
|                                  |                             |                                                                                     |        |            |   |             |     |               |   |               |        |        |   |   |         |       |   |   |     |   |     |   |        |      
|Stock option exercises            |                             |                                                                                     | 77     |            |   |             | 1   |               |   |               | 366    |        |   |   |        |       |   |   |    |   |     |   | 367    |      
|                                  |                             |                                                                                     |        |            |   |             |     |               |   |               |        |        |   |   |         |       |   |   |     |   |     |   |        |      
|BALANCE AT JANUARY 3, 2004        |                             |                                                                                     | 34,202 |            |   | $           | 342 |               |   | $             | 97,769 |        |   | $ | (17,881 | )     |   | $ | (47 | ) |     | $ | 80,183 |      
|                                  |                             |                                                                                     |        |            |   |             |     |               |   |               |        |        |   |   |         |       |   |   |     |   |     |   |        |      

See accompanying notes to financial statements

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##### Table of Contents



PRESSTEK, INC.

STATEMENTS OF CASH FLOWS

(In thousands)


|                                                     |                                           |                                                                                                                                                            |                                             |         |        |         |        |        |       |        |        |        |       |        |  
|---------------------------------------------------- | ----------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | ------- | ------ | ------- | ------ | ------ | ----- | ------ | ------ | ------ | ----- | ------ | -
|                                                     |                                           |                                                                                                                                                           
|                                                     |                                           | For the Fiscal Years Ended                                                                                                                                
|                                                     |                                           |                                                                                                                                                           
|                                                     |                                           | Jan 3,                                                                                                                                                     |                                             | Dec 28, |        | Dec 29,
|                                                     |                                           | 2004                                                                                                                                                       |                                             | 2002    |        | 2001   
|                                                     |                                           |                                                                                                                                                            |                                             |         |        |        
|                                                     |                                           |                                                                                                                                                           
|CASH FLOWS  OPERATING
    ACTIVITIES:               |                                           |                                                                                                                                                            |                                             |         |        |         |        |        |       |        |        |       
|                                                     | Net income                                |                                                                                                                                                            | $                                           | 8,097   |        |         | $      | (8,280 | )     |        | $      | (3,816 | )    
|                                                     |                                           | Less income from discontinued operations                                                                                                                   |                                             |         | (1,429 | )       |        |        |      |        |        |        |      |       
|                                                     |                                           |                                                                                                                                                            |                                             |         |        |         |        |        |       |        |        |       
|                                                     | Income (loss) from continuing operations  |                                                                                                                                                            |                                             | 6,668   |        |         |        | (8,280 | )     |        |        | (3,816 | )    
|                                                     |                                           | Adjustments to reconcile income (loss) from
    continuing operations to net cash provided by (used in)
    operating activities of continuing operations: |                                             |         |        |         |        |        |       |        |        |        |       |       
|                                                     |                                           |                                                                                                                                                            | Special charges and discontinued programs   |         |        | 550     |        |        |       | 9,646  |        |        |       |       |  
|                                                     |                                           |                                                                                                                                                            | Depreciation and amortization               |         |        | 8,867   |        |        |       | 9,422  |        |        |       | 9,003  |  
|                                                     |                                           |                                                                                                                                                            | Provision for warranty and other costs      |         |        | 1,228   |        |        |       | 1,938  |        |        |       | 2,124  |  
|                                                     |                                           |                                                                                                                                                            | Provision for losses on accounts receivable |         |        | 1,358   |        |        |       | 901    |        |        |       | 990    |  
|                                                     |                                           |                                                                                                                                                            | Other non-cash charge, net                  |         |        | 2       |        |        |       | 294    |        |        |       | 995    |  
|                                                     |                                           | Changes in operating assets and liabilities:                                                                                                               |                                             |         |        |         |        |        |       |        |        |        |       |       
|                                                     |                                           |                                                                                                                                                            | Accounts receivable                         |         |        | (1,172  | )      |        |       | 2,117  |        |        |       | (2,161 | )
|                                                     |                                           |                                                                                                                                                            | Inventories                                 |         |        | (639    | )      |        |       | 3,391  |        |        |       | (5,773 | )
|                                                     |                                           |                                                                                                                                                            | Other current assets                        |         |        | (510    | )      |        |       | 564    |        |        |       | 6,484  |  
|                                                     |                                           |                                                                                                                                                            | Accounts payable                            |         |        | 1,419   |        |        |       | 1,264  |        |        |       | (4,628 | )
|                                                     |                                           |                                                                                                                                                            | Accrued expenses                            |         |        | (3,510  | )      |        |       | (3,221 | )      |        |       | (1,236 | )
|                                                     |                                           |                                                                                                                                                            | Deferred revenue                            |         |        | 300     |        |        |       | (68    | )      |        |       | (1,052 | )
|                                                     |                                           |                                                                                                                                                            | Other non-current assets                    |         |        | (708    | )      |        |       | (1,016 | )      |        |       | (320   | )
|                                                     |                                           |                                                                                                                                                            |                                             |         |        |         |        |        |       |        |        |       
|                                                     | Net cash provided by operating activities |                                                                                                                                                            |                                             | 13,853  |        |         |        | 16,952 |       |        |        | 610    |      
|                                                     |                                           |                                                                                                                                                            |                                             |         |        |         |        |        |       |        |        |       
|CASH FLOWS  INVESTING
    ACTIVITIES:               |                                           |                                                                                                                                                            |                                             |         |        |         |        |        |       |        |        |       
|                                                     |                                           |                                                                                                                                                            | Property, plant and equipment purchases     |         |        | (1,344  | )      |        |       | (1,497 | )      |        |       | (9,643 | )
|                                                     |                                           |                                                                                                                                                            | Proceeds from the sale of equipment         |         |        |        |        |        |       | 213    |        |        |       |       |  
|                                                     |                                           |                                                                                                                                                            |                                             |         |        |         |        |        |       |        |        |       
|                                                     | Net cash used in investing activities     |                                                                                                                                                            |                                             | (1,344  | )      |         |        | (1,284 | )     |        |        | (9,643 | )    
|                                                     |                                           |                                                                                                                                                            |                                             |         |        |         |        |        |       |        |        |       
|CASH FLOWS  FINANCING
    ACTIVITIES:               |                                           |                                                                                                                                                            |                                             |         |        |         |        |        |       |        |        |       
|                                                     |                                           |                                                                                                                                                            | Net proceeds from stock option exercises    |         |        | 367     |        |        |       | 61     |        |        |       | 658    |  
|                                                     |                                           |                                                                                                                                                            | Proceeds from mortgage term loan            |         |        | 15,000  |        |        |       |       |        |        |       |       |  
|                                                     |                                           |                                                                                                                                                            | Repayments of mortgage term loan            |         |        | (7,953  | )      |        |       | (1,063 | )      |        |       | (890   | )
|                                                     |                                           |                                                                                                                                                            | Proceeds from lease line of credit          |         |        |        |        |        |       | 3,000  |        |        |       |       |  
|                                                     |                                           |                                                                                                                                                            | Repayments of lease line of credit          |         |        | (9,290  | )      |        |       | (1,628 | )      |        |       | (1,182 | )
|                                                     |                                           |                                                                                                                                                            | Revolving line of credit                    |         |        |        |        |        |       | (967   | )      |        |       | 967    |  
|                                                     |                                           |                                                                                                                                                            |                                             |         |        |         |        |        |       |        |        |       
|                                                     | Net cash used in financing activities     |                                                                                                                                                            |                                             | (1,876  | )      |         |        | (597   | )     |        |        | (447   | )    
|                                                     |                                           |                                                                                                                                                            |                                             |         |        |         |        |        |       |        |        |       
|INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS |                                           |                                                                                                                                                            | 10,633                                      |         |        |         | 15,071 |        |       |        | (9,480 | )     
|CASH AND CASH EQUIVALENTS BEGINNING OF
    PERIOD    |                                           |                                                                                                                                                            | 17,563                                      |         |        |         | 2,492  |        |       |        | 11,972 |       
|                                                     |                                           |                                                                                                                                                            |                                             |         |        |         |        |        |       |        |        |       
|CASH AND CASH EQUIVALENTS END OF
    PERIOD          |                                           | $                                                                                                                                                          | 28,196                                      |         |        | $       | 17,563 |        |       | $      | 2,492  |       
|                                                     |                                           |                                                                                                                                                            |                                             |         |        |         |        |        |       |        |        |       
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW
    INFORMATION |                                           |                                                                                                                                                            |                                             |         |        |         |        |        |       |        |        |       
|                                                     | Cash paid during the period for:          |                                                                                                                                                            |                                             |         |        |         |        |        |       |        |        |        |      
|                                                     |                                           | Interest                                                                                                                                                   |                                             | $       | 707    |         |        | $      | 1,057 |        |        | $      | 1,367 |       
|                                                     |                                           |                                                                                                                                                            |                                             |         |        |         |        |        |       |        |        |       
|                                                     |                                           | Income taxes                                                                                                                                               |                                             | $       |       |         |        | $      |      |        |        | $      | 121   |       
|                                                     |                                           |                                                                                                                                                            |                                             |         |        |         |        |        |       |        |        |       

See accompanying notes to financial statements

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PRESSTEK, INC.

NOTES TO FINANCIAL STATEMENTS



|   |                                               
|-- | ----------------------------------------------
|1. | Summary of Significant Accounting
    Policies

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

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

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

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

Fiscal Year
The Company operates and reports on a 52- or 53-week, fiscal
year ending on the Saturday closest to December 31.
Accordingly, the financial statements include the 53-week fiscal
year ended January 3, 2004, (fiscal 2003), and the 52-week
fiscal years ended December 28, 2002, (fiscal
2002), and December 29, 2001 (fiscal
2001).

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

Revenue Recognition The Company recognizes revenue
when persuasive evidence of an agreement exists, delivery has
occurred or services have been rendered, the price to the
customer is fixed or determinable, and collection is reasonably
assured, and no future services are required.

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

Fair Value of Financial Instruments The carrying values of cash
equivalents, accounts receivable, and accounts payable
approximate fair value due to the short-term maturity of these
instruments. The carrying amounts of the Companys bank
borrowings, refinanced in 2003 under its credit agreement,
approximates fair value because the interest rates are based on
floating rates identified by reference to market rates. At
January 3, 2004 and December 28, 2002, the fair value
of the Companys long-term debt approximated carrying value.

F-7



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##### Table of Contents



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

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

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

The Company evaluates its accounts receivable on
an ongoing basis and establishes an allowance for doubtful
accounts based on specific customer circumstances and on its
historical rate of write-offs. The Company includes any accounts
receivable balances that are determined to be uncollectible,
along with a general reserve, in an overall allowance for
doubtful accounts. After reasonable attempts to collect a
receivable have failed, the receivable is written off against
the allowance. The Company believes the allowance for doubtful
accounts as of January 3, 2004 is adequate, however, actual
write-offs might exceed the recorded allowance.

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

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

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

Patent Application Costs and License Rights Patent application costs
represent the cost of preparing and filing applications to
patent the Companys proprietary technologies, in addition
to certain patent and license rights obtained in the
Companys acquisitions. Such costs are amortized over a
period ranging from five to seven years, beginning on the date
the patents or rights are issued or acquired. Amortization
expense relating to patent application costs and license rights
for fiscal 2003, 2002 and 2001, was $890,000, $853,000, and
$780,000, respectively.

At January 3, 2004 and December 28,
2002, the Companys gross carrying amount for Patent
Application Costs and License Rights was $7.9 million and
$8.0 million, respectively. The accumulative amortization at

F-8



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##### Table of Contents



January 3, 2004 and December 28, 2002
was $4.5 million and $3.6 million, respectively. The
following table summarizes the Companys projected
amortization expense:


|           |  |                |       | 
|---------- |  | -------------- | ----- | 
|           |  | (In thousands)
|           |  |               
|2004       |  | $              | 904   | 
|2005       |  |                | 611   | 
|2006       |  |                | 537   | 
|2007       |  |                | 172   | 
|2008       |  |                | 66    | 
|Thereafter |  |                | 4     | 
|           |  |                |       | 
|           |  | $              | 2,294 | 
|           |  |                |       | 

Software Development Costs Software development costs for
products and certain product enhancements are capitalized
subsequent to the establishment of their technological
feasibility (as defined in Statement of Financial Accounting
Standards No. 86) based upon the existence of working
models of the products that are ready for initial customer
testing. Costs incurred prior to such technological feasibility
or subsequent to a products general release to customers
are expensed as incurred. During fiscal 2003, 2002 and 2001, the
Company did not incur any costs subject to capitalization.

Long Lived Assets Long-lived assets, such as
intangible assets and property and equipment, are required to be
evaluated for impairment annually, or more frequently 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 such impairment existed at
January 3, 2004.

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

Changes in the Companys warranty liability
during fiscal 2003 is as follows:

|                                                                        |  |                |        |      |  |      |        |   |  |   |        |  
|----------------------------------------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                        |  | 2003           |        | 2002 |  | 2001
|                                                                        |  |                |        |      |  |     
|                                                                        |  |               
|                                                                        |  | (In thousands)
|Balance, beginning of year                                              |  | $              | 1,089  |      |  | $    | 793    |   |  | $ | 598    |  
|Warranties issued                                                       |  |                | 1,228  |      |  |      | 1,938  |   |  |   | 3,877  |  
|Charges                                                                 |  |                | (1,382 | )    |  |      | (1,642 | ) |  |   | (3,682 | )
|Changes in estimated pre-existing warranties,
    including expirations |  |                |       |      |  |      |       |   |  |   |       |  
|                                                                        |  |                |        |      |  |      |        |   |  |   |        |  
|Balance, end of year                                                    |  | $              | 935    |      |  | $    | 1,089  |   |  | $ | 793    |  
|                                                                        |  |                |        |      |  |      |        |   |  |   |        |  

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

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

Stock-Based Compensation The Company accounts for stock
options granted to employees under the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), as permitted by
Statement of Financial Accounting Standards No. 123,
(SFAS 123) Accounting for Stock-Based
Compensation. APB 25 provides for compensation cost to be
recognized over the vesting period of

F-9



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##### Table of Contents



the options based on the difference, if any,
between the fair market value of the Companys stock and
the option price on the grant date. As the Company has only
issued fixed term stock option grants at or above the quoted
market price on the date of the grant, there is no compensation
expense recognized in the accompanying financial statements. The
Company adopted the disclosure provisions of SFAS 123 that
require 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.


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

|                                                     |         |                                       |        |      |  |      |         |       |   |   |        |       |  
|---------------------------------------------------- | ------- | ------------------------------------- | ------ | ---- |  | ---- | ------- | ----- | - | - | ------ | ----- | -
|                                                     |         | 2003                                  |        | 2002 |  | 2001
|                                                     |         |                                       |        |      |  |     
|                                                     |         |                                      
|                                                     |         | (In thousands, except per share data)
|Net income (loss), as reported                       |         | $                                     | 8,097  |      |  | $    | (8,280  | )     |   | $ | (3,816 | )    
|Total stock-based employee
    compensation expense  |         |                                       | (2,942 | )    |  |      | (4,707  | )     |   |   | (1,104 | )    
|                                                     |         |                                       |        |      |  |      |         |       |   |   |        |      
|Pro forma net income (loss)                          |         | $                                     | 5,155  |      |  | $    | (12,987 | )     |   | $ | (4,920 | )    
|                                                     |         |                                       |        |      |  |      |         |       |   |   |        |      
|Net income (loss) per common share, as
    reported: |         |                                       |        |      |  |      |         |       |   |   |        |      
|                                                     | Basic   |                                       | $      | 0.24 |  |      | $       | (0.24 | ) |   | $      | (0.11 | )
|                                                     |         |                                       |        |      |  |      |         |       |   |   |        |      
|                                                     | Diluted |                                       | $      | 0.24 |  |      | $       | (0.24 | ) |   | $      | (0.11 | )
|                                                     |         |                                       |        |      |  |      |         |       |   |   |        |      
|Pro forma net income (loss) per common share:        |         |                                       |        |      |  |      |         |       |   |   |        |      
|                                                     | Basic   |                                       | $      | 0.15 |  |      | $       | (0.38 | ) |   | $      | (0.14 | )
|                                                     |         |                                       |        |      |  |      |         |       |   |   |        |      
|                                                     | Diluted |                                       | $      | 0.15 |  |      | $       | (0.38 | ) |   | $      | (0.14 | )
|                                                     |         |                                       |        |      |  |      |         |       |   |   |        |      

The above pro forma net income (loss) and net
income (loss) per share do not consider any related tax benefit
from option exercises in fiscal 2003, 2002 or 2001.

The Company used the Black-Scholes option-pricing
model to estimate the fair value of $3.59, $3.78 and $5.60 for
each stock option issued in fiscal 2003, 2002 and 2001,
respectively, using the following weighted average assumptions:

|                        |  |      |       |      |  |      |       |   |  |  |       |  
|----------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                        |  | 2003 |       | 2002 |  | 2001
|                        |  |      |       |      |  |     
|Dividend yield          |  |      | none  |      |  |      | none  |   |  |  | none  |  
|Expected volatility     |  |      | 69.00 | %    |  |      | 74.57 | % |  |  | 71.76 | %
|Risk free interest rate |  |      | 3.51  | %    |  |      | 3.43  | % |  |  | 4.95  | %
|Expected option life    |  |      | 5.49  |      |  |      | 6.45  |   |  |  | 6.29  |  

Comprehensive Income (Loss) Comprehensive income (loss) is
comprised of net income and all changes in stockholders
equity except those due to investments by owners. In fiscal
2003, comprehensive income included a $47,000 loss which related
to derivatives used to hedge interest rate exposure. In fiscal
2002 and 2001 comprehensive income (loss) was comprised
solely of net income (loss).

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

Effect of New Accounting Pronouncements In January 2003, the
Emerging Issues Task Force (EITF) issued EITF Issue
No. 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables(EITF 00-21).EITF
00-21 addresses certain aspects of the accounting by a vendor
for arrangements under which it will perform multiple revenue
generating activities; specifically, how to determine whether an
arrangement involving multiple deliverables contains more than
one unit of accounting and how arrangement consideration should
be measured

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##### Table of Contents



and allocated to the separate units of accounting
in the arrangement. EITF 00-21 does not change otherwise
applicable revenue recognition criteria. EITF 00-21 is effective
for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The adoption of EITF 00-21
did not have a material effect on the Companys financial
statements.


In January 2003, the Financial Accounting
Standards Board (FASB), issued Interpretation
No. 46, Consolidation of Variable Interest Entities,
an Interpretation of Accounting Research Bulletin No. 51,
(FIN No. 46) which requires all variable
interest entities (VIEs) to be consolidated by the
primary beneficiary. The primary beneficiary is the entity that
holds the majority of the beneficial interests in the VIE. In
addition, the interpretation expands disclosure requirements for
both variable interest entities that are consolidated, as well
as VIEs from which the entity is the holder of a significant
amount of the beneficial interests, but not the majority. The
disclosure requirements of this interpretation are effective for
all financial statements issued after January 31, 2003. The
consolidation requirements of this interpretation are effective
for all periods beginning after June 15, 2003. The Company
does not have any VIEs, therefore the adoption of this
interpretation did not have a material effect on its results of
operations or financial condition.

In April 2003, the FASB issued Statement of
Financial Accounting Standards, (SFAS),
No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. SFAS No. 149
amends and clarifies the accounting for derivative instruments,
including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No, 133,
Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 149 is generally effective for
contracts entered into or modified after June 29, 2003 and
for hedging relationships designated after June 29, 2003.
The adoption of this statement did not material effect on the
Companys results of operations or financial condition.

In May 2003, the FASB issued SFAS
No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. SFAS
No. 150 requires that certain financial instruments, which
under previous guidance were accounted for as equity, must now
be accounted for as liabilities. The financial instruments
affected include mandatorily redeemable stock, certain financial
instruments that require or may require the issuer to buy back
some of its shares in exchange for cash or other assets and
certain obligations that can be settled with shares of stock.
SFAS No. 150 is effective for all financial instruments
entered into or modified after May 31, 2003 and must be
applied to existing financial instruments effective
June 29, 2003. The adoption of this statement did not have
a material effect on the Companys results of operations or
financial condition.

In December 2003, the FASB issued SFAS
No. 132, Employers Disclosures about Pensions
and Other Postretirement Benefits (revised 2003). This
statement revises employers disclosures about pension
plans and other post-retirement benefit plans. We adopted the
additional disclosure requirements of this statement as of
January 4, 2003.



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

During the third quarter of fiscal 2003, the
Company filed a joint motion for dismissal of a lawsuit that
PPG, Inc. (PPG) brought against the Companys
subsidiary, Delta V Technologies, Inc., whose operations were
discontinued in fiscal 1999. As a result of the dismissal, the
Company reversed all previously recorded liabilities associated
with this discontinued operation in the third quarter of fiscal
2003, resulting in net income of $1.4 million from
discontinued operations in fiscal 2003.

F-11



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##### Table of Contents





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

Inventories consisted of the following at
January 3, 2004 and December 28, 2002:

|                  |  |                |        |      |  |   |        | 
|----------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                  |  | 2003           |        | 2002
|                  |  |                |        |     
|                  |  |               
|                  |  | (In thousands)
|Raw materials     |  | $              | 2,782  |      |  | $ | 2,162  | 
|Work in process   |  |                | 2,939  |      |  |   | 4,179  | 
|Finished goods    |  |                | 6,633  |      |  |   | 5,374  | 
|                  |  |                |        |      |  |   |        | 
|Total inventories |  | $              | 12,354 |      |  | $ | 11,715 | 
|                  |  |                |        |      |  |   |        | 

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



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

Property, plant and equipment, net consisted of
the following at January 3, 2004 and December 28, 2002:

|                                         |                               |                |        |         |   |   |        |         |  
|---------------------------------------- | ----------------------------- | -------------- | ------ | ------- | - | - | ------ | ------- | -
|                                         |                               | 2003           |        | 2002   
|                                         |                               |                |        |        
|                                         |                               |               
|                                         |                               | (In thousands)
|At cost:                                 |                               |                |        |         |   |   |        |        
|Land and improvements                    |                               | $              | 2,038  |         |   | $ | 2,038  |        
|Buildings and leasehold improvements     |                               |                | 24,518 |         |   |   | 24,456 |        
|Production equipment and other           |                               |                | 46,931 |         |   |   | 46,023 |        
|Office furniture and equipment           |                               |                | 4,831  |         |   |   | 4,545  |        
|                                         |                               |                |        |         |   |   |        |        
|                                         |                               |                | 78,318 |         |   |   | 77,062 |        
|                                         | Less accumulated depreciation |                |        | (32,586 | ) |   |        | (24,771 | )
|                                         |                               |                |        |         |   |   |        |        
|Total property, plant and equipment, net |                               | $              | 45,732 |         |   | $ | 52,291 |        
|                                         |                               |                |        |         |   |   |        |        

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

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



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

Accrued expenses consisted of the following at
January 3, 2004 and December 28, 2002:

|                                           |  |                |       |      |  |   |       | 
|------------------------------------------ |  | -------------- | ----- | ---- |  | - | ----- | 
|                                           |  | 2003           |       | 2002
|                                           |  |                |       |     
|                                           |  |               
|                                           |  | (In thousands)
|Accrued payroll and benefits               |  | $              | 2,154 |      |  | $ | 2,152 | 
|Accrued warranty                           |  |                | 935   |      |  |   | 1,089 | 
|Accrued special charges                    |  |                | 1,055 |      |  |   | 3,226 | 
|Accrued royalties                          |  |                | 1,057 |      |  |   | 660   | 
|Other current liabilities                  |  |                | 1,930 |      |  |   | 1,416 | 
|Net liabilities of discontinued operations |  |                |      |      |  |   | 1,449 | 
|                                           |  |                |       |      |  |   |       | 
|Total accrued expenses                     |  | $              | 7,131 |      |  | $ | 9,992 | 
|                                           |  |                |       |      |  |   |       | 

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

Long-term debt consisted of the following at
January 3, 2004 and December 28, 2002:

|                     |                      |                |        |        |   |   |        |        |  
|-------------------- | -------------------- | -------------- | ------ | ------ | - | - | ------ | ------ | -
|                     |                      | 2003           |        | 2002  
|                     |                      |                |        |       
|                     |                      |               
|                     |                      | (In thousands)
|Term Loan            |                      | $              | 14,464 |        |   | $ |       |       
|Mortgage term loans  |                      |                |       |        |   |   | 7,417  |       
|Lease line of credit |                      |                |       |        |   |   | 9,290  |       
|                     |                      |                |        |        |   |   |        |       
|                     |                      |                | 14,464 |        |   |   | 16,707 |       
|                     | Less current portion |                |        | (2,143 | ) |   |        | (3,045 | )
|                     |                      |                |        |        |   |   |        |       
|Total long-term debt |                      | $              | 12,321 |        |   | $ | 13,662 |       
|                     |                      |                |        |        |   |   |        |       

In October 2003, the Company replaced its
existing credit facilities, entering into a $50.0 million
senior secured credit facility jointly with two lenders. This
new credit facility includes a $35.0 million revolving line
of credit (the Revolver) and a $15.0 million
term loan (the Term Loan). These credit facilities
are secured by all of the Companys assets, and bear
interest, at the Companys election, at either the Prime
rate or the LIBOR rate, plus an applicable margin based on
certain financial ratios, ranging from a minimum of .25% to a
maximum of 2.5%.

The Revolver is a five-year loan, expiring in
September 2008, under which the Company may borrow a
maximum of $35.0 million, reduced by the amount of all
letters of credit outstanding. Advances under the Revolver may
be used to finance working capital requirements, capital
expenditures, and future acquisitions as permitted under the
loan agreement. At January 3, 2004, the Company had
$35.0 million available under the revolving line of credit
loan, reduced by $5.5 million outstanding under standby
letters of credit.

The Term Loan is a five-year loan in the amount
of $15.0 million. Under the Term Loan, principal and
interest payments will be made in nineteen quarterly
installments of $535,714 plus interest, with a final payment of
all remaining principal, and accrued and unpaid interest due on
September 30, 2008. At January 3, 2004, the effective
interest rate was 2.4%. Proceeds from the Term Loan were used to
re-finance all debt outstanding under the Companys
previous credit facilities.

The Company uses derivatives to hedge its
interest rate exposure on its floating rate debt. At
January 3, 2004 the net cost and the estimated fair value
were not material.

Under the terms of the Revolver and Term Loan,
the Company is required to meet various financial covenants on a
quarterly and annual basis, including maximum funded debt to
EBITDA and minimum fixed charge coverage covenants. As of
January 3, 2004, the Company was in compliance with all
financial covenants.

As of January 3, 2004, aggregate debt
maturities for long-term debt were as follows:

|     |                                 |                |       |        | 
|---- | ------------------------------- | -------------- | ----- | ------ | 
|     |                                 | (In thousands)
|2004 |                                 | $              | 2,143 |       
|2005 |                                 |                | 2,143 |       
|2006 |                                 |                | 2,143 |       
|2007 |                                 |                | 2,143 |       
|2008 |                                 |                | 5,892 |       
|     |                                 |                |       |       
|     | Total long-term debt maturities |                | $     | 14,464 | 
|     |                                 |                |       |       



|   |                     
|-- | --------------------
|7. | Stockholders Equity

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

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---



##### Table of Contents



Employee Stock Option Plans As of January 3, 2004 the
Company had three stock option plans in effect, namely, the 1994
Stock Option Plan (the 1994 Plan), the 1998 Stock
Incentive Plan (the 1998 Plan), and the 2003 Stock
Option and Incentive Plan (the 2003 Plan).

The 1988 Stock Option Plan (the 1988
Plan) expired on August 21, 1998, the 1991 Stock
Option Plan (the 1991 Plan) expired on
August 18, 2001, and the 1997 Interim Stock Option Plan
(the 1997 Plan) expired on September 22, 2002.
No future grants will be issued under these expired plans,
however at January 3, 2004, options outstanding under the
1991 and 1997 plans totaled 233,525 and 139,350, respectively,
and will expire according to the specified expiration terms of
the individual option grant. There were no options outstanding
under the 1988 plan at January 3, 2004.

The 1994 Plan, which expires April 8, 2004,
provides for the award of options to key employees and other
persons to purchase up to 2,500,000 shares of the Companys
common stock. Options granted under this plan may be either
Incentive Stock Options (ISOs) or Nonqualified
Options (NQOs). Generally, ISOs may only be granted
to employees of the Company, at an exercise price of not less
than fair market value of the stock at the date of grant. NQOs
may be granted to any person, at any exercise price not less
than par value, within the discretion of the Board of Directors
or a committee appointed by the Board of Directors
(Committee). Under the 1994 Plan, any options
granted will generally become exercisable in increments over a
period not to exceed ten years from the date of grant, to be
determined by the Board of Directors or Committee. These options
generally will expire not more than ten years from the date of
grant. At January 3, 2004 options outstanding totaled
1,306,876 and will expire according to the specified expiration
terms of the individual option grants.

The 1998 Plan provides for the award
(collectively awards) of stock options, restricted
stock, deferred stock, and other stock based awards to officers,
directors, employees, and other key persons. A total of
3,000,000 shares of common stock, subject to anti-dilution
adjustments have been reserved under this plan. Options under
the 1998 Plan become exercisable upon the earlier of a date set
by the Board of Directors or Committee at the time of grant or
the close of business on the day before the tenth anniversary of
the stock options date of grant. Options become
exercisable the day before the fifth anniversary of the date of
grant in the case of an ISO. At January 3, 2004 options
outstanding totaled 1,690,225 and will expire according to the
specified expiration terms of the individual option grants.

The 2003 Plan provides for the award of stock
options, stock issuances and other equity interests in the
Company to employees, officers, directors (including those
directors who are not an employee or officer of the Company),
such directors being referred to as Non-Employee Directors,
consultants and advisors of the Company and its Subsidiaries,
all of whom are eligible to receive awards under the plan. A
total of 2,000,000 shares of common stock, subject to
anti-dilution adjustments have been reserved under this plan.
Options under the 2003 Plan become exercisable at such times and
subject to such terms and conditions as the Board of Directors
or Committee may specify in the applicable option agreement at
the time of grant. At January 3, 2004 there were no
outstanding options under this plan.

Employee Stock Purchase Plan The Companys 2002
Employee Stock Purchase Plan (ESPP) provides for all
eligible employees of the Company and its participating
subsidiaries to purchase shares of the Companys common
stock through payroll deductions at 85% of the fair market value
of the Companys common stock on specified days. A total of
950,000 shares of the Companys common stock subject to
adjustment, have been reserved for issuance under this plan. At
January 3, 2004, a total of 893,506 shares remain available
for issuance.

Director Stock Option Plan, The Companys Non-employee
Director Stock Option Plan (the Director Plan) that
expired on December 31, 2003 allowed only non-employee
directors of the Company to receive grants under the plan. The
plan provided 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. At January 3, 2004
options outstanding totaled 82,500 and will expire according to
the specified expiration terms of the individual option grants.

F-14



---



##### Table of Contents



The following table summarizes information about
all stock options outstanding at January 3, 2004:

|                |  |                     |           |                     |  |          |     |             |  |          |      |  |  |  |           |  |  |   |       | 
|--------------- |  | ------------------- | --------- | ------------------- |  | -------- | --- | ----------- |  | -------- | ---- |  |  |  | --------- |  |  | - | ----- | 
|                |  |                     |           |                    
|                |  | Options Outstanding |           | Options Exercisable
|                |  |                     |           |                    
|                |  |                     |           | Weighted            |  | Weighted |     |             |  | Weighted
|                |  |                     |           | Average             |  | Average  |     | Exercisable |  | Average 
|Range of        |  | Outstanding         |           | Contractual         |  | Exercise |     | as of       |  | Exercise
|Exercise Prices |  | as of 01/03/04      |           | Years               |  | Price    |     | 01/03/04    |  | Price   
|                |  |                     |           |                     |  |          |     |             |  |         
|$0.00 - $5.22   |  |                     | 309,500   |                     |  |          | 8.6 |             |  | $        | 4.38 |  |  |  | 66,250    |  |  | $ | 3.41  | 
|$5.23 - $6.00   |  |                     | 688,750   |                     |  |          | 7.6 |             |  | $        | 5.29 |  |  |  | 387,812   |  |  | $ | 5.30  | 
|$6.01 - $6.75   |  |                     | 554,575   |                     |  |          | 8.0 |             |  | $        | 6.33 |  |  |  | 159,000   |  |  | $ | 6.35  | 
|$6.76 - $8.00   |  |                     | 670,475   |                     |  |          | 4.4 |             |  | $        | 7.39 |  |  |  | 536,225   |  |  | $ | 7.37  | 
|$8.01 - $13.70  |  |                     | 523,600   |                     |  |          | 4.8 |             |  | $        | 9.75 |  |  |  | 414,099   |  |  | $ | 9.70  | 
|$13.71 - $23.00 |  |                     | 705,576   |                     |  |          | 4.9 |             |  | $        | 9.75 |  |  |  | 689,826   |  |  | $ | 14.54 | 
|                |  |                     |           |                     |  |          |     |             |  |          |      |  |  |  |           |  |  |   |       | 
|                |  |                     | 3,452,476 |                     |  |          | 6.2 |             |  | $        | 8.36 |  |  |  | 2,253,212 |  |  | $ | 9.45  | 
|                |  |                     |           |                     |  |          |     |             |  |          |      |  |  |  |           |  |  |   |       | 

Information concerning all stock option activity
under the 1988, 1991, 1994, 1997, 1998, the Director and 2003
Plans for the fiscal years ended January 3, 2004,
December 28, 2002 and December 29, 2001 is summarized
as follows:

|                                 |  |        |            |              |  |               |               |  |  |   |       | 
|-------------------------------- |  | ------ | ---------- | ------------ |  | ------------- | ------------- |  |  | - | ----- | 
|                                 |  |        |            |              |  | Weighted     
|                                 |  | Option |            | Option Price |  | Average Price
|                                 |  | Shares |            | Per Share    |  | Per Share    
|                                 |  |        |            |              |  |              
|Outstanding at December 30, 2000 |  |        | 3,192,837  |              |  | $             | 5.88 - $26.94 |  |  | $ | 10.77 | 
|Granted                          |  |        | 331,500    |              |  | $             | 5.50 - $14.95 |  |  | $ | 9.15  | 
|Exercised                        |  |        | (87,925    | )            |  | $             | 6.50 - $ 8.00 |  |  | $ | 7.40  | 
|Cancelled/ Expired               |  |        | (130,925   | )            |  | $             | 6.88 - $21.00 |  |  | $ | 12.60 | 
|                                 |  |        |            |              |  |               |               |  |  |   |       | 
|Outstanding at December 29, 2001 |  |        | 3,305,487  |              |  | $             | 5.50 - $26.94 |  |  | $ | 10.62 | 
|Granted                          |  |        | 1,508,900  |              |  | $             | 2.85 - $ 8.79 |  |  | $ | 5.72  | 
|Exercised                        |  |        | (9,575     | )            |  | $             | 6.88 - $ 7.78 |  |  | $ | 7.25  | 
|Cancelled/ Expired               |  |        | (1,165,011 | )            |  | $             | 5.82 - $19.19 |  |  | $ | 9.87  | 
|                                 |  |        |            |              |  |               |               |  |  |   |       | 
|Outstanding at December 28, 2002 |  |        | 3,639,801  |              |  | $             | 2.85 - $26.94 |  |  | $ | 8.84  | 
|Granted                          |  |        | 385,000    |              |  | $             | 4.36 - $ 8.21 |  |  | $ | 5.84  | 
|Exercised                        |  |        | (20,200    | )            |  | $             | 6.30 - $ 6.88 |  |  | $ | 6.71  | 
|Cancelled/ Expired               |  |        | (552,125   | )            |  | $             | 2.85 - $26.94 |  |  | $ | 9.83  | 
|                                 |  |        |            |              |  |               |               |  |  |   |       | 
|Outstanding at January 3, 2004   |  |        | 3,452,476  |              |  | $             | 2.88 - $22.75 |  |  | $ | 8.36  | 
|                                 |  |        |            |              |  |               |               |  |  |   |       | 

Options exercisable under the Companys
stock option plans at January 3, 2004, December 28,
2002 and December 29, 2001 were 2,253,212, 2,154,460 and
2,322,224, respectively.

The proceeds to the Company from stock options
exercised under the Companys stock option plans during
fiscal years 2003, 2002, and 2001, totaled $ $367,000, $61,000,
and $658,000, respectively.

In addition to the above mentioned plans, as of
January 3, 2004, the Companys Lasertel subsidiary has
in place a stock option plan, the Lasertel Inc. 2000 Stock
Incentive Plan (the Lasertel Plan). The Lasertel
Plan, as amended in fiscal 2001, provides for the award of
NQOs to employees and other key individuals of Lasertel
and Presstek, to purchase up to 2,100,000 shares of
Lasertels common stock. These options generally vest over
a period of four years with termination dates generally ten
years from date of grant and are subject to earlier termination
as provided in the Lasertel Plan.

F-15



---



##### Table of Contents



Information concerning all stock option activity
under the Lasertel Plan for fiscal years ended January 3,
2004, December 28, 2002 and December 29, 2001 is
summarized as follows:

|                                 |  |        |            |              |  |               |              |  |  |   |      | 
|-------------------------------- |  | ------ | ---------- | ------------ |  | ------------- | ------------ |  |  | - | ---- | 
|                                 |  |        |            |              |  | Weighted     
|                                 |  | Option |            | Option Price |  | Average Price
|                                 |  | Shares |            | Per Share    |  | Per Share    
|                                 |  |        |            |              |  |              
|Outstanding at December 30, 2000 |  |        | 2,564,250  |              |  | $             | 0.10 - $0.75 |  |  | $ | 0.11 | 
|Granted                          |  |        | 297,450    |              |  | $             | 0.15 - $1.00 |  |  | $ | 0.37 | 
|Exercised                        |  |        | (78,687    | )            |  | $             | 0.10 - $0.10 |  |  | $ | 0.10 | 
|Cancelled/ Expired               |  |        | (1,545,769 | )            |  | $             | 0.10 - $1.00 |  |  | $ | 0.12 | 
|                                 |  |        |            |              |  |               |              |  |  |   |      | 
|Outstanding at December 29, 2001 |  |        | 1,237,244  |              |  | $             | 0.10 - $1.00 |  |  | $ | 0.16 | 
|Granted                          |  |        | 89,500     |              |  | $             | 0.15 - $0.15 |  |  | $ | 0.15 | 
|Exercised                        |  |        | (496,119   | )            |  | $             | 0.10 - $1.00 |  |  | $ | 0.10 | 
|Cancelled/ Expired               |  |        | (266,450   | )            |  | $             | 0.10 - $1.00 |  |  | $ | 0.21 | 
|                                 |  |        |            |              |  |               |              |  |  |   |      | 
|Outstanding at December 28, 2002 |  |        | 564,175    |              |  | $             | 0.10 - $1.00 |  |  | $ | 0.19 | 
|Granted                          |  |        | 46,550     |              |  | $             | 0.15 - $0.15 |  |  | $ | 0.15 | 
|Exercised                        |  |        | (12,500    | )            |  | $             | 0.10 - $0.25 |  |  | $ | 0.15 | 
|Cancelled/ Expired               |  |        | (54,788    | )            |  | $             | 0.10 - $1.00 |  |  | $ | 0.32 | 
|                                 |  |        |            |              |  |               |              |  |  |   |      | 
|Outstanding at January 3, 2004   |  |        | 543,437    |              |  | $             | 0.10 - $1.00 |  |  | $ | 0.17 | 
|                                 |  |        |            |              |  |               |              |  |  |   |      | 

The Lasertel Plan contains a provision that in
the event that a public offering of Lasertels common stock
has not occurred prior to August 31, 2004, Lasertel is
obligated to repurchase, at their then fair value, all of the
Lasertel common stock issued and outstanding as a result of the
exercise of the options under the Lasertel Plan, provided such
shares of Lasertel common stock have been issued and outstanding
for at least six months. Fair value is to be determined by an
independent third party. Fair value as of January 3, 2004
was not material.

In May 2000, warrants to purchase 300,000
shares of the Companys common stock were issued at a price
of $20.81 in exchange for consulting services. These warrants
were valued at $2.5 million, using the Black-Scholes
pricing model. The valuation was recorded as a long-term asset
through May of 2002, and was being amortized over the five-year
term of the consulting agreement. In June 2002, as a result
of the termination of the consulting agreement, the balance of
$1.4 million was written down as part of the special charge
recorded in fiscal 2002. See Note 12. Amortization expense
recorded in fiscal years 2002 and 2001 was $207,000, and
$498,000, respectively. Warrants to purchase 100,000 shares of
the Companys common stock were outstanding at
January 3, 2004, and expired on February 23, 2004.



|   |             
|-- | ------------
|8. | Income Taxes

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

The Company did not record a provision for
federal income taxes in fiscal 2003 as a result of the
utilization of net operating loss carryforwards. The Company did
not record a provision for federal income taxes in fiscal 2002
or 2001 due to operating losses. The Company did not record a
provision for state income taxes in fiscal 2003 as a result of
the utilization of net operating loss and business enterprise
credit carryforwards. The Company did not record a provision for
state income taxes in fiscal 2002 and 2001 due to operating
losses.

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

F-16



---



##### Table of Contents



tax assets and liabilities consisted of the
following at January 3, 2004, December 28, 2002 and
December 29, 2001:


|                          |                                                        |                                |         |        |        |      |         |        |        |   |         |        |        | 
|------------------------- | ------------------------------------------------------ | ------------------------------ | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                          |                                                        | 2003                           |         | 2002   |        | 2001
|                          |                                                        |                                |         |        |        |     
|                          |                                                        |                               
|                          |                                                        | (In thousands)                
|Deferred tax assets:      |                                                        |                                |         |        |        |      |         |        |        |   |         |       
|                          | Net operating loss carryforwards                       |                                | $       | 30,400 |        |      | $       | 31,300 |        |   | $       | 32,100 |       
|                          | Tax credits                                            |                                |         | 5,100  |        |      |         | 4,600  |        |   |         | 4,800  |       
|                          | Warranty provisions, litigation and
    other accruals |                                |         | 3,800  |        |      |         | 4,700  |        |   |         | 3,100  |       
|                          |                                                        |                                |         |        |        |      |         |        |        |   |         |       
|                          |                                                        | Gross deferred tax assets      |         |        | 39,300 |      |         |        | 40,600 |   |         |        | 40,000 | 
|                          |                                                        |                                |         |        |        |      |         |        |        |   |         |       
|Deferred tax liabilities: |                                                        |                                |         |        |        |      |         |        |        |   |         |       
|                          | Amortizable and depreciable assets                     |                                |         | 100    |        |      |         |       |        |   |         | 100    |       
|                          | Accumulated depreciation and amortization              |                                |         | 3,300  |        |      |         | 3,600  |        |   |         | 3,700  |       
|                          |                                                        |                                |         |        |        |      |         |        |        |   |         |       
|                          |                                                        | Gross deferred tax liabilities |         |        | 3,400  |      |         |        | 3,600  |   |         |        | 3,800  | 
|                          |                                                        |                                |         |        |        |      |         |        |        |   |         |       
|                          |                                                        |                                | 35,900  |        |        |      | 37,000  |        |        |   | 36,200  |       
|Less valuation allowance  |                                                        |                                | (35,900 | )      |        |      | (37,000 | )      |        |   | (36,200 | )     
|                          |                                                        |                                |         |        |        |      |         |        |        |   |         |       
|Deferred tax assets  net |                                                        | $                              |        |        |        | $    |        |        |        | $ |        |       
|                          |                                                        |                                |         |        |        |      |         |        |        |   |         |       

The valuation allowance decreased
$1.1 million, in fiscal 2003, and increased $800,000 and
$7.1 million in fiscal 2002 and 2001, respectively.

The difference between income taxes at the United
States federal income tax rate and the effective income tax rate
was primarily a result of the change in the valuation allowance
and previously unrecognized tax credit for fiscal 2003, 2002 and
2001.

As of January 3, 2004, the Company had net
operating loss carryforwards totaling approximately
$89.1 million, of which $55.8 million resulted from
compensation deductions for tax purposes relating to stock
option compensation and $33.3 million resulted from
operating losses. To the extent net operating losses resulting
from stock option compensation deductions become realizable, the
benefit will be credited directly to additional paid in capital.
The amount of the net operating loss carryforwards that may be
utilized to offset future taxable income, when earned, may be
subject to certain limitations, based upon changes in the
ownership of the Companys common stock.

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

|           |  |                              |        | 
|---------- |  | ---------------------------- | ------ | 
|Expiration |  | Amount of Remaining Net     
|Date       |  | Operating Loss Carryforwards
|           |  |                             
|           |  | (In thousands)              
|2005       |  | $                            | 1,120  | 
|2006       |  |                              | 5,020  | 
|2008       |  |                              | 50     | 
|2009       |  |                              | 500    | 
|2010       |  |                              | 9,570  | 
|2011       |  |                              | 22,710 | 
|2012       |  |                              | 12,580 | 
|2013       |  |                              | 570    | 
|2014       |  |                              | 14,660 | 
|2015       |  |                              | 5,000  | 
|2016       |  |                              | 14,380 | 
|2017       |  |                              | 2,940  | 

F-17



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##### Table of Contents



In addition, the Company has available tax credit
carryforwards (adjusted to reflect provisions of the Tax Reform
Act of 1986) of approximately $5.1 million that are available to
offset future income tax liabilities when incurred.



|   |                          
|-- | -------------------------
|9. | Earnings (Loss) Per Share

The following represents the calculation of basic
and diluted earnings (loss) per share for fiscal 2003, 2002
and 2001:

|                                                         |                              |                                       |        |      |  |      |        |       |   |   |        |       |  
|-------------------------------------------------------- | ---------------------------- | ------------------------------------- | ------ | ---- |  | ---- | ------ | ----- | - | - | ------ | ----- | -
|                                                         |                              | 2003                                  |        | 2002 |  | 2001
|                                                         |                              |                                       |        |      |  |     
|                                                         |                              |                                      
|                                                         |                              | (In thousands, except per share data)
|Income (loss) from continuing operations                 |                              | $                                     | 6,668  |      |  | $    | (8,280 | )     |   | $ | (3,816 | )    
|Income from discontinued operations                      |                              |                                       | 1,429  |      |  |      |       |       |   |   |       |      
|                                                         |                              |                                       |        |      |  |      |        |       |   |   |        |      
|Net income (loss)                                        |                              | $                                     | 8,097  |      |  | $    | (8,280 | )     |   | $ | (3,816 | )    
|                                                         |                              |                                       |        |      |  |      |        |       |   |   |        |      
|Weighted average common shares outstanding
     Basic   |                              |                                       | 34,167 |      |  |      | 34,124 |       |   |   | 34,096 |      
|Effect of assumed conversion of stock options            |                              |                                       | 233    |      |  |      |       |       |   |   |       |      
|                                                         |                              |                                       |        |      |  |      |        |       |   |   |        |      
|Weighted average common shares outstanding
     Diluted |                              |                                       | 34,400 |      |  |      | 34,124 |       |   |   | 34,096 |      
|                                                         |                              |                                       |        |      |  |      |        |       |   |   |        |      
|Earnings (loss) per share  Basic:                       |                              |                                       |        |      |  |      |        |       |   |   |        |      
|                                                         | From continuing operations   |                                       | $      | 0.20 |  |      | $      | (0.24 | ) |   | $      | (0.11 | )
|                                                         | From discontinued operations |                                       | $      | 0.04 |  |      | $      | 0.00  |   |   | $      | 0.00  |  
|                                                         |                              |                                       |        |      |  |      |        |       |   |   |        |      
|Earnings (loss) per share  Basic                        |                              | $                                     | 0.24   |      |  | $    | (0.24  | )     |   | $ | (0.11  | )    
|                                                         |                              |                                       |        |      |  |      |        |       |   |   |        |      
|Earnings (loss) per share  Diluted:                     |                              |                                       |        |      |  |      |        |       |   |   |        |      
|                                                         | From continuing operations   |                                       | $      | 0.20 |  |      | $      | (0.24 | ) |   | $      | (0.11 | )
|                                                         | From discontinued operations |                                       | $      | 0.04 |  |      | $      | 0.00  |   |   | $      | 0.00  |  
|                                                         |                              |                                       |        |      |  |      |        |       |   |   |        |      
|Earnings (loss) per share  Diluted                      |                              | $                                     | 0.24   |      |  | $    | (0.24  | )     |   | $ | (0.11  | )    
|                                                         |                              |                                       |        |      |  |      |        |       |   |   |        |      

Options and warrants to purchase 1,930,116 shares
of common stock at exercise prices ranging from $6.30 to $22.75
per share were not included in the computation of diluted
earnings per share for fiscal 2003, as the exercise prices of
the options and warrants were greater than the average market
price of the common shares. These options and warrants, which
expire between January 4, 2004 and December 31, 2013, were
all outstanding at the end of fiscal 2003.

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



|    |                
|--- | ---------------
|10. | Related Parties

During fiscal 2003, the Company paid the law firm
of Amster, Rothstein & Ebenstein (Amster),
approximately $94,000 in legal fees and expenses, while
representing the Company on various intellectual property
matters. Mr. Daniel Ebenstein, who has been a director of
the Company since November 1999, is a partner of Amster and
shares in the profits of that firm. The Company paid Amster
approximately $632,000 and $3.0 million in fiscal 2002 and
2001, respectively.

During fiscal 2003, the Company paid R.H.
Ventures, Inc. (RH), $144,000 pursuant to an
agreement with Mr. Robert Howard, an executive of RH, who
served as the Companys Chairman Emeritus from
October 1998 to December 2000, when he resigned from this
position. The Company paid RH $144,000 in fiscal 2002 and 2001.
This agreement terminated at the end of fiscal 2003.

During fiscal 2003, the Company made payments to
Mr. John Evans, a director, totaling approximately $23,700
for consulting services. Mr. Evans provides consulting
services if and when requested by the Company, and is paid based
on the actual number of days he provides such service including
his related expenses. Mr. Evans has been a director of the
Company since October 1997.

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##### Table of Contents



During fiscal 2003, the Company made payments
totaling $204,306 to Mr. Richard A. Williams, the
Companys Chairman of the Board of Directors, pursuant to
his retirement agreement.

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

During fiscal 2001, the Company recorded sales of
equipment and consumables to Pitman Company (Pitman)
of $14.3 million, with an accounts receivable balance at
December 29, 2001, of $2.5 million. John Dreyer, who
has been a director of the Company since February 1996, was
Chairman of the Board and Chief Executive Officer and a director
of Pitman until his retirement in 2001.

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



|    |                                            
|--- | -------------------------------------------
|11. | Segment Information and Major
    Customers

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

The accounting policies of the reportable
segments are consistent with those of the Company. Sales between
the segments are recorded at prices that 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.

F-19



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##### Table of Contents



A summary of the Companys operations by
segment for the years ended January 3, 2004,
December 28, 2002 and December 29, 2001 were as
follows:

|                              |  |                |         |          |  |         |         |       |  |   |        |   |  |   |         |  
|----------------------------- |  | -------------- | ------- | -------- |  | ------- | ------- | ----- |  | - | ------ | - |  | - | ------- | -
|                              |  | Digital        |         |          |  |         |         |      
|                              |  | Imaging        |         |          |  | Inter-  |         |      
|                              |  | Products       |         | Lasertel |  | Segment |         | Total
|                              |  |                |         |          |  |         |         |      
|                              |  |               
|                              |  | (In thousands)
|Year ended January 3, 2004    |  |                |         |          |  |         |         |       |  |   |        |   |  |   |         |  
|Net revenue                   |  | $              | 85,497  |          |  | $       | 6,804   |       |  | $ | (5,069 | ) |  | $ | 87,232  |  
|Income (loss) from operations |  |                | 10,285  |          |  |         | (3,450  | )     |  |   |       |   |  |   | 6,835   |  
|Total assets                  |  |                | 92,484  |          |  |         | 14,044  |       |  |   |       |   |  |   | 106,528 |  
|Depreciation and amortization |  |                | 6,137   |          |  |         | 2,730   |       |  |   |       |   |  |   | 8,867   |  
|Capital expenditures          |  |                | 1,045   |          |  |         | 300     |       |  |   |       |   |  |   | 1,345   |  
|                             
|Year ended December 28, 2002  |  |                |         |          |  |         |         |       |  |   |        |   |  |   |         |  
|Net revenue                   |  | $              | 83,417  |          |  | $       | 2,959   |       |  | $ | (2,923 | ) |  | $ | 83,453  |  
|Income (loss) from operations |  |                | 397     |          |  |         | (7,826  | )     |  |   |       |   |  |   | (7,429  | )
|Total assets                  |  |                | 85,676  |          |  |         | 16,120  |       |  |   |       |   |  |   | 101,796 |  
|Depreciation and amortization |  |                | 6,797   |          |  |         | 2,625   |       |  |   |       |   |  |   | 9,422   |  
|Capital expenditures          |  |                | 1,006   |          |  |         | 491     |       |  |   |       |   |  |   | 1,497   |  
|                             
|Year ended December 29, 2001  |  |                |         |          |  |         |         |       |  |   |        |   |  |   |         |  
|Net revenue                   |  | $              | 103,717 |          |  | $       | 2,046   |       |  | $ | (3,460 | ) |  | $ | 102,303 |  
|Income (loss) from operations |  |                | 8,745   |          |  |         | (11,362 | )     |  |   |       |   |  |   | (2,617  | )
|Total assets                  |  |                | 83,805  |          |  |         | 23,039  |       |  |   |       |   |  |   | 106,844 |  
|Depreciation and amortization |  |                | 7,205   |          |  |         | 1,798   |       |  |   |       |   |  |   | 9,003   |  
|Capital expenditures          |  |                | 2,636   |          |  |         | 7,007   |       |  |   |       |   |  |   | 9,643   |  

The geographic information included in the
following table for fiscal 2003, 2002 and 2001 attributes
revenue to the geographic locations based on the location of the
Companys customer.

|                    |               |                |        |        |  |      |        |        |  |   |         |        | 
|------------------- | ------------- | -------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------- | ------ | 
|                    |               | 2003           |        | 2002   |  | 2001
|                    |               |                |        |        |  |     
|                    |               |               
|                    |               | (In thousands)
|Geographic Revenue: |               |                |        |        |  |      |        |        |  |   |         |       
|                    | United States |                | $      | 41,910 |  |      | $      | 33,211 |  |   | $       | 39,948 | 
|                    | Germany       |                |        | 19,276 |  |      |        | 25,083 |  |   |         | 32,738 | 
|                    | Japan         |                |        | 7,594  |  |      |        | 6,886  |  |   |         | 13,410 | 
|                    | All Other     |                |        | 18,452 |  |      |        | 18,273 |  |   |         | 16,207 | 
|                    |               |                |        |        |  |      |        |        |  |   |         |       
|Total revenue       |               | $              | 87,232 |        |  | $    | 83,453 |        |  | $ | 102,303 |       
|                    |               |                |        |        |  |      |        |        |  |   |         |       

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

Revenue generated under the Companys
agreements with Heidelberg and its distributors, Pitman Company,
and Koeing & Bauer and its distributors totaled
$18.3 million, $15.1 million and $9.0 million,
respectively for fiscal 2003, with accounts receivable balances
of $1.7 million, $1.9 million, and $1.7 million,
respectively, at January 3, 2004.

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

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

No other customer represented more than ten
percent of the Companys revenue in fiscal 2003, 2002 and
2001.

F-20



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##### Table of Contents





|    |                                              
|--- | ---------------------------------------------
|12. | Discontinued Programs and Special
    Charges

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

As a result of these actions, the Company
recorded a charge of $3.7 million to cost of products sold in
2002, which included $2.7 million for inventory write-downs
and $1.0 million for other charges related to discontinued
programs, $3.0 million of which was recorded by the Digital
Imaging Products segment, and $688,000 by the Lasertel segment.

In addition, the Company recorded special charges
of $6.0 million in the second quarter of fiscal 2002. The
special charges included $850,000 related to severance and
fringe benefit costs associated with the reduction of
approximately 50 employees, primarily in manufacturing and
research and development, $1.9 million related to the
write-down of equipment and lease termination costs as a result
of the Hampshire Drive consolidation, $1.6 million related
primarily to other asset write-downs and costs associated with
the repositioning, and $1.5 million related to executive
contractual obligations, as a result of a separation agreement
with Robert W. Hallman, former President and Chief Executive
Officer of the Company. Under the terms of the separation
agreement with Mr. Hallman, effective April 30, 2002,
the Company agreed to pay Mr. Hallman a separation payment
equal to three times his current then annual salary, payable
bi-weekly over 36 months, until May 2005. Under the terms
of the resignation agreement with Mr. Williams, effective
January 8, 2003, the Company agreed to pay
Mr. Williams a severance payment equal to $200,000 in 2003
and $100,000 in 2004, payable bi-weekly, until December 2004.

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

In the second quarter of fiscal 2003, the Company
expanded its repositioning actions to reduce costs, which had
been initiated in the second quarter of fiscal 2002. The Company
recorded a charge of $550,000 in the second quarter of fiscal
2003, primarily related to severance and benefit costs
associated with the reduction of approximately
43 employees, in April 2003.

The following tables summarize the charge for
discontinued programs and special charges recorded in
June 2002 and May 2003 and their respective balances
at January 3, 2004 and December 28, 2002:

|                                                            |  |                |       |         |  |             |     |            |  |            |        |   |  |   |     |   |  |   |       | 
|----------------------------------------------------------- |  | -------------- | ----- | ------- |  | ----------- | --- | ---------- |  | ---------- | ------ | - |  | - | --- | - |  | - | ----- | 
|                                                            |  | Balance at     |       | Fiscal  |  | Fiscal      |     | Fiscal     |  | Balance at
|                                                            |  | Dec 28         |       | 2003    |  | 2003        |     | 2003       |  | Jan 3     
|Fiscal 2003                                                 |  | 2002           |       | Expense |  | Utilization |     | Adjustment |  | 2004      
|                                                            |  |                |       |         |  |             |     |            |  |           
|                                                            |  |               
|                                                            |  | (In thousands)
|Inventory write-downs                                       |  | $              |      |         |  | $           |    |            |  | $          |       |   |  | $ |    |   |  | $ |      | 
|Equipment and other asset write downs                       |  |                | 39    |         |  |             |    |            |  |            |       |   |  |   | (39 | ) |  |   |      | 
|Discontinued programs                                       |  |                | 1,501 |         |  |             |    |            |  |            | (1,501 | ) |  |   |    |   |  |   |      | 
|Executive contractual obligations                           |  |                | 1,257 |         |  |             |    |            |  |            | (558   | ) |  |   |    |   |  |   | 699   | 
|Severance and fringe benefits                               |  |                | 262   |         |  |             | 550 |            |  |            | (456   | ) |  |   |    |   |  |   | 356   | 
|Lease termination and other
    miscellaneous costs         |  |                | 167   |         |  |             |    |            |  |            | (167   | ) |  |   |    |   |  |   |      | 
|                                                            |  |                |       |         |  |             |     |            |  |            |        |   |  |   |     |   |  |   |       | 
|Total accrued special charges and
    discontinued programs |  | $              | 3,226 |         |  | $           | 550 |            |  | $          | (2,682 | ) |  | $ | (39 | ) |  | $ | 1,055 | 
|                                                            |  |                |       |         |  |             |     |            |  |            |        |   |  |   |     |   |  |   |       | 
|Deferred revenue associated with
    discontinued programs  |  | $              | 120   |         |  | $           |    |            |  | $          | (120   | ) |  | $ |    |   |  | $ |      | 
|                                                            |  |                |       |         |  |             |     |            |  |            |        |   |  |   |     |   |  |   |       | 

F-21



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##### Table of Contents



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

The Company paid $2.7 million and
$1.7 million in fiscal 2003 and 2002, respectively, as a
result of the forgoing repositioning actions, and anticipates
the remaining payments related to the discontinued programs and
special charges will be completed by May 2005.



|    |                              
|--- | -----------------------------
|13. | Commitments and Contingencies

The Company leases certain of its computer
equipment and has a future lease commitment of approximately
$178,000, as of January 3, 2004.

The Company has employment agreements with
certain key executive officers. The agreements provide for
minimum salary levels, subject to periodic review by the
Companys Board of Directors or Compensation Committee. The
employment agreements also contain certain termination and
change in control provisions, as defined in the agreements. The
Companys maximum contingent liability under such
agreements as of January 3, 2004 would be $3.1 million.

The Company entered into an agreement in fiscal
2000 with Fuji Photo Film Co., Ltd. (Fuji), whereby
minimum royalty payments to Fuji are required based on specified
sales volumes of the Companys A3 format size four-color
sheet-fed press. The agreement provides for payment of a total
of $14.0 million in royalties, of which a minimum of
$6.0 million is required to be paid by June 2005. The
remaining commitment under the agreement is payable at specified
rates based on units shipped. The Companys maximum
remaining liability under the royalty agreement is
$11.4 million as of January 3, 2004.



|    |                      
|--- | ---------------------
|14. | Heidelberg Agreements

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

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

In July 2003, we entered into OEM
consumables supply agreements with Heidelberg and Heidelberg,
USA that provide the Company with certain preferred supplier
rights, which vary based on territory, time period and sales
volume. Under the terms of the OEM agreements, which include
minimum volume commitments from Heidelberg and Heidelberg, USA,
the Company will manufacture and supply Heidelberg branded
consumable

F-22



---



##### Table of Contents



plate products for the Heidelberg Quickmaster DI
press. Shipments to Heidelberg of the branded consumable product
began in August 2003.


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

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

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



|    |                  
|--- | -----------------
|15. | Other Information

In September 2003, Presstek filed an action
against Fuji Photo Film Corporation, Ltd., in the District Court
of Mannheim, Germany for patent infringement. In this action,
Presstek alleges that Fuji has manufactured and distributed a
product that violates Presstek European Patent 0 644 047
registered under number DE 694 17 129 with the German Patent and
Trademark Office. Presstek seeks an order from the court that
Fuji refrain from offering the infringing product for sale, from
using the infringing material or introducing it for the named
purposes, or from possessing such infringing material.

In August 2003, the Company was served with
a purported securities class action lawsuit filed on
June 2, 2003 in the United States District Court for the
District of New Hampshire against the Company and two of its
former officers, captioned James B. Zouras v.
Robert W. Hallman, et. al. (Civ. Action No.
3-240 M). On December 15, 2003, an amended class action
complaint (the Complaint), which superseded the
original complaint, was filed with the court. The Complaint is
captioned In re Presstek, Inc. Securities Litigation
(Civ. Action No. 3-240 M) and names as defendants the
Company and two of its former officers. The Complaint, which
seeks unspecified damages, alledgedly was filed on behalf of all
purchasers of the Companys common stock during the period
December 10, 1999 to August 7, 2001 and generally
alleges, among other things, that during such period, the
defendants made misstatements and omissions to the investing
public relating to an arbitration proceeding commenced in 1999
and concluded in 2001 with one of the Companys customers,
and also relating to production issues and projected sales of
certain of the Companys products. Presstek, along with the
other named defendants, has filed a motion to dismiss the
litigation in its entirety, which is currently pending with the
court. Although the Company believes this matter lacks merit and
intends to vigorously defend against it, the litigation process
is inherently uncertain and there can be no guarantee as to the
ultimate outcome of this matter.

In December 1999, PPG, Inc. brought suit
against Delta V Technologies, Inc. (Delta V), a
subsidiary of the Company, and Presstek. The suit alleged that
Delta V sold to PPG certain vacuum coating equipment that did
not meet certain product specifications. PPG sought damages in
excess of $7.0 million. PPG sought to hold Presstek liable
for the alleged breach of contract by its subsidiary, Delta V,
on a theory of indirect liability. Presstek and Delta V answered
PPGs complaint. Delta V asserted a counterclaim against
PPG for PPGs failure to make the final installment payment
in excess of $400,000 for Delta Vs work. In
November 2002, the U.S. District Court granted summary
judgment in favor of Presstek, because, as a matter of law, PPG
was unable to demonstrate any grounds upon which to hold
Presstek liable for any alleged breach of contract by Delta V.
In August 2003, PPG and Delta V reached a settlement in
this matter and the suit was dismissed with prejudice.

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

F-23



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##### Table of Contents





|    |                                                
|--- | -----------------------------------------------
|16. | Financial Statements and Supplementary
    Data

Selected Quarterly Financial Data
(unaudited)

|                                                         |                              |                |        |      |  |    |        |      |  |   |        |      |  |   |        |      | 
|-------------------------------------------------------- | ---------------------------- | -------------- | ------ | ---- |  | -- | ------ | ---- |  | - | ------ | ---- |  | - | ------ | ---- | 
|Fiscal 2003                                              |                              | Q1             |        | Q2   |  | Q3 |        | Q4  
|                                                         |                              |                |        |      |  |    |        |     
|                                                         |                              |               
|                                                         |                              | (In thousands)
|Total revenue                                            |                              | $              | 22,442 |      |  | $  | 22,519 |      |  | $ | 19,758 |      |  | $ | 22,513 |     
|Total costs and expenses (1)                             |                              |                | 20,500 |      |  |    | 20,595 |      |  |   | 18,729 |      |  |   | 20,573 |     
|Income from continuing operations                        |                              |                | 1,790  |      |  |    | 1,825  |      |  |   | 1,008  |      |  |   | 2,045  |     
|Income from discontinued operations (2)                  |                              |                |       |      |  |    |       |      |  |   | 1,429  |      |  |   |       |     
|                                                         |                              |                |        |      |  |    |        |      |  |   |        |      |  |   |        |     
|Net income                                               |                              | $              | 1,790  |      |  | $  | 1,825  |      |  | $ | 2,437  |      |  | $ | 2,045  |     
|                                                         |                              |                |        |      |  |    |        |      |  |   |        |      |  |   |        |     
|Earnings per share  Basic                               |                              |                |        |      |  |    |        |      |  |   |        |      |  |   |        |     
|                                                         | From continuing operations   |                | $      | 0.05 |  |    | $      | 0.05 |  |   | $      | 0.03 |  |   | $      | 0.06 | 
|                                                         | From discontinued operations |                |        |     |  |    |        |     |  |   |        | 0.04 |  |   |        |     | 
|                                                         |                              |                |        |      |  |    |        |      |  |   |        |      |  |   |        |     
|Earnings per share  Basic                               |                              | $              | 0.05   |      |  | $  | 0.05   |      |  | $ | 0.07   |      |  | $ | 0.06   |     
|                                                         |                              |                |        |      |  |    |        |      |  |   |        |      |  |   |        |     
|Earnings (loss) per share  Diluted                      |                              |                |        |      |  |    |        |      |  |   |        |      |  |   |        |     
|                                                         | From continuing operations   |                | $      | 0.05 |  |    | $      | 0.05 |  |   | $      | 0.03 |  |   | $      | 0.06 | 
|                                                         | From discontinued operations |                |        |     |  |    |        |     |  |   |        | 0.04 |  |   |        |     | 
|                                                         |                              |                |        |      |  |    |        |      |  |   |        |      |  |   |        |     
|Earnings per share  Diluted                             |                              | $              | 0.05   |      |  | $  | 0.05   |      |  | $ | 0.07   |      |  | $ | 0.06   |     
|                                                         |                              |                |        |      |  |    |        |      |  |   |        |      |  |   |        |     
|Weighted average common shares outstanding
     Basic   |                              |                | 34,142 |      |  |    | 34,156 |      |  |   | 34,177 |      |  |   | 34,193 |     
|                                                         |                              |                |        |      |  |    |        |      |  |   |        |      |  |   |        |     
|Weighted average common shares outstanding
     Diluted |                              |                | 34,186 |      |  |    | 34,283 |      |  |   | 34,625 |      |  |   | 34,653 |     
|                                                         |                              |                |        |      |  |    |        |      |  |   |        |      |  |   |        |     

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



---



|    |                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes charges of $550,000 related to severance
    and fringe benefit costs associated with a reduction in
    workforce in April, 2003.                                                                                                                                                               
|   
|(2) | As a result of the dismissal of a lawsuit filed
    by PPG against our subsidiary Delta V, whose operations were
    discontinued in 1999, we reversed all previously recorded
    liabilities, resulting in income from discontinued operations of
    $1.4 million, in the third quarter of fiscal 2003.
|   
|(3) | Includes a $10.7 million special charge
    related to the repositioning activities and workforce reduction
    implemented by the Company in June 2002. See Note 12.                                                                                                                                     
|   
|(4) | Includes a $1.0 million favorable adjustment
    in December 2003, related to the special charges recorded
    in June 2002. See Note 12.                                                                                                                                                                 

F-24



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##### Table of Contents



PRESSTEK, INC.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES


|       |      |             |  |                                             |  |            |       |               |  |             |       |             |  |   |   |  |  |   |        |      |  |   |       | 
|------ | ---- | ----------- |  | ------------------------------------------- |  | ---------- | ----- | ------------- |  | ----------- | ----- | ----------- |  | - | - |  |  | - | ------ | ---- |  | - | ----- | 
|       |      |             |  | Balance at                                  |  | Charged to |       | Charged to    |  | Charges Add |       | Balance at 
|Fiscal |      |             |  | Beginning of                                |  | Costs and  |       | Other Account |  | (Deduct)    |       | End of     
|Year   |      | Description |  | Fiscal Year                                 |  | Expenses   |       | Describe      |  | Describe    |       | Fiscal Year
|       |      |             |  |                                             |  |            |       |               |  |             |       |            
|       |      |             |  |                                            
|       |      |             |  | (In thousands)                             
|       | 2001 |             |  | Allowance for losses on accounts receivable |  | $          | 2,842 |               |  | $           | 990   |             |  | $ |  |  |  | $ | (1,412 | )(1) |  | $ | 2,420 | 
|       |      |             |  |                                             |  |            |       |               |  |             |       |             |  |   |   |  |  |   |        |      |  |   |       | 
|       |      |             |  | Warranty reserve                            |  |            | 598   |               |  |             | 2,124 |             |  |   |  |  |  |   | (1,929 | )(2) |  |   | 793   | 
|       |      |             |  |                                             |  |            |       |               |  |             |       |             |  |   |   |  |  |   |        |      |  |   |       | 
|       | 2002 |             |  | Allowance for losses on accounts receivable |  | $          | 2,420 |               |  | $           | 945   |             |  | $ |  |  |  | $ | (1,198 | )(1) |  | $ | 2,167 | 
|       |      |             |  |                                             |  |            |       |               |  |             |       |             |  |   |   |  |  |   |        |      |  |   |       | 
|       |      |             |  | Warranty reserve                            |  |            | 793   |               |  |             | 1,938 |             |  |   |  |  |  |   | (1,642 | )(2) |  |   | 1,089 | 
|       |      |             |  |                                             |  |            |       |               |  |             |       |             |  |   |   |  |  |   |        |      |  |   |       | 
|       | 2003 |             |  | Allowance for losses on accounts receivable |  | $          | 2,167 |               |  | $           | 1,358 |             |  | $ |  |  |  | $ | (1,633 | )(1) |  | $ | 1,892 | 
|       |      |             |  |                                             |  |            |       |               |  |             |       |             |  |   |   |  |  |   |        |      |  |   |       | 
|       |      |             |  | Warranty reserve                            |  |            | 1,089 |               |  |             | 1,228 |             |  |   |  |  |  |   | (1,382 | )(2) |  |   | 935   | 
|       |      |             |  |                                             |  |            |       |               |  |             |       |             |  |   |   |  |  |   |        |      |  |   |       | 



---



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

FS-1