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 January 3, 2009, as filed with the SEC on March 24, 2009.

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.

Presstek's business model is a capital equipment and consumables model. In this model, approximately two-thirds (on average) of our revenue is recurring revenue. Our model is designed so that each placement of either a DIŽ press or a CTP system generally results in recurring aftermarket revenue for consumables and service.

Through our various operations, we:

ˇ 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;

ˇ 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;

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

ˇ manufacture and distribute printing plates for conventional print applications.

We have developed DIŽ solution, a proprietary system by which digital images are transferred onto printing plates for direct imaging on-press applications. Our advanced DIŽ 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 DIŽ 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.

Similar digital imaging technologies are used in our CTP systems. Our Presstek segment also designs and manufactures CTP systems that incorporate our technology to image our chemistry-free printing plates. Our chemistry-free digital imaging systems enable customers to produce high-quality, full color lithographic printed materials more quickly and cost effectively than conventional methods that employ more complicated workflows and toxic chemical processing. This results in reduced printing cycle time and lowers the effective cost of production for commercial printers. Our solutions make it more cost effective for printers to meet the increasing demand for shorter print runs, higher quality color and faster turn-around times.

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 A.B. Dick and Precision Lithograining 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.

ˇ Presstek is primarily engaged in the development, manufacture, sale, distribution, 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.

ˇ 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. The Company expects to announce a definitive agreement for the sale of Lasertel during the fourth quarter of 2009.

We generate revenue through four main sources: (i) the sale of our equipment and related workflow software, including DIŽ 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 DIŽ presses and CTP devices, as well as the servicing of customers using our business solutions. Our strategy centers on increasing the number of our DIŽ and CTP units, 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 ("Ryobi"), Heidelberger Druckmaschinen AG ("Heidelberg"), and Koenig & Bauer, AG of Germany ("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 the base of our DIŽ and CTP units, 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 CTP units manufactured by thermal CTP market leaders, such as DaiNippon Screen Mfg., Ltd. ("Screen") and Eastman Kodak Company ("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.

Since 2007, management has been taking steps to improve the Company's cost structure and strengthen its balance sheet in order to enable Presstek to increase profitability on improved revenue growth when economic conditions in the United States and elsewhere recover. An important element of this effort was our Business Improvement Plan, as described in the next section.

Business Improvement Plan

In the fourth quarter of fiscal 2007, we announced our Business Improvement Plan ("BIP"). The plan involved 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.

Since the second quarter of fiscal 2007, headcount in the Presstek segment of our business has been reduced by 23.8%, leased facilities have been consolidated, operating expenses, excluding restructuring and other charges and goodwill impairment, have been reduced from $21.5 million in the second quarter of 2007 to $12.8 million in the third quarter of 2009, working capital has decreased from $39.8 million at June 30, 2007 to $18.4 million at October 3, 2009, short term debt decreased by approximately $4.6 million from $28.0 million at June 30, 2007 to $23.4 million at October 3, 2009 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 Business Improvement Plan has been completed and there are no further restructuring costs anticipated in 2009 as part of this Plan.

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 week periods ended October 3, 2009 (the "third quarter and first nine months of fiscal 2009" or "the nine months ended October 3, 2009") and September 27, 2008 (the "third quarter and first nine months of fiscal 2008" or "the nine months ended September 27, 2008").

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
                          October 3,               September 27,                October 3,                 September 27,
                             2009                       2008                        2009                       2008
                                   % of                       % of                        % of                        % of
                                  revenue                    revenue                     revenue                     revenue
Revenue
Equipment           $  3,627          11.0     $ 15,235          31.4     $  13,827          13.7     $  42,957          28.5
Consumables           22,150          67.1       25,053          51.6        65,170          64.5        81,807          54.2
Service and parts      7,229          21.9        8,246          17.0        21,979          21.8        26,170          17.3
Total revenue         33,006         100.0       48,534         100.0       100,976         100.0       150,934         100.0

Cost of revenue
Equipment              8,152          24.7       12,937          26.6        18,015          17.8        37,207          52.1
Consumables           11,982          36.3       12,652          26.1        35,603          35.3        41,452
Service and parts      5,172          15.7        6,096          12.6        16,528          16.4        19,561          13.0
Total cost of
revenue               25,306          76.7       31,685          65.3        70,146          69.5        98,220          65.1

Gross profit           7,700          23.3       16,849          34.7        30,830          30.5        52,714          34.9

Operating
expenses
  Research and
development            1,379           4.2        1,059           2.2         3,803           3.8         3,697           2.5
  Sales,
marketing and
customer support       6,276          19.0        7,088          14.6        19,525          19.3        22,411          14.9
  General and
administrative         4,946          15.0        5,932          12.2        17,239          17.1        18,321          12.1
  Amortization of
intangible assets        225           0.7          258           0.5           712           0.7           823           0.5
  Restructuring
and other charges      1,040           3.1          374           0.8         1,162           1.1         1,569           1.0
  Goodwill
impairment                 -           0.0            -           0.0        19,114          18.9             -           0.0
  Total operating
expenses              13,866          42.0       14,711          30.3        61,555          60.9        46,821          31.0

  Operating
income (loss)         (6,166 )       (18.7 )      2,138           4.4       (30,725 )       (30.4 )       5,893           3.9

  Interest and
other income
(expense), net          (745 )        (2.3 )       (359 )        (0.7 )        (531 )        (0.5 )        (646 )        (0.4 )
  Provision for
income taxes            (264 )        (0.8 )      1,153           2.4        16,366          16.2         2,731           1.8

  Income (loss)
from continuing
operations            (6,647 )       (20.1 )        626           1.3       (47,622 )       (47.1 )       2,516           1.7
  Loss from
discontinued
operations, net
of tax                   706           2.1         (431 )        (0.9 )        (959 )        (1.0 )      (1,536 )        (1.0 )
  Net income
(loss)              $ (5,941 )       (18.0 )   $    195           0.4     $ (48,581 )       (48.1 )   $     980           0.7

Three and nine months ended October 3, 2009 compared to three and nine months ended September 27, 2008

Revenue

Consolidated revenues were $33.0 million and $101.0 million in the third quarter and first nine months of 2009 respectively, compared to $48.5 million and $150.9 million in the comparable prior year periods. The decline in revenues was driven primarily by the impact of the deterioration in the global economy, the continuing decline in our traditional lines of business, and an unfavorable change in foreign currency exchange rates. Overall, sales of Presstek's "growth" portfolio of products, defined as 34DI and 52DI digital offset solutions and the Presstek family of chemistry free CtP solutions, decreased $11.9 million, or 46%, and $34.5 million, or 44%, in the third quarter and first nine months of 2009 compared to the same prior year periods.

Equipment revenues were $3.6 million and $13.8 million in the third quarter and first nine months of 2009 respectively, compared to $15.2 million and $43.0 million in the same prior year periods. Equipment sales were significantly impacted by the deterioration of the economy and were consistent with declines in global capital equipment markets. Potential customers are delaying purchasing decisions and lenders are delaying financing commitments in anticipation of a continuing sluggish economy. Sales of growth portfolio DI presses and peripherals declined from $12.9 million and $34.7 million in the third quarter and first nine months of 2008 respectively, to $2.9 million and $10.2 million in the comparable current year periods. Sales of our remaining growth portfolio of equipment, Dimension, Dimension Pro, Compass, and Vector TX52 platesetters, declined from $2.2 million and $7.2 million in the third quarter and first nine months of 2008 respectively, to $1.1 million and $3.7 million in the comparable current year periods. Equipment sales of our "traditional" line of products, defined as QMDI presses, polyester CtP platesetters, and conventional equipment, were also lower in 2009 compared to 2008 due to the sluggish economy as well as the ongoing transition of our customer base from analog to digital technologies. Revenues from our traditional line of equipment products declined from $1.2 million and $4.6 million in the third quarter and first nine months of 2008, respectively, to $0.4 million and $2.3 million in the comparable current year periods.

Consumables product revenues declined from $25.1 million and $81.8 million in the third quarter and first nine months of 2008, respectively, to $22.2 million and $65.2 million in the comparable current year periods due primarily to lower sales of our "traditional" portfolio of consumables as well as the negative impact of the deterioration in the economy. Sales of Presstek's traditional plate products, consisting of QMDI, other DI, and polyester plates, declined from $9.8 million and $32.5 million in the third quarter and first nine months of 2008, respectively, to $8.3 million and $24.1 million in the comparable current year periods, while sales of other traditional consumables products declined from $6.5 million and $21.4 million to $5.8 million and $17.5 million in the comparable periods. Total sales of Presstek's traditional products declined 14% and 23% in the third quarter and first nine months of 2009, to $14.1 million and $41.7 million respectively. Sales of Presstek's "growth" portfolio of consumables, defined as 52DI, 34DI, and chemistry-free CtP plates, declined from $8.7 million and $27.9 million in the third quarter and first nine months of 2008, respectively, to $8.1 million and $23.5 million in the comparable current year periods, reflecting underutilized capacity in the printing markets resulting from the slow economy as well as customer inventory reductions. Overall sales of Presstek's growth portfolio of DI plates declined from $4.7 million and $14.2 million in the third quarter and first nine months of 2008 respectively, to $4.3 million and $12.6 million in the comparable current year period. Sales of chemistry-free CtP plates declined by 8% and 21% in the third quarter and first nine months of 2009, respectively, from $4.1 million and $13.7 million in the third quarter and first nine months of 2008. Sales of Aurora Pro, Presstek's new chemistry-free CtP thermal plate, increased 210% and 86% in the third quarter and first nine months respectively, compared to the same prior year periods.

Service and parts revenues were $7.2 million and $22.0 million in the third quarter and first nine months of 2009, respectively, reflecting a decrease of $1.0 million, or 12%, and $4.2 million, or 16%, from the comparable prior year periods. The decrease is due primarily to lower parts revenues resulting from the transition of our customer base from analog to digital solutions as well as lower equipment usage due to the sluggish economy.

Cost of Revenue

Consolidated cost of product, consisting of costs of material, labor and overhead, shipping and handling costs and warranty expenses, was $20.1 million and $53.6 million in the third quarter and first nine months of fiscal year 2009, respectively, compared to $25.6 million and $78.7 million, respectively, in the comparable prior year periods. Cost of product in the third quarter of 2009 includes a write-down of equipment inventory of $2.7 million related to lower production volume levels in our equipment manufacturing plant, the impact of a change in certain product strategies, and a refinement in the calculations and assumptions used to determine the allocation of manufacturing spending between period costs and capitalized variances. The overall decrease in product cost was due primarily to lower revenues. Included in the $2.7 million writedown of equipment inventory are out of period adjustments of $1.1 million and $0.1 million for the three and nine month periods ended October 3, 2009, respectively. Management concluded that the adjustments were not material to the prior periods and current period.

Consolidated cost of service and parts declined from $6.1 million and $19.6 million in the third quarter and first nine months of 2008, respectively, to $5.2 million and $16.5 million in the comparable current year periods. These amounts represent the cost of spare parts, labor and overhead associated with the ongoing service of products. The reduction in overall cost is due primarily to lower field service expenses resulting from cost reduction initiatives, as well as lower parts revenues.

Gross Profit

Including the impact of the $2.7 million equipment inventory write-down in the third quarter, consolidated gross profit as a percentage of total revenue was 23.3% and 30.5% in the third quarter and first nine months of fiscal year 2009, respectively, compared to 34.7% and 34.9% in the third quarter and first nine months of fiscal year 2008, respectively. Excluding the impact of the $2.7 million inventory write down, gross profit as a percentage of total revenue was 31.5% and 33.2% in the third quarter and first nine months of 2009 respectively.

Gross profit as a percentage of product revenues was 21.9% in the third quarter of 2009 compared to 36.5% in the third quarter of 2008. On a year to date basis, gross profit as a percentage of product revenues was 32.1% in fiscal year 2009 compared to 37.0% in fiscal year 2008. Gross profit has been negatively impacted in 2009 by an unfavorable change in foreign currency exchange rates but has been offset somewhat by a favorable mix of higher margin product sales. Excluding the impact of the $2.7 million inventory write down, gross profit as a percentage of product revenues was 32.4% and 35.5% in the third quarter and first nine months of 2009 respectively.

Gross profit as a percentage of service revenues was 28.5% and 24.8% in the third quarter and first nine months of 2008, respectively, compared to 26.1% and 25.3% in the comparable current year periods, respectively.

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 and consumables development efforts.

Research and development expenses were $1.4 million and $3.8 million in the third quarter and first nine months of fiscal year 2009, respectively, compared to $1.1 million and $3.7 million in the comparable prior year periods. Higher spending in the third quarter of 2009 was due primarily to higher parts and supplies expense related to product development.

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 $7.1 and $22.4 million in the third quarter and first nine months of fiscal year 2008, respectively, to $6.3 million and $19.5 million in the comparable current year periods. Favorable expenses were due primarily to lower payroll and consulting related costs resulting from cost reduction actions as well as lower commission expense due to lower sales. In addition, 2008 expense includes the impact of the DRUPA trade show which took place in the second quarter.

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 and administrative activities.

General and administrative expenses were $4.9 million and $17.2 million in the third quarter and first nine months of 2009 respectively, compared to $5.9 million and $18.3 million in the comparable prior year periods. Favorable expenses in the third quarter of 2009 were due in large part to lower payroll related costs and lower legal fees. On a year to date basis, favorable payroll related costs, and other professional services were offset somewhat by higher bad debt expenses resulting from the impact of the sluggish economy.

Amortization of Intangible Assets

Amortization expense was $0.2 million and $0.7 million in the third quarter and first nine months of fiscal 2009, respectively, compared to $0.3 million and $0.8 million in the comparable 2008 periods. These expenses relate to intangible assets recorded in connection with the Company's 2004 ABDick acquisition, patents and other purchased intangible assets.

Restructuring and Other Charges

During the first nine months of 2009, the Company has initiated certain cost reduction efforts related to the US and UK operations. The Company has recorded expense of approximately $1.2 million during the first nine months of 2009 related to these actions. These expenses are expected to be fully paid by year-end and are recorded on the restructuring and other charges line in the consolidated statements of operations.

In the third quarter and first nine months of 2008 the Company recognized $0.4 million and $1.6 million respectively of restructuring and other related costs associated with our business improvement plan as well as charges related to the impairment of long-lived assets located at our South Hadley, Massachusetts facility.

Goodwill

In order to complete the two-step goodwill impairment tests as required by FASB Accounting Standards Codification Topic 350 Intangibles-Goodwill and Other (originally issued as "SFAS 142, Goodwill and Other Intangible Assets"), the Company identifies its reporting units and determines the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. In accordance with the provisions of Topic 350, the Company designates reporting units for purposes of assessing goodwill impairment. Topic 350 defines a reporting unit as the lowest level of an entity that is a business and that can be distinguished, physically and operationally and for internal reporting purposes, from the other activities, operations, and assets of the entity. Goodwill is assigned to reporting units of the Company that are expected to benefit from the synergies . . .