The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks described below in the section entitled "Information Regarding Forward-Looking Statements" and in "Part I, Item 1A, Risk Factors" of our Annual Report on Form 10-K for the year ended December 29, 2007, as filed with the SEC on April 30, 2008.

Overview of the Company

The Company is a provider of high-technology, digital-based printing solutions to the commercial print segment of the graphics communications industry. The Company designs, manufactures and distributes proprietary and non-proprietary solutions aimed at serving the needs of a wide range of print service providers worldwide. Our proprietary digital imaging and advanced technology consumables offer superior business solutions for commercial printing focusing on the growing need for short-run, high quality color applications. We are helping to lead the industry's transformation from analog print production methods to digital imaging technology. We are a leader in the development of advanced printing systems using digital imaging equipment, workflow and consumables-based solutions that economically benefit the user through streamlined operations and chemistry-free, environmentally responsible solutions. We are also a leading sales and service channel across a broadly served market in the small to mid-sized commercial, quick and in-plant printing segments. Our product offerings cover a wide range of solutions to over 20,000 customers worldwide.

Presstek's business model is a capital equipment and consumables (razor and blade) model. In this model, approximately two-thirds of our revenue is recurring revenue. Our model is designed so that each placement of either a Direct Imaging Press or a Computer to Plate system generally results in recurring aftermarket revenue for consumables and service.

Through our various operations, we:

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

· are a leading sales and services company delivering Presstek digital solutions and solutions from other manufacturing partners through our direct sales and service force and through distribution partners worldwide;

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

· manufacture and distribute printing plates for conventional print applications.

We have developed a proprietary system by which digital images are transferred onto printing plates for Direct Imaging on-press applications ("DI"). Our advanced DI technology is integrated into a Direct Imaging Press to produce a waterless, easy to use, high quality printing press that is fully automated and provides our users with competitive advantages over alternative print technologies. We believe that our process results in a DI press which, in combination with our proprietary printing plates and streamlined workflow, produces a superior print solution. By combining advanced digital technology with the reliability and economic advantages of offset printing, we believe our customers are better able to grow their businesses, generate higher profits and better serve the needs of their customers.

We have executed a major transformation in the way we go to market. In the past, we had been reliant on OEM partners to deliver our business solutions to customers. Today, more than 90% of our sales are through our own distribution channels.

In addition to marketing, selling and servicing our proprietary digital products, we also market, sell and service traditional, or analog products for the commercial print market. This analog equipment is manufactured by third party strategic partners and the analog consumables are manufactured by either us or our strategic partners. The addition of these non-proprietary products and our ability to directly sell and service them was made possible by the ABDick and Precision acquisitions, which we completed in 2004.

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

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

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

On September 24, 2008, the Board of Directors approved a plan to sell the Lasertel subsidiary; as such the Company has presented the results of operations of this subsidiary within discontinued operations.

We generate revenue through four main sources: (i) the sale of our equipment and related workflow software, including DI presses and CTP devices, (ii) the sale of high-powered laser diodes for the graphic arts, defense and industrial sectors; (iii) the sale of our proprietary and non-proprietary consumables and supplies; and (iv) the servicing of offset printing systems and analog and CTP systems and related equipment.

Strategy

Our business strategy is centered on maximizing the sale of consumable products, such as printing plates, and therefore our business efforts focus on the sale of "consumable burning engines" such as our DI presses and CTP devices, as well as the servicing of customers using our business solutions. Our strategy centers on increasing the number of our DI and CTP units (together, referred to as CBEs), which increases the demand for our consumables.

To complement our direct sales efforts, in certain territories, we maintain relationships with key press manufacturers such as Ryobi Limited, Heidelberger Druckmaschinen AG, or Heidelberg, and Koenig & Bower AG, or KBA, who market printing presses and/or press solutions that use our proprietary consumables.

Another method of growing the market for consumables is to develop consumables that can be imaged by non-Presstek devices. In addition to expanding our base of our CBEs, an element of our focus is to reach beyond our proprietary systems and penetrate the installed base of CTP devices in all market segments with our chemistry-free and process-free offerings. The first step in executing this strategy was the launch of our Aurora chemistry-free printing plate designed to be used with CBEs manufactured by thermal CTP market leaders, such as Screen and Kodak. We continue to work with other CTP manufacturers to qualify our consumables on their systems. We believe this shift in strategy fundamentally enhances our ability to expand and control our business.

Business Improvement Plan

In the fourth quarter of fiscal 2007, we announced our Business Improvement Plan ("BIP"). The plan involves virtually every aspect of the business and includes pricing actions, improved manufacturing efficiencies, increased utilization of field service resources, right-sizing of operating expenses, and cash flow improvements driven by working capital reductions and the sale of selected real estate assets.

For the nine months ended September 27, 2008, we have incurred approximately $1.1 million of restructuring charges related to this plan. Since the second quarter of fiscal 2007, headcount has been reduced by 10.7%, leased facilities have been consolidated, operating expenses, excluding special charges, have been reduced from 32.3% of revenue in the second quarter of 2007 to 29.5% in the third quarter of 2008, working capital has decreased from $56.1 million at June 30, 2007 to $48.2 million at September 27, 2008, short term debt decreased by approximately $12.9 million from $28.0 million at June 30, 2007 to $15.1 million at September 27, 2008 and in the third quarter of fiscal 2008, the Company completed the sale of real estate property located in Tucson, Arizona, of which the proceeds were used to pay down debt. The sale of this property included a sale-leaseback of a portion of the facility for the Lasertel operations. The amortization of the gain associated with this transaction will be recognized beginning in the third quarter of fiscal 2008 within discontinued operations.

Internal Review

Beginning in the third quarter of 2007, we commenced a self-initiated internal review of certain practices and procedures surrounding inventory, accounts receivable and commercial receivable terms. We conducted a worldwide review of accounts receivable; conducted a worldwide physical inventory to assess the existence and valuation of inventory; and reviewed revenue practices surrounding the commercial terms granted in certain transactions, resulting in an enhanced revenue recognition policy. The culmination of these actions resulted in increased professional fees during the latter part of fiscal 2007 and a negative impact to revenue in the fourth quarter of fiscal 2007 and the first quarter of fiscal 2008 largely due to the disruption in our European operations related to the business reviews, as well as tightened commercial receivable terms.

General

We operate and report on a 52- or 53-week, fiscal year ending on the Saturday closest to December 31. Accordingly, the accompanying consolidated financial statements include the thirteen and thirty-nine week periods ended September 27, 2008 (the "third quarter and first nine months of fiscal 2008" or "the nine months ended September 27, 2008") and September 29, 2007 (the "third quarter and first nine of fiscal 2007" or "the nine months ended September 29, 2007").

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

RESULTS OF OPERATIONS

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

                                  Three months ended                        Nine months ended
                        September 27, 2008   September 29, 2007  September 27, 2008  September 29, 2007
                                    % of                 % of                % of                 % of
                                  revenue               revenue             revenue              revenue
Revenue
Product                   40,288       83.0   $ 48,174      83.5   124,764      82.7   $ 158,414    84.4
Service and parts          8,246       17.0      9,488      16.5    26,170      17.3      29,276    15.6
Total revenue             48,534      100.0     57,662     100.0   150,934     100.0     187,690   100.0

Cost of revenue
Cost of product           25,589       52.7     34,457      59.8    78,659      52.1     112,696    60.0
Cost of service and        6,096       12.6      8,097      14.0    19,561      13.0      24,568    13.1
parts
Total cost of revenue     31,685       65.3     42,554      73.8    98,220      65.1     137,264    73.1

Gross profit              16,849       34.7     15,108      26.2    52,714      34.9      50,426    26.9

Operating expenses
  Research and             1,059        2.2      1,212       2.1     3,697       2.5       3,789     2.0
development
  Sales, marketing and     7,088       14.6      9,315      16.2    22,411      14.9      29,810    15.9
customer support
  General and              5,932       12.2      8,796      15.2    18,321      12.1      23,603    12.6
administrative
  Amortization of            258        0.5        517       0.9       823       0.5       1,819     1.0
intangible assets
  Restructuring and          374        0.8        399       0.7     1,569       1.0       1,527     0.8
other charges
  Total operating         14,711       30.3     20,239      35.1    46,821      31.0      60,548    32.3
expenses

  Operating income         2,138        4.4    (5,131)     (8.9)     5,893       3.9    (10,122)   (5.4)
(loss)

  Interest and other       (359)      (0.7)      (285)     (0.5)     (646)     (0.4)     (1,610)   (0.9)
expense, net
  Income (loss) from
continuing                 1,779        3.7    (5,416)     (9.4)     5,247       3.5    (11,732)   (6.3)
operations    before
income taxes
  Provision (benefit)      1,153        2.4    (2,732)     (4.7)     2,731       1.8     (3,541)   (1.9)
for income taxes

  Income (loss) from         626        1.3    (2,684)     (4.7)     2,516       1.7     (8,191)   (4.4)
continuing operations
  Income (loss) from
discontinued               (431)      (0.9)      (932)     (1.6)   (1,536)     (1.0)     (1,233)   (0.6)
operations, net of tax
  Net income (loss)          195        0.4   $(3,616)     (6.3)       980       0.7    $(9,424)   (5.0)

Three and nine months ended September 27, 2008 compared to three and nine months ended September 29, 2007

Revenue

Consolidated revenues were $48.5 million and $150.9 million in the third quarter and first nine months of 2008, respectively, compared to $57.7 million and $187.7 million in the comparable prior year periods. The decline in sales was driven by several factors, including the continued decline in analog products, economic weakness in the United States and the impact of business reviews conducted in the company's European operations in the fourth quarter of 2007 which had an adverse effect on sales in the first quarter of 2008. Overall, sales of Presstek's "growth" portfolio of products, defined as 34DI and 52DI digital offset solutions, the Presstek family of chemistry free CTP solutions, decreased $1.2 million, or 4.5%, and $14.8 million, or 16.4%, in the third quarter and first nine months of 2008 compared to the same prior year periods.

Presstek's equipment revenues were $15.2 million and $43.0 million in the third quarter and first nine months of 2008, respectively, compared to $18.0 million and $67.5 million in the same prior year periods. Sales of DI presses declined from $13.1 million and $47.2 million in the third quarter and first nine months of 2007, respectively, to $12.9 million and $34.5 million in the comparable current year period. Unfavorable sales of DI presses in the first nine months of 2008 were due primarily to lower press sales in the United States resulting from challenging economic conditions, and the impact of business reviews conducted in the Company's European operations in the fourth quarter of fiscal 2007. Total unit sales of DI presses decreased slightly from 38 in the third quarter of 2007 to 37 in the third quarter of 2008, however unit sales of DI presses in Europe increased from 10 to 16 in the comparable periods. Sales of 34DI kits to Ryobi declined from $0.1 million and $1.5 million in the third quarter and first nine months of 2007, respectively, to zero in 2008 as Ryobi is reducing their inventory of kits used to support press sales to their own channels. Sales of our remaining growth portfolio of equipment, Dimension and Vector TX52 platesetters, declined from $3.0 million and $10.1 million in the third quarter and first nine months of 2007, respectively, to $2.2 million and $7.2 million in the comparable current year periods, due primarily to deteriorating economic conditions in the United States. Equipment sales of our "traditional" line of products, defined as QMDI presses, polyester CTP platesetters, and conventional equipment, were all lower in the third quarter and first nine months of 2008 compared to 2007 due to the ongoing transition of our customer base from traditional products to the more modern digital technologies, as well as the impact of the current economic environment. Revenues from our traditional line of equipment products declined from $3.2 million and $12.7 million in the third quarter and first nine months of 2007, respectively, to $1.2 million and $4.8 million in 2008. As a percentage of total gross equipment revenue, sales of growth portfolio equipment products increased from 83.7% and 82.2% of revenue in the third quarter and first nine months of 2007, to 92.7% and 89.7% in the comparable current year period.

Consumables product revenues declined from $30.2 million and $90.9 million in the third quarter and first nine months of 2007, respectively, to $25.1 million and $81.8 million in the comparable 2008 periods, due primarily to lower sales of our traditional products resulting from the continuing migration of our customer base from analog to digital solutions as well as deteriorating economic conditions in the United States. Sales of Presstek's "growth" portfolio of consumables, defined as 52DI, 34DI, and chemistry-free CTP plates, declined from $9.6 million to $8.7 million in the third quarter of 2008 due primarily to lower demand for Anthem plates as printing volumes have been negatively impacted by slowing economic conditions. For the first nine months of 2008, sales of Presstek's "growth" portfolio of consumables increased slightly from $27.8 million in 2007 to $27.9 million in 2008. Sales of 52DI and 34DI plates increased by $0.1 million, or 2.0%, in the third quarter of 2008, and $1.4 million, or 10.7%, in the first nine months of 2008, versus the comparable prior year periods. As a percentage of total consumables revenue, growth portfolio products comprised 34.8% and 34.1% of revenue in the third quarter and first nine months of 2008, compared to 31.8% and 30.5% in the comparable prior year periods. Total sales of Presstek's "traditional" portfolio of consumable products declined from $20.6 million in the third quarter of 2007 to $16.3 million in the third quarter of 2008, a decrease of 20.5%, driven primarily by lower sales of QMDI plates and conventional consumables. For the first nine months of 2008, sales of Presstek's "traditional" portfolio of consumables products declined from $90.9 million to $81.8 million, a decrease of 10.0%.

Cost of Revenue

Cost of product, consisting of costs of material, labor and overhead, shipping and handling costs and warranty expenses, was $25.6 million and $78.7 million in the third quarter and first nine months of fiscal year 2008, respectively, compared to $34.5 million and $112.7 million in the comparable prior year periods. The decrease was due primarily to lower sales volume and lower costs resulting from the positive impact of our BIP. Favorable results from the BIP include improved efficiencies and yields in our South Hadley plate manufacturing operation, lower overall freight costs, and procurement initiatives that have resulted in lower product costs. In addition, the Company recorded $3.1 million of charges in the third quarter of fiscal 2007 related primarily to excess and obsolete inventory write-downs which were not repeated during 2008 due to improved operating discipline. The company recorded $5.8 million of charges in the first nine months of fiscal 2007 related primarily to excess and obsolete write-downs, and warranty charges related to the Vector TX52 product line.

Consolidated cost of service and parts was $6.1 million and $19.6 million in the third quarter and first nine months of fiscal year 2008, respectively, compared to $8.1 million and $24.6 million in the comparable prior year periods. These amounts represent the costs of spare parts, labor and overhead associated with the ongoing service of products. The reduction in overall cost is principally due to the termination of service personnel in North America, an element of our BIP intended to realign our service costs with a declining analog revenue base. In addition, the company recorded $0.3 million and $1.1 million of charges in the third quarter and first nine months of fiscal 2007, respectively, related to field service parts inventory. The company has recorded no similar charges in fiscal 2008 as a result of efforts to tighten internal control policies and procedures in this area.

Gross Profit

Gross profit as a percentage of total revenue was 34.7% and 34.9% in the third quarter and first nine months of fiscal year 2008, respectively, compared to 26.2% and 26.9% in the comparable prior year periods.

Gross profit as a percentage of product revenues was 36.5% and 37.0% in the third quarter and first nine months of 2008, respectively, compared to 28.5% and 28.9% in the comparable prior year periods. The increase in gross profit reflects the favorable impact of the company's higher profit consumables business representing a greater proportion of total product sales, the favorable impact of the company's BIP actions, and the absence of charges related to excess and obsolete inventory and the Vector TX52 experienced in fiscal 2007.

Gross profit on service revenues increased from 14.7% and 16.1% in the third quarter and first nine months of 2007, respectively, to 26.1% and 25.3% in the comparable current year periods. The increase in profits is due primarily to the positive impact of the company's BIP plan which has resulted in a cost structure more appropriately aligned with the current revenue base, as well as the absence of charges related to field service parts inventory experienced in fiscal 2007.

Research and Development

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

Research and development expenses were $1.1 million and $3.7 million in the third quarter and first nine months of fiscal year 2008, respectively, compared to $1.2 million and $3.8 million in the comparable prior year periods.

Sales, Marketing and Customer Support

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

Sales, marketing and customer support expenses decreased from $9.3 million and $29.8 million in the third quarter and first nine months of fiscal year 2007, respectively, to $7.1 million and $22.4 million in the comparable current year period. The decrease in expense in both periods is due primarily to lower payroll, facilities, and travel related expenses resulting from the favorable impact of our BIP program, as well as lower commission expense resulting from lower sales, offset somewhat by costs associated with the DRUPA trade show which took place in the second quarter of 2008.

General and Administrative

General and administrative expenses are primarily comprised of payroll and related expenses, including stock compensation, for personnel and contracted professional services necessary to conduct our general management, finance, information systems, human resources, legal and administrative activities.

General and administrative expenses were $5.9 million and $18.3 million in the third quarter and first nine months of 2008, respectively, compared to $8.8 million and $23.6 million in the comparable prior year periods. Approximately $0.2 million and $2.1 million of the decreased expense in the third quarter and first nine months, respectively, was due to lower restricted stock and stock based compensation costs related to option grants to officers, directors, and employees. In addition, approximately $2.7 million and $4.0 million of the decrease in the third quarter and first nine months, respectively, were due to lower legal fees and litigation accruals, lower accounting fees, and lower bad debt expense. These reductions were offset slightly by higher costs related to increased incentive plan accruals as well as the rebuilding of our finance organization necessary to remediate previously disclosed material weaknesses.

Amortization expense of $0.3 million and $0.8 million in the third quarter and first nine months of fiscal 2008 declined $0.3 million and $1.0 million from the comparable prior year periods.

These expenses relates to intangible assets recorded in connection with the Company's 2004 ABDick acquisition, patents and other purchased intangible assets.

Restructuring and Other Charges

In the third quarter of 2008, the company recognized $0.4 million of restructuring costs associated with severance benefits relating the remaining BIP initiatives.

Interest and Other Expense, Net

Consolidated net interest and other expense, comprised primarily of foreign exchange gains or losses, increased slightly from $0.3 million in the third quarter of 2007 to $0.4 million in 2008, and decreased from $1.6 million in the . . .