##### Table of Contents









Form 10-K

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


|  |  |                                                                                           
|- |  | ------------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES AND EXCHANGE ACT OF 1934
| 
|  |  | For the fiscal year ended September 30,
	2001                                             

Commission File Number: 0-10691

Check Technology Corporation

(Exact name of registrant as specified in its
charter)


|                                                                                        |  |                                      
|--------------------------------------------------------------------------------------- |  | -------------------------------------
|Minnesota                                                                               |  | 41-1392000                           
|(State or other jurisdiction of
	incorporation or organization)                         |  | (I.R.S. Employer
	Identification No.)
|                                                                                       
|12500 Whitewater Drive,
	Minnetonka, Minnesota(Address of principal executive
	offices) |  | 55343-9420(Zip Code)                 

Registrants telephone number, including
area code:

(952) 939-9000


Securities registered pursuant to
Section 12(b) of the Act: None

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

Common Stock ($.10 par value)

(Title of Class)




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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
last
60 days.     Yes þ          No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this form
10-K. o

The aggregate market value of the voting stock
held by nonaffiliates of the Registrant was approximately
$31,422,646 at December 3, 2001 when the closing price of
such stock, as reported by NASDAQ, was $5.220.

There were 6,159,798 shares outstanding of
Registrants $.10 par value common stock as of
December 3, 2001.

DOCUMENTS INCORPORATED BY REFERENCE



|   |                                                                                                                                                     
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------
|1. | Portions of the definitive proxy statement to be
	filed with the Commission by the end of January 2002 are
	incorporated by reference into Part III.

This Form 10-K consists of 73 pages
(including exhibits). The index is set forth on page 15.



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TABLE OF CONTENTS



|                                                                                                                                                |  |  |  |  |  |  |  | 
|----------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                                                                                                                         
|PART II                                                                                                                                        
|PART III                                                                                                                                       
|PART IV                                                                                                                                        
|SIGNATURES                                                                                                                                     
|FORM 10-K -- ITEM 14(a)(1) AND (2) CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
|REPORT OF INDEPENDENT AUDITORS                                                                                                                 
|CONSOLIDATED STATEMENTS OF OPERATIONS                                                                                                          
|CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY                                                                                                
|Bank Line of Credit Agreement                                                                                                                  
|2000 Stock Plan                                                                                                                                
|List of Subsidiaries                                                                                                                           
|Consent of Independent Auditors                                                                                                                



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PART I

Item 1.     Business

Company Background

Check Technology Corporation (the Company)
designs, manufactures, sells and services document printing
systems that personalize, encode, print and collate documents
into packages that are tailored to the customers
requirements. The Company was formed in 1981 and began to ship
its first system, the Model 2000 Checktronic®, in
1983. The original product concept for the Company was a
computerized financial document production system, which
integrated (i) automatic collation of checkbook components,
(ii) high quality alphanumeric and graphics printing for
customer personalization and bank address, and
(iii) consistent Magnetic Ink Character Recognition (MICR)
printing for the electronic processing of checks.

Within a short time after the introduction of the
Checktronic system, the Company recognized the
products applicability in such areas as insurance claim
production and centralized funds disbursements. The latter
includes payroll and accounts payable checks. The Company calls
these Checkwriting applications. Checkwriting
typically requires a high level of security (e.g., secure
operator access and the ability to produce an audit trail after
a batch of checks is produced). The Company developed
sophisticated control software/hardware, which met these
stringent operating requirements. This security capability is
offered as an option on many of the Companys systems and
differentiates the Companys products from many
competitors products.

The Company has had a significant presence in the
international check production marketplace since 1983. The
integration of the check production functions described above
allowed lower cost production of small check orders (25 to 100
checks) that are typical in most markets outside the United
States. This and an improvement in printing quality created a
demand for the Companys systems in many international
markets. The Company opened its first subsidiary, Check
Technology Limited, in England in 1983 and a French subsidiary
in 1987.

During 1998, the Company launched the
Imaggia® MG20 system in response to the
changing demands of security printers and on-demand printing
applications worldwide. The Imaggia MG20 system utilizes
state-of-the-art digital, non-impact technology, offering print
quality that is visually indistinguishable from offset print.
The Company markets the Imaggia system to customers with
high volume folio production and print-on-demand applications.

In April 1999, the Company completed an agreement
with Océ Printing Systems GmbH for worldwide exclusive
rights to sell (on a private label basis) and service the PS75
MICR product manufactured by Océ. In addition, the Company
obtained certain non-exclusive rights to sell and service other
high-performance sheet-fed MICR printing systems (PS MICR
systems) and non-MICR printing systems manufactured by Océ.

In July 2001, the Company announced introduction
of the Imaggia II system. Faster, easier to
use, and supporting a larger media size than the Imaggia
MG20 system, the Imaggia II system features a
new flat-screen operator interface with the front-end data
processing capacity to support production of truly variable data
from sheet to sheet. The Imaggia II system is
scheduled to begin shipping in the third quarter of fiscal 2002.

As of September 30, 2001, the Company had an
installed base of approximately 540 systems located in more than
50 countries.

Products

Check Technology sells both cut-sheet
and continuous printing systems that are used for
four basic applications: folio production, insurance claims,
fulfillments and disbursements. Folio production includes the
printing of checkbooks and financial payment coupon books.
Insurance claim applications consist of explanation of benefit
forms and insurance claim checks. Fulfillment applications
include coupons and rebate

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checks, while disbursement applications include
accounts payable checks and payroll checks. These electronic
production systems enable companies, banks and government
customers to easily and quickly transform blank paper stock into
fully collated checks and forms.


Cut-Sheet Production Systems.Currently, the Companys premier
cut-sheet system is the Imaggia MG20 system, with the
Imaggia II system scheduled for shipment in the
third quarter of fiscal 2002. The Imaggia system utilizes
state-of-the-art digital, non-impact technology, offering print
quality that is visually indistinguishable from offset print.
The Company markets the Imaggia system to customers with
high volume folio production and print-on-demand applications.
The Imaggia MG20 system operates at a rated speed of 228
pages per minute and accommodates varying paper sizes up to
18.75 inches in width and 22 inches in length. The
Imaggia II system is expected to operate at a rated
speed of 300 pages per minute and accommodates varying paper
sizes up to 18.75 inches in width and 26 inches in
length. The Imaggia systems can be purchased with various
input and output paper handling options and provides a high
level of flexibility, reliability and the consistency required
to produce high quality documents while reducing production
costs.

The Companys other manufactured cut-sheet
system is the Checktronic system. The Checktronic
system uses a combination of ion-deposition and impact
technology. The Company markets four Checktronic system
models to customers with medium to high volume folio production,
insurance claim, fulfillment and disbursement applications. The
Model 1750X operates at a rated speed of 45 pages per
minute, while the Models 2100X, 4000X and 4500X operate at 60,
90 and 120 pages per minute, respectively. The
Checktronic system can be purchased with advanced
security/audit capability.

The Company has an agreement with Océ
Printing Systems GmbH for worldwide exclusive rights to sell (on
a private label basis) and service the PS75 MICR product
manufactured by Océ. In addition, the Company has certain
non-exclusive rights to sell (on a private label basis) and
service other high-performance sheet-fed MICR and non-MICR
printing systems manufactured by Océ. The Companys
PS MICR systems line of products utilize
electrophotography imaging technology, suitable for customers
with medium to high volume folio production, insurance claim,
fulfillment, disbursement and print-on-demand applications. The
Model PS75 MICR operates at a rated speed of 75 pages per
minute, while the Model PS155 operates at 155 pages per minute
and has both simplex and duplex operating modes.

Continuous Form Production Systems.The Companys CheckPrinter
systems are continuous form systems and are available as either
stand-alone MICR printers or as tandem systems. The Model 930
and Model 960 operate at over 300 and 600 documents per minute,
respectively. These two models utilize impact technology to
produce high quality MICR characters.

Finishing Units.In
addition to document production systems, the Company offers a
finishing system to complement its cut-sheet product line. The
Foliotronic® system consists of a guillotine and
stitcher/binder module. Its rated throughput is up to 2,000
books per hour. When used with the Companys electronic
production systems, the Foliotronic system enables
customers with folio production applications to transform blank
paper stock into finished books.

Service and Maintenance.Service and maintenance revenues
result from the sale of maintenance contracts, the sale of
proprietary consumable and supply items and the sale of spare
parts to customers who have purchased the Companys
equipment. Supplies are operating materials that are consumed
during normal operation of the Companys systems. Examples
of these supplies are MICR ribbon, which is consumed in the
printing of each MICR code line, and toner, which is consumed in
the printing of each document.

The Company employs customer engineers at each of
its major service locations. For customers who purchase
maintenance contracts after the warranty period, which typically
is 90 days from customer acceptance of a system, the
Company provides ongoing customer support through its service
network, for which it charges for time and materials on an
annual service contract basis. Some customers elect to provide
their own maintenance and service on the system they have
purchased. Historically, warranty service expense has not been
significant to the Company after the initial units of a new
product have been placed with customers.

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Sales and Marketing

Organization.The
Companys system sales are made predominantly through
direct sales personnel based in the United States and abroad.
Marketing activities for the Company and its subsidiaries are
centralized at the Companys headquarters in Minnetonka,
Minnesota, USA. These activities include the development and
implementation of product pricing, advertising and public
relations strategies. In addition, the Company utilizes market
research and market development resources to anticipate changes
in the Companys competitive environment.

United States Market.The market in the United States for
checks and other financial documents is the largest in the
world, notwithstanding the fact that the annual consumption of
checks has shown a slowing growth rate over the last several
years. The Company believes alternatives to the check document,
such as debit and credit cards, will eventually reduce the
number of checks used, although the size and rate of reduction
are difficult to predict. Company studies have shown that other
documents produced by the Companys systems have exhibited
higher growth rates over the same period. These documents
include payment coupons, tax payment and other installment
payment products.

Checkwriting activities have been affected by
alternative payment technologies. These substitutes include
Electronic Funds Transfer (EFT) and Electronic Data
Interchange (EDI). Although these alternatives comprise only a
small percentage of total payment transactions in the United
States, they are expected to have an increasingly significant
impact on United States disbursement activities over the next
several years.

The Companys systems have been sold in the
United States primarily to check printers, payment coupon
producers, service bureaus and large corporations. These
organizations all have requirements for the production of
personalized encoded document packages such as small personal
check orders, installment payment books, payroll, payables and
insurance claims checks. The Company expects to continue to
increase its installed system base in the United States.

International Market.The market for the Companys
products outside the United States has been primarily in
personalized check production. The average personalized check
order size in most international markets is between 25 and
100 checks. These small order sizes are produced cost
effectively on the Companys products because of their
automatic collation capabilities. Stringent MICR quality
standards, enforced by the major clearing banks in most
international markets, are also met by the Companys high
quality MICR printing capabilities. As a result of these market
factors, the Company has had success in penetrating the largest
personal check production markets outside of the United States.
These include Australia, Brazil, France, Mexico, Spain and the
United Kingdom.

Competition

The Companys products are sold into a
number of different market segments. Competition will differ
depending on the segment and application in which the Company
competes. Many of the Companys competitors are well
established and have significantly greater access to financial,
technical and personnel resources. The Company believes sales of
the Imaggia system are critical to its ability to remain
competitive in the markets it serves, and is continuing to
invest in its future success with the planned introduction of
the Imaggia II system. See Research and
Development.

Folio production involves the manufacture of
checkbooks and payment coupon books. In the United States, check
production is dominated by a small number of companies such as
Deluxe Corporation (St. Paul, Minnesota), John H. Harland
Company (Decatur, Georgia) and Clarke American
(San Antonio, Texas), all of which are customers of the
Company. These major customers establish competitive standards
for alphanumeric print quality, MICR print quality and delivery
time that must be met or surpassed in order to compete
effectively in the United States personal check market. With the
Checktronic system product line, the Company was able to
establish itself only in the production of new account kits,
money market checkbooks and other applications that do not
require offset or letterpress quality. The Imaggia system
was designed to provide entry into the United States check
production market. The Companys major competitors in the
manufacture of checkbooks in the United States are Xerox (United
States) and Océ (Germany).

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The Company has had success in the segment of the
United States folio production segment that involves the
production of personalized payment books such as installment
loan and tax payment books. This market is dominated by a small
number of companies such as NCP (Birmingham, Alabama), Cummins
Allison (Indianapolis, Indiana) and Venture Encoding (Dallas,
Texas). The predominant personal checkbook manufacturers
discussed above also produce payment books. The Companys
products have found market acceptance in this segment because
they provide the efficiency, reliability and production
flexibility sought by this segment. Xerox and Océ are
presently the Companys major competition for the
production of payment books.

International folio production markets, like the
United States payment book production market, are also driven
more by cost and production efficiency factors than by
alphanumeric print quality standards. In addition, enforcement
of high MICR standards by the clearing banks in most
international markets makes MICR printing quality an extremely
important competitive factor. The Companys
Checktronic system product line has found a high degree
of acceptance in the international market segments because these
systems provide the efficiency, production flexibility and MICR
quality sought by the major check producers. The Company
competes in the international marketplace with Troy (United
States), Xerox, Océ and Nipson Bull (France).

The centralized high volume production of
insurance claims and check disbursements does not require
extensive collation. For this reason, the Company finds many
competitors in this market segment. Specific competitors include
Xerox, Océ, Troy and IBM (United States). The
Companys products offer security and audit control, which
for companies that generate many checks is a significant
advantage as it restricts unauthorized access to data printed on
Check Technology systems. The Companys security/audit
capability also physically tracks the total number of documents
printed and maintains a running total of the dollar amounts
printed in each run.

Backlog

At December 3, 2001, the Company had a
backlog of approximately $9,936,000, compared with a backlog of
$13,590,000 as of December 1, 2000. The Company defines its
backlog as purchase orders which are unfilled. Because of
customer changes in delivery schedules and potential
cancellation of orders, the Companys backlog as of any
particular date may not be representative of the Companys
actual sales for any succeeding fiscal period. During most of
fiscal 2001, the Company had a significant backlog due to the
January 2000 acceptance of a three-year Imaggia system
and service contract, valued at approximately
$40.0 million. Backlog declined throughout the year as
scheduled deliveries were met and rebounded modestly with a
follow-on contract with the customer that was executed in
September of 2001.

The Companys equipment is manufactured to
orders received, and to date, the Company has never been unable
to meet a scheduled shipment date because of excessive order
backlog. The Company expects that, from time to time, it will
continue to have periods during which there may be little or no
backlog.

Manufacturing and Sources of Supply

The Company has adopted a manufacturing process
to enable it to produce a generic product that can
be quickly configured to a customers specific order
without rework. This process has enabled the Company to begin
manufacturing without firm final orders. As a result, the
Company has been able to reduce manufacturing parts and material
inventories, while, at the same time, being able to respond
quickly to new orders.

The components of the Companys financial
document production systems are manufactured by outside vendors,
tested and then incorporated into the systems by Company
employees. While the Company uses only one source for many of
the key components of its printing systems, most components,
with the exception of the non-impact alphanumeric print engine
and the MICR printer hammer bank component, are available from
multiple sources. However, many of the critical components of
the Companys systems would require redesign if new vendors
were used.

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The non-impact alphanumeric printers and
associated spare parts and consumables for both the
Checktronic system and the Imaggia system are
supplied to the Company by Delphax Systems (Delphax), which has
its manufacturing facilities in Toronto, Canada. Delphax has
been the supplier of the print engines used in the
Companys systems since the Companys inception.
Xerox, one of the Companys competitors, owned a one-third
partnership interest in Delphax for many years and in November
1997, Xerox acquired the remaining equity of Delphax. At the end
of November 2001, subsequent to fiscal year-end, the Company
signed a definitive purchase agreement with Xerox to acquire the
North American assets of Delphax in a cash transaction that is
expected to close in late December 2001. See NOTE I to
Consolidated Financial Statements.

Research and Development

Since its formation, the Companys research
and development activities have been focused on the development
of computerized printing systems capable of producing, on a
precision basis, financial documents at required speeds and
volumes. The Company continues to develop features for the
Imaggia system, which is targeted at customers with high
volume folio production and print-on-demand applications and has
achieved its greatest success to date in the high volume United
States check printing market. Continued Imaggia system
development also offers significant potential for increasing the
Companys international business. The Companys
research and development expenditures were $2.6 million in
fiscal 2001 and $2.7 million in each of fiscal 2000 and
1999.

During fiscal 2001, the Company has continued
product engineering on the Imaggia system to improve its
performance to meet market demands, and in July 2001, announced
introduction of the Imaggia II system. The next
generation of the Companys flagship product boasts
significant performance improvements, ease-of-use-enhancements
and new paper handling capabilities to accommodate the largest
cut-sheet media size of any digital sheet-fed system in the
world. Software enhancements to improve the front-end data
processing and serviceability of the system in the field are
also important. In keeping with the Companys philosophy of
providing continuous improvement to the units operating in the
field, most of the new capabilities of Imaggia II
can also be offered to existing customers in the field as
upgrades. The Company expects that product engineering efforts
seeking further improvements and enhancements will be ongoing.
The Company has also continued product engineering on its legacy
product lines.

Patents

In July 1997, the Company received a patent
covering certain aspects of its Imaggia system. In prior
years, the Company has received patents covering the Model 2000
Checktronic system, its fusing process and the autotaper
for the Foliotronic system. There is no assurance that
such patents will afford the Company any competitive advantage.
The Company believes that its future success will depend
primarily upon the technical competence and creative skills of
its employees rather than on patents. The Companys
printing systems, or components of such systems, may be covered
in whole or part by patents held by others. Although the Company
is not presently aware of any such patents, it could be required
to obtain patent licenses in order to conduct its business.

Employees

As of December 3, 2001, the Company had
216 full-time employees. Many of the Companys
employees are highly skilled, and the Companys future
success will depend, in part, upon its ability to attract and
retain such employees. The Company is not subject to any
collective bargaining agreement and considers its employee
relations to be good.

Recent Developments

At the end of November 2001, the Company signed a
definitive purchase agreement with Xerox to acquire, in a cash
transaction, the North American assets of Delphax, the
sole-source supplier of the print engines used in the
Companys systems since the Companys inception. In
addition to giving the Company

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ownership of its core print technology and
associated expertise, the Companys and Delphaxs
product lines are highly complementary. The transaction is
expected to close in late December 2001.


Item 2.     Properties

The Companys corporate and manufacturing
offices are located in Minnetonka, a suburb of Minneapolis,
Minnesota. The Company leases a 75,000 square foot building
under a lease that expires on September 15, 2010. The
annual rent is $420,000, increasing to $481,000 on
September 15, 2005 and thereafter, plus operating expenses
and real estate taxes incurred by the landlord.

In addition, the Company leases office space for
its European sales and service center in Crawley, England, under
a lease which expires in 2013 and provides for annual lease
payments of $180,000, subject to adjustment every five years,
plus a pro rata portion of the operating expenses incurred by
the landlord. The Company leases smaller office premises for its
operations in France and Australia, with the Australian office
scheduled to close, and the lease to terminate, in the first
quarter of fiscal 2002.

The Company believes that its current
arrangements for facilities are adequate to meet its present
needs and those for the foreseeable future.

Item 3.     Legal
Proceedings

Neither the Company nor its subsidiaries are a
party to, nor is any of their property the subject of, any
material pending legal proceedings. From time to time, the
Company and its subsidiaries receive complaints from customers
with respect to product performance and occasionally such
complaints evolve into litigation. The Company regards these
matters as routine litigation incidental to its business.

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

There were no matters submitted to a vote of
security holders during the fourth quarter of the fiscal year
ended September 30, 2001.

The names and ages of all of the Companys
executive officers and the positions held as of the date of this
report are:

Executive Officers of the Company

|                    |  |                                         |  |     |    | 
|------------------- |  | --------------------------------------- |  | --- | -- | 
|Name                |  | Position                                |  | Age
|                    |  |                                         |  |    
|Jay A. Herman       |  | Chairman and Chief Executive Officer    |  |     | 54 | 
|Robert M. Barniskis |  | Vice President, Chief Financial Officer |  |     | 38 | 
|M. H. (Bill) Kuhn   |  | Vice President, Customer Service        |  |     | 60 | 
|Bruce H. Malmgren   |  | Vice President, Sales and Marketing     |  |     | 57 | 
|Dieter P. Schilling |  | Vice President, Operations              |  |     | 46 | 
|Peter J. Wood       |  | Vice President, Engineering             |  |     | 59 | 

Officers of the Company are elected annually by
the Board of Directors and serve until their successors are duly
elected and qualified. There are no family relationships among
the Companys officers and directors.

Set forth below is a summary of the business
experience of each of the executive officers of the Company:

Jay A. Hermanjoined
the Company as Executive Vice President and Chief Financial
Officer in May 1988, was promoted to President in June 1989 and
elected Chairman of the Board in October 2001. Prior to joining
the Company, Mr. Herman was Vice President and Chief
Financial Officer of Gelco Corporations International
Division. He held that post from 1986 to 1988. Between 1979 and
1986, Mr. Herman held positions of Vice President of
Administrative Services for Gelco Corporation and Director of
Planning and Budgets for Gelcos Fleet Leasing Division.
Before joining Gelco, Mr. Herman held several positions
with General Mills.

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Robert M. Barniskisjoined the Company as Vice President, Chief Financial Officer in
November 1999. Prior to joining the Company, Mr. Barniskis
spent 14 years in various financial roles within Rosemount
Inc., a wholly owned subsidiary of Emerson Electric Company. He
was Finance Director, Americas, of Rosemounts Measurement
Division from 1998 to 1999. Between 1996 and 1998,
Mr. Barniskis was Finance Director, Asia Pacific, for
Fisher-Rosemount Systems, Inc., based in Singapore. Previous to
this, Mr. Barniskis was Director of Finance and MIS for
Kay-Ray/ Sensall, Inc., a wholly owned subsidiary of Rosemount
Inc., from 1993 to 1995.

M. H. (Bill)
Kuhnjoined the Company as Vice
President, Customer Service in November 2000.
Mr. Kuhns previous experience in management and
customer service, largely focused on the capital goods market,
spans over 30 years, most recently, from 1997 to 2000 as
Vice President, Global Customer Support for Grove Worldwide.
Earlier in his career, Mr. Kuhn held increasingly more
responsible roles with Hogue Equipment from 1986 to 1996,
A. K. Equipment from 1980 to 1986, and Caterpillar
from 1969 to 1980.

Bruce H. Malmgrenjoined the Company as Vice President, Sales and Marketing in
November 2000. Since 1966, Mr. Malmgren served in
successively more responsible sales and marketing positions, and
sales and marketing management roles at various companies, most
notably, Xerox Corporation from 1968 to 1990. Just prior to
joining the Company, from 1995 to 2000, Mr. Malmgren was
President of National Independent Billing, Inc. and Senior Vice
President and National Sales Manager for Dataserv, Inc. from
1992 to 1994.

Dieter P. Schillingwas named Vice President, Operations in November 2000 after
having held the position of Vice President of Operations and
Customer Service since October of 1989. From October 1986 until
October 1989, he held the position of Vice President of Customer
Service. Mr. Schilling joined the Company as Director of
Field Services in 1985 and was promoted to Director of Customer
Service in April of 1986. Previous to this, Mr. Schilling
was a co-founder and President of Southern California Telephone,
a telephone interconnects company, which was sold to American
Telecommunications, Inc. in 1985.

Peter J. Woodjoined
the Company as Vice President, Engineering in July 1997.
Mr. Wood has over 30 years experience in the
development and user application of electronic digital product
technology. Prior to joining the Company, Mr. Wood served
as Principal Consultant to Vivo Software, Inc. from 1996 to
1997, as Vice President, Engineering and Technology, for Iris
Graphics Inc. from 1995 to 1996 and as President of Vital
Imaging Systems, Inc. from 1993 to 1995.




PART II

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

The Companys Common Stock trades on the
over-the-counter market and is quoted on the National
Association of Securities Dealers Automated Quotation System
(NASDAQ) under the symbol CTCQ. The
following table sets forth for the periods indicated, the range
of high and low closing prices per share as reported by NASDAQ.
The NASDAQ bid quotations represent inter-dealer prices, without
retail markup, markdown or commissions, and may not necessarily
represent actual transactions.

|                              |                |      |   |       |  |  |   |       | 
|----------------------------- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|                              |                | High |   | Low  
|                              |                |      |   |      
|Year ended September 30, 2001 |                |      |   |       |  |  |   |      
|                              | First quarter  |      | $ | 4.563 |  |  | $ | 2.688 | 
|                              | Second quarter |      |   | 3.875 |  |  |   | 2.750 | 
|                              | Third quarter  |      |   | 3.500 |  |  |   | 2.250 | 
|                              | Fourth quarter |      |   | 3.620 |  |  |   | 2.800 | 
|Year ended September 30, 2000 |                |      |   |       |  |  |   |      
|                              | First quarter  |      |   | 4.313 |  |  |   | 1.875 | 
|                              | Second quarter |      |   | 8.375 |  |  |   | 3.563 | 
|                              | Third quarter  |      |   | 6.375 |  |  |   | 4.250 | 
|                              | Fourth quarter |      |   | 5.625 |  |  |   | 4.250 | 

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Stock Repurchase Program

In September 1998, the Company announced a stock
repurchase program of up to 500,000 shares of Common Stock.
In the fiscal year ended September 30, 2001, the Company
purchased 27,250 shares at a cost of $83,000, bringing the
total purchased under the program to 197,750 shares at a
cost of approximately $518,000.

Holders

As of December 3, 2001, the Company had
308 holders of Common Stock of record.

Dividends

The holders of Common Stock are entitled to
receive dividends when and as declared by the Companys
Board of Directors. Since its inception, the Company has not
paid any dividends and does not anticipate paying any dividends
in the foreseeable future. The Company intends to retain any
earnings it may generate to provide for the operation and
projected expansion of its business.

Item 6.     Selected
Financial Data

|                                            |                                                                                                        |                          |   |            |  |      |   |            |   |      |   |            |   |  |   |            |  |  |   |            | 
|------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ------------------------ | - | ---------- |  | ---- | - | ---------- | - | ---- | - | ---------- | - |  | - | ---------- |  |  | - | ---------- | 
|                                            |                                                                                                        |                         
|                                            |                                                                                                        | Year Ended September 30,
|                                            |                                                                                                        |                         
|                                            |                                                                                                        | 2001                     |   | 2000       |  | 1999 |   | 1998       |   | 1997
|                                            |                                                                                                        |                          |   |            |  |      |   |            |   |     
|Consolidated Statements of Operations Data: |                                                                                                        |                          |   |            |  |      |   |            |   |      |   |            |   |  |   |            |  |  |   |           
|                                            | Net sales                                                                                              |                          | $ | 42,843,882 |  |      | $ | 28,781,718 |   |      | $ | 22,308,000 |   |  | $ | 23,739,528 |  |  | $ | 22,866,674 | 
|                                            | Net income (loss)                                                                                      |                          |   | 2,149,869  |  |      |   | (290,437   | ) |      |   | (1,614,387 | ) |  |   | 198,862    |  |  |   | 325,979    | 
|                                            | Earnings (loss) per common share                                                                       |                          |   | 0.35       |  |      |   | (0.05      | ) |      |   | (0.26      | ) |  |   | 0.03       |  |  |   | 0.05       | 
|                                            | Earnings (loss) per common share, assuming
	dilution                                                   |                          |   | 0.35       |  |      |   | (0.05      | ) |      |   | (0.26      | ) |  |   | 0.03       |  |  |   | 0.05       | 
|                                            | Weighted average number of shares outstanding
	during the period(1)                                    |                          |   | 6,174,411  |  |      |   | 6,146,630  |   |      |   | 6,129,225  |   |  |   | 6,273,756  |  |  |   | 6,224,797  | 
|                                            | Weighted average number of shares and equivalents
	outstanding during the period, assuming dilution(2) |                          |   | 6,227,724  |  |      |   | 6,146,630  |   |      |   | 6,129,225  |   |  |   | 6,289,872  |  |  |   | 6,295,073  | 
|Consolidated Balance Sheets Data:           |                                                                                                        |                          |   |            |  |      |   |            |   |      |   |            |   |  |   |            |  |  |   |           
|                                            | Working capital                                                                                        |                          | $ | 16,944,815 |  |      | $ | 15,036,839 |   |      | $ | 15,736,047 |   |  | $ | 17,634,271 |  |  | $ | 17,588,576 | 
|                                            | Total assets                                                                                           |                          |   | 25,786,616 |  |      |   | 24,365,873 |   |      |   | 20,455,869 |   |  |   | 22,319,507 |  |  |   | 22,971,493 | 
|                                            | Long-term liabilities                                                                                  |                          |   |           |  |      |   |           |   |      |   |           |   |  |   | 35,059     |  |  |   | 78,903     | 
|                                            | Shareholders equity                                                                                   |                          |   | 17,982,624 |  |      |   | 15,923,236 |   |      |   | 16,706,060 |   |  |   | 18,567,126 |  |  |   | 18,679,662 | 



---



|    |                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Earnings per share of Common Stock is computed by
	dividing the net income for the period by the weighted average
	number of shares of Common Stock outstanding during the period.                                   
|   
|(2) | Earnings per share of Common Stock assuming
	dilution is computed by dividing the net income for the period
	by the weighted average number of shares of Common Stock and
	equivalents outstanding during the period.

9



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##### Table of Contents





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

Results of Operations

The following table sets forth the Companys
Statements of Operations expressed as a percentage of net sales
and should be read in connection with the Consolidated Financial
Statements and notes thereto presented elsewhere in this report.

|                                            |                                     |                          |       |      |   |      |       |      |   |  |       |      |  
|------------------------------------------- | ----------------------------------- | ------------------------ | ----- | ---- | - | ---- | ----- | ---- | - |  | ----- | ---- | -
|                                            |                                     |                         
|                                            |                                     | Year Ended September 30,
|                                            |                                     |                         
|                                            |                                     | 2001                     |       | 2000 |   | 1999
|                                            |                                     |                          |       |      |   |     
|Sales:                                      |                                     |                          |       |      |   |      |       |      |   |  |       |     
|                                            | Printing equipment                  |                          |       | 64.9 | % |      |       | 54.3 | % |  |       | 34.9 | %
|                                            | Maintenance, spares and supplies    |                          |       | 35.1 |   |      |       | 45.7 |   |  |       | 65.1 |  
|                                            |                                     |                          |       |      |   |      |       |      |   |  |       |     
|NET SALES                                   |                                     |                          | 100.0 |      |   |      | 100.0 |      |   |  | 100.0 |     
|Costs and Expenses                          |                                     |                          |       |      |   |      |       |      |   |  |       |     
|                                            | Cost of sales                       |                          |       | 50.6 |   |      |       | 49.0 |   |  |       | 47.4 |  
|                                            | Selling, general and administrative |                          |       | 35.2 |   |      |       | 42.5 |   |  |       | 49.1 |  
|                                            | Research and development            |                          |       | 6.2  |   |      |       | 9.5  |   |  |       | 12.2 |  
|                                            |                                     |                          |       |      |   |      |       |      |   |  |       |     
|                                            |                                     |                          | 92.0  |      |   |      | 101.0 |      |   |  | 108.7 |     
|                                            |                                     |                          |       |      |   |      |       |      |   |  |       |     
|INCOME (LOSS) FROM SYSTEM SALES AND SERVICE |                                     |                          | 8.0   |      |   |      | (1.0  | )    |   |  | (8.7  | )   
|Interest expense                            |                                     |                          | 0.1   |      |   |      | 0.0   |      |   |  | 0.0   |     
|Interest income                             |                                     |                          | (0.1  | )    |   |      | (0.4  | )    |   |  | (0.5  | )   
|Unrealized exchange loss                    |                                     |                          | 0.3   |      |   |      | 1.0   |      |   |  | 0.5   |     
|                                            |                                     |                          |       |      |   |      |       |      |   |  |       |     
|INCOME (LOSS) BEFORE TAXES                  |                                     |                          | 7.7   |      |   |      | (1.6  | )    |   |  | (8.7  | )   
|Income tax expense (benefit)                |                                     |                          | 2.7   |      |   |      | (0.6  | )    |   |  | (1.5  | )   
|                                            |                                     |                          |       |      |   |      |       |      |   |  |       |     
|NET INCOME (LOSS)                           |                                     |                          | 5.0   | %    |   |      | (1.0  | )%   |   |  | (7.2  | )%  
|                                            |                                     |                          |       |      |   |      |       |      |   |  |       |     

The Companys revenues are from sales of
(i) document production systems and related equipment, and
(ii) maintenance contracts, spare parts, supplies and
consumable items. For the year ended September 30, 2001
(fiscal 2001), sales of document production equipment increased
78% over the year ended September 30, 2000 (fiscal 2000),
compared with an increase of 101% in fiscal 2000 over the year
ended September 30, 1999 (fiscal 1999). The increases in
fiscal 2001 and fiscal 2000 were due primarily to increased
North American sales of the Imaggia system. The Company
completed the sale of 39 Imaggia systems in fiscal
2001, compared with 22 in fiscal 2000 and seven in fiscal 1999,
and as of September 30, 2001, had an order backlog of
approximately $6.4 million for its Imaggia system,
which it expects to ship in fiscal 2002.

For some time, the Company has held a dominant
position in many of the international markets in which its
Checktronic equipment is sold. Demand for the
Checktronic system product line has softened in these
international markets and revenues from this product line are
now largely dependent on sales to emerging markets such as Latin
America, Asia and Africa. The present uncertain economic
environment in many of the countries within these emerging
markets has limited the Companys current opportunities to
sell high-end capital equipment into those regions.

Revenues from maintenance contracts, spare parts,
supplies and consumable items increased 14% in fiscal 2001 over
fiscal 2000, compared with a 9% decrease in fiscal 2000 over
fiscal 1999. The $1.9 million increase in fiscal 2001 was
due to the significant increase in the installed base of
Imaggia systems in fiscal 2001 and 2000. The decrease in
fiscal 2000 over fiscal 1999 was primarily due to: the impact of
the stronger U.S. dollar on the translation of foreign
currency denominated sales; the continued reduction in
maintenance and consumables revenues from Pacific Rim customers;
and the reduction in consumable revenues from Western European
customers. The Company expects domestic revenues from
maintenance contracts, spare parts, supplies and

10



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##### Table of Contents



consumable items to increase in fiscal 2002 with
the projected growth of the Imaggia system product line,
partially offset by the projected decline in international
maintenance and consumable revenues.


The Companys gross margin percentage in
fiscal 2001 was 49%, compared with 51% and 53% in fiscal 2000
and fiscal 1999, respectively. The decrease in gross margin
percentage for fiscal 2001, compared with fiscal 2000 was
primarily due to the shift in the product mix from the
Checktronic system product line to the Imaggia
system product line, coupled with lower margins on the increased
level of service revenues. In addition, in the fourth quarter of
fiscal 2001, the Company recorded a non-recurring supplier price
adjustment, which for the quarter contributed approximately 4
points to gross margin. The decrease in gross margin percentage
for fiscal 2000, compared with fiscal 1999 was primarily due to
the shift in the product mix from the Checktronic system
product line to the Imaggia system product line and the
decreased revenues from the sale of maintenance, spares and
supplies. The Company anticipates that its gross margin
percentage in fiscal 2002 will be somewhat lower than in fiscal
2001 due to a shift in sales mix as maintenance, spares and
supplies revenues comprise a larger portion of total revenues in
fiscal 2002.

Selling, general and administrative expenses
increased $2.9 million in fiscal 2001, compared with fiscal
2000, and were $1.3 million higher in fiscal 2000 than in
fiscal 1999. As a percentage of net sales, these expenses were
35% in fiscal 2001, 43% for fiscal 2000 and 49% for fiscal 1999.
Increased expense levels between fiscal years were due to the
increase in employees and associated expenses required to
support the increase in total revenues. For fiscal 2001,
approximately $1.3 million of the total increase was due to
expansion of the field force supporting the higher installed
base of the Imaggia system. The Company anticipates that
its selling, general and administrative expenses in fiscal 2002
may continue to increase to support the projected growth in
total revenues, but at a rate less than the projected total
revenue rate of growth.

Research and development expenses of
$2.6 million in fiscal 2001 were slightly lower, compared
with fiscal 2000 and fiscal 1999, and decreased year to year as
a percentage of net sales. In terms of dollars invested,
research and development expenses are expected to remain flat in
fiscal 2002.

Net interest expense was $13,000 in fiscal 2001,
compared with net interest income of $117,000 and $114,000 in
fiscal 2000 and fiscal 1999, respectively. The significant shift
to a net interest expense position in fiscal 2001 was due to
current fiscal year borrowing against the bank line of credit to
fund operating activities, which had not been necessary in
fiscal 2000 or fiscal 1999.

Unrealized exchange gains or losses are related
to the Companys foreign operations. The Company
experiences foreign currency gains and losses, which are
reflected on the Companys Statements of Operations, due to
the strengthening and weakening of the U.S. dollar against
the currencies of the Companys foreign subsidiaries and
the resulting effect of the valuation of the intercompany
accounts and certain assets of the subsidiaries, which are
denominated in U.S. dollars. The net exchange losses for
fiscal years 2001, 2000 and 1999 were $110,000, $293,000 and
$120,000, respectively, due to the strengthening of the
U.S. dollar against the currencies of the Companys
foreign subsidiaries. The Company anticipates that it will
continue to have exchange gains or losses from foreign
operations in the future, although strategies to reduce the size
of the gains or losses will be reviewed and implemented whenever
economical and practical.

The Company recorded an income tax expense of 35%
in fiscal 2001, compared with an income tax benefit of 37% in
fiscal 2000 and an income tax benefit of 17% in fiscal 1999. The
income tax expense for fiscal 2001 has changed as a percentage
primarily because the Company generated pre-tax earnings in
fiscal 2001 and incurred pre-tax losses in fiscal 2000. The
income tax benefit increase from 17% in fiscal 1999 to 37% in
2000 reflects a lower benefit in fiscal 1999 because of an
increase in the deferred tax asset valuation allowance. The
Company believes recorded net deferred tax assets are more
likely than not to be recoverable, based upon its estimates of
future sources of taxable income and the expected timing of
temporary difference reversals. The Company believes it will
generate sufficient future taxable income to recover its net
deferred tax assets from increased sales of its Imaggia
system product line, sales of the PS MICR systems
product line and continued sales of maintenance, spares and
supplies.

11



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##### Table of Contents



Net income for fiscal 2001 was $0.35 per
share, compared with a net loss of $0.05 per share in
fiscal 2000 and a net loss of $0.26 per share in fiscal
1999. The return to profitability in fiscal 2001 was due to the
increase in document production systems revenues, offset by the
effect of reduced gross margins, increased selling, general and
administrative expenses, fiscal 2001 interest expense versus
fiscal 2000 interest income, and the unfavorable effects of
foreign currency exchange rate fluctuations. Similarly, the
reduction in the net loss in fiscal 2000, compared with fiscal
1999 was due to the increase in document production systems
revenues, offset by the effect of reduced gross margins,
increased selling, general and administrative expenses, and the
unfavorable effects of foreign currency exchange rate
fluctuations.

In February 2001, the Company determined that the
market served by its Australian subsidiary could be served more
profitably by alternative means, including independent
distributors and sales agents, and developed a formal exit plan
to cease operations of the subsidiary as of September 30,
2001. In the second quarter of fiscal 2001, the Company recorded
a one-time charge of $115,000, anticipating closure of the
subsidiary before the end of the fiscal year. Customer service
and transition issues delayed the office closing until the first
quarter of fiscal 2002. As a result of this delay and refinement
of closing cost estimates, an additional charge of $100,000 was
recorded in the fourth quarter of fiscal 2001, bringing the
total one-time charge to $215,000. By closing the subsidiary,
the Company anticipates eliminating annual operating expenses of
approximately $500,000, beginning in fiscal 2002, with no
further loss of revenues from Pacific Rim customers as a result
of this change.

Market Risk

The Company has foreign subsidiaries in England
and France (and one in Australia that is in the process of being
closed). The Company does business in more than 50 countries and
generates approximately 31% of its revenues from outside North
America. The Companys ability to sell its products in
these foreign markets may be affected by changes in economic,
political or market conditions in the foreign markets in which
it does business.

The Companys net investment in its foreign
subsidiaries was $5.7 million and $7.0 million at
September 30, 2001 and 2000, respectively, translated into
U.S. dollars at the closing exchange rates. The potential
loss based on end-of-period balances and prevailing exchange
rates resulting from a hypothetical 10% strengthening of the
dollar against foreign currencies was not material in the fiscal
year ended September 30, 2001.

From time to time, the Company has entered into
foreign exchange contracts as a hedge against specific foreign
currency receivables. In fiscal 2001 and 2000, the Company did
not enter into any foreign exchange contracts and does not
currently anticipate entering into any such contracts.

Factors Affecting Results of
Operations

The Companys revenues are subject to
fluctuations which may be material.

In January 2000, the Company entered into a
three-year equipment and service contract for its Imaggia
system that is valued at approximately $40.0 million.
Equipment deliveries under the contract began in the second
quarter of fiscal 2000 and concluded in the third quarter of
fiscal 2001. In the fourth quarter of fiscal 2001, the Company
executed a new contract with this customer, valued at
approximately $19.5 million, approximately
$11.5 million for Imaggia systems and an estimated
$8.0 million over the next three years for supplies and
consumable items. Under both contracts, the Company records
document production systems and related equipment revenues with
the delivery of each component piece of equipment. The Company
records revenues for maintenance, spare parts, supplies and
consumable items based on the monthly usage of these components.
Revenues from this customer have been significant, representing
57% and 32% of total revenues for fiscal 2001 and 2000,
respectively. The Company anticipates that revenues from this
customer will also be significant in fiscal 2002, but to a
lesser extent than in fiscal 2001.

At the end of November 2001, subsequent to fiscal
year-end, the Company signed a definitive purchase agreement
with Xerox to acquire the North American assets of Delphax, the
sole-source supplier of the print

12



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##### Table of Contents



engines used in the Companys systems. The
transaction is expected to close in late December 2001 and will
be financed via a bank credit facility. While the Company
expects the acquisition to provide increased revenue and
incremental operating income, there can be no assurances that
actual results will be as anticipated.


The Companys PS MICR systems
product line is marketed under an agreement with Océ
Printing Systems GmbH for the worldwide exclusive rights to
private label, sell and service the PS75 MICR
product, and provides for certain non-exclusive rights to
private label, sell and service other high-performance sheet-fed
MICR and non-MICR printing systems manufactured by Océ.
Under the agreement, the Company guarantees to purchase a
minimum quantity of the PS 75 MICR product, and is subject
to a minimum commitment fee, contingent on quantities sold, not
to exceed DM 700,000. For fiscal 2001, sales of the
PS MICR systems product line, totaled
$2.0 million, surpassing sales of $463,000 for fiscal 2000,
the first year in which the PS MICR systems product
line was sold, but less than the minimum sales level required by
the agreement. While the Company anticipates that sales of the
PS MICR systems product line will comprise a larger
portion of its document production systems revenues in future
periods, there can be no assurances that sales levels will be
either higher, or high enough to retain current rights of
exclusivity.

The Companys net sales and operating
results may also fluctuate from quarter to quarter because
(i) the Companys sales cycle is relatively long,
(ii) the size of orders may vary significantly,
(iii) the availability of financing for customers in some
countries is variable, (iv) customers may postpone or
cancel orders, and (v) economic, political and market
conditions in some markets change with minimal notice and effect
the timing and size of orders. Because the Companys
operating expenses are based on anticipated revenue levels and a
high percentage of the Companys operating costs are
relatively fixed, variations in the timing of revenue
recognition could result in significant fluctuations in
operating results from period to period.

Euro Conversion

On January 1, 1999, certain member countries
of the European Union established fixed conversion rates between
their existing currencies and the European Unions common
currency (Euro). The transition period for the introduction of
the Euro is from January 1, 1999 to January 1, 2002.
The Company has prepared for the introduction of the Euro and
has evaluated methods to address the many issues involved with
the introduction of the Euro, including the conversion of
information technology systems, recalculating currency risk,
strategies concerning continuity of contracts, and ramifications
on the processes for preparing taxation and accounting records.
The Company believes the Euro conversion will not have a
material impact on its financial statements.

Revenue Recognition

On December 3, 1999, the Securities and
Exchange Commission issued SEC Staff Accounting Bulletin Number
101 Revenue Recognition in Financial Statements
(SAB 101). SAB 101 summarizes certain of the
staffs views on applying generally accepted accounting
principles to revenue recognition in financial statements.
SAB 101 was effective for the Company in the fourth quarter
of fiscal 2001 and had no material impact on the Companys
operations or financial position.

Liquidity and Capital Resources

Working capital was $16.9 million at
September 30, 2001, compared with $15.0 million at
September 30, 2000. The Companys fiscal year-end
inventory levels for these years were flat at
$11.8 million. Accounts receivable increased to
$10.1 million at September 30, 2001, from
$5.4 million at September 30, 2000, due to increased
sales and the timing of sales in relation to period end. Cash
and short-term investments were $592,000 at September 30,
2001, compared with $3.2 million at September 30,
2000. The $2.6 million decrease in cash and short-term
investments was primarily due to increases in accounts
receivable. Deferred revenue was $1.1 million at
September 30, 2001, compared with $3.3 million at
September 30, 2000. This decrease was principally due to
deliveries under the equipment portion of the three-year
contract executed in January 2000 (described above), and the
earning of the related deferred revenue.

13



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##### Table of Contents



The Company has undertaken no significant
investing activities. No significant capital investment has been
undertaken or is planned, and at September 30, 2001, the
Company had no material commitments for capital expenditures.
Short-term investments are purchased as cash is available and
sold as they mature.

As of September 30, 2001 and
December 3, 2001, the Company maintained a
$2.5 million bank line of credit, which expires on
April 30, 2002 and is secured by the Companys
accounts receivable, inventory, equipment and general
intangibles. Advances under the line of credit bear interest at
the banks reference rate. The line of credit agreement
places certain restrictions on the Company, including, among
others, requirements as to profitability and minimum levels of
tangible net worth. At September 30, 2001, the Company was
in compliance with all loan covenants, and the amount owed under
the line was $595,000. Subsequent to year-end, the Company plans
to undertake new financing activities to finance purchase of the
assets of Delphax.

Under the Companys stock repurchase program
announced in 1998 the Company purchased 27,250 shares in
fiscal 2001 at a cost of $83,000. No shares were repurchased in
fiscal 2000. Since the program was announced, the Company has
purchased a total of 197,750 shares at a cost of
approximately $518,000.

The Company believes that its current and planned
financial arrangements, and anticipated level of internally
generated funds, will be sufficient to purchase the assets of
Delphax and fund the working capital requirements of the
enterprise in fiscal 2002.

Cautionary Statement

Statements included in this Managements
Discussion and Analysis of Financial Condition and Results of
Operations, the Companys Annual Report, the Companys
Form 10-K, in other filings with the Securities and
Exchange Commission, in the Companys press releases and in
oral statements made to securities market analysts and
shareholders, which are not historical or current facts, are
forward-looking statements made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform
Act of 1995. Such statements are subject to certain risks and
uncertainties that could cause the Companys actual results
to differ materially from historical earnings and those
presently anticipated or projected.

The factors mentioned under the subheading
Factors Affecting Results of Operations are among
those that in some cases have affected, and in the future could
affect, the Companys actual results, and could cause the
Companys actual financial performance to differ materially
from that expressed in any forward-looking statement.

Item 7a.     Qualitative
and Quantitative Disclosures about Market Risk

The qualitative and quantitative disclosures
about market risk are included in Item 7 of this report.

Item 8.     Financial
Statements and Supplementary Data

The Consolidated Financial Statements of the
Company and its subsidiaries are included in a separate section
of this report.

Item 9.     Disagreements
on Accounting and Financial Disclosure

None.






PART III


Item 10.     Directors
and Executive Officers of the Registrant

Reference is made to the section entitled
Election of Directors included in the Companys
definitive proxy statement, to be mailed to shareholders on or
about January 31, 2002, and filed with the Securities and
Exchange Commission.

14



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##### Table of Contents



Pursuant to Section 16(a) under the
Securities Exchange Act of 1934, executive officers, directors
and 10% shareholders of the Company are required to file reports
on Forms 3, 4 and 5 of their beneficial holdings and
transactions in the Companys Common Stock.

Item 11.     Executive
Compensation and Transactions

Reference is made to the section entitled
Executive Compensation included in the
Companys definitive proxy statement, to be mailed to
shareholders on or about January 31, 2002, and filed with
the Securities and Exchange Commission.



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

Reference is made to the section entitled
Security Ownership of Principal Shareholders and
Management included in the Companys definitive proxy
statement, to be mailed to shareholders on or about
January 31, 2002, and filed with the Securities and
Exchange Commission.

Item 13.     Certain
Relationships and Related Transactions

None.




PART IV

Item 14.     Exhibits,
Financial Statement Schedules and Reports on Form
8-K

Financial Statements

The following Consolidated Financial Statements
of Check Technology Corporation and subsidiaries are submitted
in a separate financial statement section of this report.

|                                                                                                      |  |      |    | 
|----------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|Description                                                                                           |  | Page
|                                                                                                      |  |     
|Report of Independent Auditors                                                                        |  |      | 20 | 
|Consolidated Balance Sheets 
	September 30, 2001 and 2000                                            |  |      | 21 | 
|Consolidated Statements of Operations 
	The years ended September 30, 2001, 2000 and 1999            |  |      | 22 | 
|Consolidated Statements of Shareholders
	Equity  The years ended September 30, 2001, 2000
	and 1999 |  |      | 23 | 
|Consolidated Statements of Cash Flows 
	The years ended September 30, 2001, 2000 and 1999            |  |      | 24 | 
|Notes to Consolidated Financial
	Statements  September 30, 2001                                      |  |      | 25 | 

Financial Statement Schedules

|            |  |                                                |  |      |    | 
|----------- |  | ---------------------------------------------- |  | ---- | -- | 
|Number      |  | Description                                    |  | Page
|            |  |                                                |  |     
|Schedule II |  | Valuation and Qualifying Accounts and Reserves |  |      | 35 | 

All other financial statement schedules have been
omitted because they are not applicable, are not required, or
the information is included in the financial statements or notes
thereto.

15



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##### Table of Contents



Reports on Form 8-K.

The Company did not file any reports on
Form 8-K during the three months ended September 30,
2001.



| |         
| | --------
| | Exhibits

|       |       |             |  |                                                                                                                                                                                                                                                                       |  |                                                                         
|------ | ----- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------
|Number |       | Description |  | Page or Incorporated by Reference from                                                                                                                                                                                                                               
|       |       |             |  |                                                                                                                                                                                                                                                                      
|       | 3.1   |             |  | Restated Articles of Incorporation                                                                                                                                                                                                                                    |  | Exhibit 3.1 to Form 10-K for fiscal
	year ended September 30, 1987      
|       | 3.2   |             |  | Amended Bylaws                                                                                                                                                                                                                                                        |  | Exhibit 3.2 to Form 10-K for fiscal
	year ended September 30, 1994      
|       | 4.1   |             |  | Specimen of the Companys Common Stock
	Certificates                                                                                                                                                                                                                  |  | Exhibit 4(b) to Registration Statement on
	Form S-1 (No. 2-97193)       
|       | 4.2   |             |  | Statement of Rights and Preferences of Capital
	Stock                                                                                                                                                                                                                 |  | Exhibit A to Current Report on Form 8-K
	dated May 15, 1990             
|       | 10.1  |             |  | Lease for Offices in Crawley, England                                                                                                                                                                                                                                 |  | Exhibit 10.9 to Form 10-K for the eight
	months ended September 30, 1985
|       | 10.2  |             |  | Bank Line of Credit Agreement, as amended,
	effective March 31, 2001                                                                                                                                                                                                  |  | Exhibit 10.2 filed herewith                                             
|       | 10.3  |             |  | 1986 Stock Option Plan                                                                                                                                                                                                                                                |  | Exhibit 10.8 to Form 10-K for fiscal
	year ended September 30, 1986     
|       | 10.4  |             |  | Form of Indemnification Agreement that the
	Company has entered into with officers and directors. Such
	agreement recites the provisions of Minnesota Statutes
	Section 302A.521 and the Company Bylaw provisions (which
	are substantially identical to the statute) |  | Exhibit 10.10 to Form 10-K for fiscal
	year ended September 30, 1987    
|       | 10.5  |             |  | Employment Agreement as of October 1, 2000,
	between the Company and Jay A. Herman                                                                                                                                                                                    |  | Exhibit 10.5 to Form 10-K for fiscal
	year ended September 30, 2000     
|       | 10.6  |             |  | 1991 Stock Plan                                                                                                                                                                                                                                                       |  | Exhibit 10.10 to Form 10-K for fiscal
	year ended September 30, 1991    
|       | 10.7  |             |  | Lease of Facilities in Minnetonka, Minnesota                                                                                                                                                                                                                          |  | Exhibit 10.9 to Form 10-K for fiscal
	year ended September 30, 1994     
|       | 10.8  |             |  | 1997 Stock Plan                                                                                                                                                                                                                                                       |  | Exhibit 10.8 to Form 10-K for fiscal
	year ended September 30, 1997     
|       | 10.9  |             |  | Executive Loan Program as Amended                                                                                                                                                                                                                                     |  | Exhibit 10.9 to Form 10-K for fiscal
	year ended September 30, 1997     
|       | 10.10 |             |  | 2000 Stock Plan                                                                                                                                                                                                                                                       |  | Exhibit 10.10 filed herewith                                            
|       | 21    |             |  | List of Subsidiaries                                                                                                                                                                                                                                                  |  | Exhibit 21 filed herewith                                               
|       | 23.1  |             |  | Consent of Independent Auditors                                                                                                                                                                                                                                       |  | Exhibit 23.1 filed herewith                                             

16



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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.



| |                             
| | ----------------------------
| | CHECK TECHNOLOGY CORPORATION



| |     |                  
| | --- | -----------------
| | By: | /s/ JAY A. HERMAN

| |                                     
| | ------------------------------------
| |                                     
| | Jay A. Herman                       
| | Chairman and Chief Executive Officer

Dated: December 13, 2001

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

|                                               |  |                                                                                            |  |                   |  | 
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | ----------------- |  | 
|                                               |  |                                                                                            |  |                  
|Signature                                      |  | Title                                                                                      |  | Date             
|                                               |  |                                                                                            |  |                  
|                                              
|/s/ JAY A. HERMANJay A. Herman                 |  | Chairman and Chief Executive Officer, Director
        (Principal Executive Officer)       |  | December 13, 2001
|                                              
|/s/ ROBERT M. BARNISKISRobert M. Barniskis     |  | Vice President, Chief Financial Officer
        (Principal Financial & Accounting Officer) |  | December 13, 2001
|                                              
|/s/ R. STEPHEN ARMSTRONGR. Stephen Armstrong   |  | Director                                                                                   |  | December 13, 2001
|                                              
|/s/ THOMAS H. GARRETT IIIThomas H. Garrett III |  | Director                                                                                   |  | December 13, 2001
|                                              
|/s/ GARY R. HOLLANDGary R. Holland             |  | Director                                                                                   |  | December 13, 2001
|                                              
|/s/ EARL W. ROGERSEarl W. Rogers               |  | Director                                                                                   |  | December 13, 2001

17



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##### Table of Contents



ANNUAL REPORT ON FORM 10-K

ITEM 8, ITEM 14(a)(1) AND (2), (c),
AND (d)


LIST OF FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES


FINANCIAL STATEMENT SCHEDULES


CERTAIN EXHIBITS


Year Ended September 30, 2001

CHECK TECHNOLOGY CORPORATION


Minnetonka, Minnesota


18



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##### Table of Contents






FORM 10-K  ITEM 14(a)(1)
AND (2)

CHECK TECHNOLOGY CORPORATION AND
SUBSIDIARIES

LIST OF FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES

The following consolidated financial statements
of Check Technology Corporation and subsidiaries are included in
Item 8:



| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | Report of Independent Auditors                                                                       
|
| | Consolidated Balance Sheets 
	September 30, 2001 and 2000                                           
|
| | Consolidated Statements of Operations 
	The years ended September 30, 2001, 2000 and 1999           
|
| | Consolidated Statements of Shareholders
	Equity  The years ended September 30, 2001, 2000
	and 1999
|
| | Consolidated Statements of Cash Flows 
	The years ended September 30, 2001, 2000 and 1999           
|
| | Notes to Consolidated Financial
	Statements  September 30, 2001                                     

The following consolidated financial statement
schedules of Check Technology Corporation and subsidiaries are
included in Item 14(d):

|       |              |             |  |  |                                                | 
|------ | ------------ | ----------- |  |  | ---------------------------------------------- | 
|Number |              | Description
|       |              |            
|       | Schedule  II |             |  |  | Valuation and Qualifying Accounts and Reserves | 

All other financial statement schedules have been
omitted because they are not applicable, are not required, or
the information is included in the financial statements or notes
thereto.

19



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##### Table of Contents






REPORT OF INDEPENDENT AUDITORS

Board of Directors

Check Technology Corporation


We have audited the accompanying consolidated
balance sheets of Check Technology Corporation and subsidiaries
as of September 30, 2001 and 2000, and the related
consolidated statements of operations, shareholders equity
and cash flows for each of the three years in the period ended
September 30, 2001. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). 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.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Check
Technology Corporation and subsidiaries at September 30,
2001 and 2000, and the consolidated results of their operations
and their cash flows for each of the three years in the period
ended September 30, 2001, in conformity with accounting
principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP
| |                      
| | Ernst & Young LLP    

Minneapolis, Minnesota

November 20, 2001


20



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##### Table of Contents



CHECK TECHNOLOGY CORPORATION AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                                                                            |                                   |            |            |           |   |            |            |           | 
|------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ---------- | ---------- | --------- | - | ---------- | ---------- | --------- | 
|                                           |                                                                                                                                                                            |                                  
|                                           |                                                                                                                                                                            | September 30,                    
|                                           |                                                                                                                                                                            |                                  
|                                           |                                                                                                                                                                            | 2001                              |            | 2000      
|                                           |                                                                                                                                                                            |                                   |            |           
|ASSETS                                    
|                                          
|CURRENT ASSETS                             |                                                                                                                                                                            |                                   |            |            |           |   |            |           
|                                           | Cash and cash equivalents                                                                                                                                                  |                                   | $          | 591,536    |           |   | $          | 3,043,754  |          
|                                           | Short-term investments                                                                                                                                                     |                                   |            |           |           |   |            | 108,760    |          
|                                           | Accounts receivable, less allowance for doubtful
	accounts of $51,749 and $51,697 as of September 30, 2001
	and 2000, respectively                                         |                                   |            | 10,129,470 |           |   |            | 5,398,986  |          
|                                           | Inventory:                                                                                                                                                                 |                                   |            |            |           |   |            |            |          
|                                           |                                                                                                                                                                            | Raw materials and component parts |            |            | 7,519,015 |   |            |            | 6,318,199 | 
|                                           |                                                                                                                                                                            | Work-in-progress                  |            |            | 317,800   |   |            |            | 1,217,165 | 
|                                           |                                                                                                                                                                            | Finished goods                    |            |            | 3,998,855 |   |            |            | 4,269,391 | 
|                                           |                                                                                                                                                                            |                                   |            |            |           |   |            |           
|                                           |                                                                                                                                                                            |                                   | 11,835,670 |            |           |   | 11,804,755 |           
|                                           | Deferred income taxes                                                                                                                                                      |                                   |            | 842,851    |           |   |            | 1,743,519  |          
|                                           | Other current assets                                                                                                                                                       |                                   |            | 1,349,280  |           |   |            | 1,379,702  |          
|                                           |                                                                                                                                                                            |                                   |            |            |           |   |            |           
|TOTAL CURRENT ASSETS                       |                                                                                                                                                                            |                                   | 24,748,807 |            |           |   | 23,479,476 |           
|                                           |                                                                                                                                                                            |                                   |            |            |           |   |            |           
|EQUIPMENT AND FIXTURES                     |                                                                                                                                                                            |                                   |            |            |           |   |            |           
|                                           | Machinery and equipment                                                                                                                                                    |                                   |            | 2,192,448  |           |   |            | 1,983,899  |          
|                                           | Furniture and fixtures                                                                                                                                                     |                                   |            | 2,440,243  |           |   |            | 2,169,434  |          
|                                           | Leasehold improvements                                                                                                                                                     |                                   |            | 309,932    |           |   |            | 315,995    |          
|                                           |                                                                                                                                                                            |                                   |            |            |           |   |            |           
|                                           |                                                                                                                                                                            |                                   | 4,942,623  |            |           |   | 4,469,328  |           
|                                           | Less accumulated depreciation and amortization                                                                                                                             |                                   |            | 3,904,814  |           |   |            | 3,582,931  |          
|                                           |                                                                                                                                                                            |                                   |            |            |           |   |            |           
|                                           |                                                                                                                                                                            |                                   | 1,037,809  |            |           |   | 886,397    |           
|                                           |                                                                                                                                                                            |                                   |            |            |           |   |            |           
|TOTAL ASSETS                               |                                                                                                                                                                            | $                                 | 25,786,616 |            |           | $ | 24,365,873 |           
|                                           |                                                                                                                                                                            |                                   |            |            |           |   |            |           
|                                          
|LIABILITIES AND SHAREHOLDERS
	EQUITY     
|CURRENT LIABILITIES                        |                                                                                                                                                                            |                                   |            |            |           |   |            |           
|                                           | Accounts payable                                                                                                                                                           |                                   | $          | 4,333,400  |           |   | $          | 4,242,943  |          
|                                           | Employee compensation and related taxes                                                                                                                                    |                                   |            | 1,573,567  |           |   |            | 868,362    |          
|                                           | Income taxes payable                                                                                                                                                       |                                   |            | 248,132    |           |   |            | 15,247     |          
|                                           | Bank line of credit                                                                                                                                                        |                                   |            | 595,000    |           |   |            |           |          
|                                           | Deferred revenue                                                                                                                                                           |                                   |            | 1,053,893  |           |   |            | 3,316,085  |          
|                                           |                                                                                                                                                                            |                                   |            |            |           |   |            |           
|TOTAL CURRENT LIABILITIES                  |                                                                                                                                                                            |                                   | 7,803,992  |            |           |   | 8,442,637  |           
|                                           |                                                                                                                                                                            |                                   |            |            |           |   |            |           
|TOTAL LIABILITIES                          |                                                                                                                                                                            |                                   | 7,803,992  |            |           |   | 8,442,637  |           
|SHAREHOLDERS EQUITY                       |                                                                                                                                                                            |                                   |            |            |           |   |            |           
|                                           | Common stock  par value $.10 per
	share  authorized 25,000,000 shares; issued and
	outstanding: 6,161,138 and 6,190,978 as of September 30,
	2001 and 2000, respectively |                                   |            | 616,114    |           |   |            | 619,098    |          
|                                           | Additional paid-in capital                                                                                                                                                 |                                   |            | 17,010,008 |           |   |            | 17,063,384 |          
|                                           | Accumulated other comprehensive loss                                                                                                                                       |                                   |            | (2,089,483 | )         |   |            | (1,968,736 | )        
|                                           | Retained earnings                                                                                                                                                          |                                   |            | 2,445,985  |           |   |            | 209,490    |          
|                                           |                                                                                                                                                                            |                                   |            |            |           |   |            |           
|TOTAL SHAREHOLDERS EQUITY                 |                                                                                                                                                                            |                                   | 17,982,624 |            |           |   | 15,923,236 |           
|                                           |                                                                                                                                                                            |                                   |            |            |           |   |            |           
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |                                                                                                                                                                            | $                                 | 25,786,616 |            |           | $ | 24,365,873 |           
|                                           |                                                                                                                                                                            |                                   |            |            |           |   |            |           

See notes to consolidated financial statements.

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##### Table of Contents



CHECK TECHNOLOGY CORPORATION AND
SUBSIDIARIES






CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                                                    |                                     |                          |            |            |  |      |            |            |  |   |            |            | 
|--------------------------------------------------------------------------------------------------- | ----------------------------------- | ------------------------ | ---------- | ---------- |  | ---- | ---------- | ---------- |  | - | ---------- | ---------- | 
|                                                                                                    |                                     |                         
|                                                                                                    |                                     | Year Ended September 30,
|                                                                                                    |                                     |                         
|                                                                                                    |                                     | 2001                     |            | 2000       |  | 1999
|                                                                                                    |                                     |                          |            |            |  |     
|Sales:                                                                                              |                                     |                          |            |            |  |      |            |            |  |   |            |           
|                                                                                                    | Printing equipment                  |                          | $          | 27,803,639 |  |      | $          | 15,625,836 |  |   | $          | 7,790,870  | 
|                                                                                                    | Maintenance, spares and supplies    |                          |            | 15,040,243 |  |      |            | 13,155,882 |  |   |            | 14,517,130 | 
|                                                                                                    |                                     |                          |            |            |  |      |            |            |  |   |            |           
|NET SALES                                                                                           |                                     |                          | 42,843,882 |            |  |      | 28,781,718 |            |  |   | 22,308,000 |           
|Costs and Expenses:                                                                                 |                                     |                          |            |            |  |      |            |            |  |   |            |           
|                                                                                                    | Cost of sales                       |                          |            | 21,683,282 |  |      |            | 14,106,518 |  |   |            | 10,583,208 | 
|                                                                                                    | Selling, general and administrative |                          |            | 15,100,284 |  |      |            | 12,235,438 |  |   |            | 10,949,967 | 
|                                                                                                    | Research and development            |                          |            | 2,635,198  |  |      |            | 2,722,404  |  |   |            | 2,709,716  | 
|                                                                                                    |                                     |                          |            |            |  |      |            |            |  |   |            |           
|                                                                                                    |                                     |                          | 39,418,764 |            |  |      | 29,064,360 |            |  |   | 24,242,891 |           
|                                                                                                    |                                     |                          |            |            |  |      |            |            |  |   |            |           
|INCOME (LOSS) FROM SYSTEM SALES AND SERVICE                                                         |                                     |                          | 3,425,118  |            |  |      | (282,642   | )          |  |   | (1,934,891 | )         
|Interest expense                                                                                    |                                     |                          | 52,564     |            |  |      | 8,214      |            |  |   | 10,900     |           
|Interest income                                                                                     |                                     |                          | (39,328    | )          |  |      | (125,243   | )          |  |   | (124,469   | )         
|Unrealized exchange loss                                                                            |                                     |                          | 110,013    |            |  |      | 292,824    |            |  |   | 120,065    |           
|                                                                                                    |                                     |                          |            |            |  |      |            |            |  |   |            |           
|INCOME (LOSS) BEFORE TAXES                                                                          |                                     |                          | 3,301,869  |            |  |      | (458,437   | )          |  |   | (1,941,387 | )         
|Income tax expense (benefit)                                                                        |                                     |                          | 1,152,000  |            |  |      | (168,000   | )          |  |   | (327,000   | )         
|                                                                                                    |                                     |                          |            |            |  |      |            |            |  |   |            |           
|NET INCOME (LOSS)                                                                                   |                                     | $                        | 2,149,869  |            |  | $    | (290,437   | )          |  | $ | (1,614,387 | )         
|                                                                                                    |                                     |                          |            |            |  |      |            |            |  |   |            |           
|Basic and diluted earnings (loss) per common share                                                  |                                     | $                        | 0.35       |            |  | $    | (0.05      | )          |  | $ | (0.26      | )         
|Weighted average number of shares outstanding
	during the period                                    |                                     |                          | 6,174,411  |            |  |      | 6,146,630  |            |  |   | 6,129,225  |           
|Weighted average number of shares and equivalents
	outstanding during the period, assuming dilution |                                     |                          | 6,227,724  |            |  |      | 6,146,630  |            |  |   | 6,129,225  |           

See notes to consolidated financial statements.

22



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CHECK TECHNOLOGY CORPORATION AND
SUBSIDIARIES






CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY


|                                                                     |                        |              |           |            |  |               |         |          |  |          |            |       |  |   |            |          |   |   |           |            |   |   |            |            |  
|-------------------------------------------------------------------- | ---------------------- | ------------ | --------- | ---------- |  | ------------- | ------- | -------- |  | -------- | ---------- | ----- |  | - | ---------- | -------- | - | - | --------- | ---------- | - | - | ---------- | ---------- | -
|                                                                     |                        |              |           |            |  | Accumulated   |         |          |  |         
|                                                                     |                        | Common Stock |           | Additional |  | Other         |         |          |  |         
|                                                                     |                        |              |           | Paid-in    |  | Comprehensive |         | Retained |  |         
|                                                                     |                        | Shares       |           | Amount     |  | Capital       |         | Income   |  | Earnings |            | Total
|                                                                     |                        |              |           |            |  |               |         |          |  |          |            |      
|Balance, September 30, 1998                                          |                        |              | 6,178,120 |            |  | $             | 617,812 |          |  | $        | 16,938,385 |       |  | $ | (917,856   | )        |   | $ | 1,928,785 |            |   | $ | 18,567,126 |           
|Comprehensive loss:                                                  |                        |              |           |            |  |               |         |          |  |          |            |       |  |   |            |          |   |   |           |            |   |   |            |           
|                                                                     | Net loss               |              |           |           |  |               |         |         |  |          |            |      |  |   |            |         |   |   |           | (1,614,387 | ) |   |            | (1,614,387 | )
|                                                                     | Translation adjustment |              |           |           |  |               |         |         |  |          |            |      |  |   |            | (266,214 | ) |   |           |           |   |   |            | (266,214   | )
|                                                                     |                        |              |           |            |  |               |         |          |  |          |            |       |  |   |            |          |   |   |           |            |   |   |            |           
|Total comprehensive loss                                             |                        |              |           |            |  |               |         |          |  |          |            |       |  |   |            |          |   |   |           |            |   |   | (1,880,601 | )         
|                                                                     |                        |              |           |            |  |               |         |          |  |          |            |       |  |   |            |          |   |   |           |            |   |   |            |           
|Exercise of stock options, including tax benefit
	of $1,047          |                        |              | 3,917     |            |  |               | 392     |          |  |          | 3,762      |       |  |   |           |          |   |   |          |            |   |   | 4,154      |           
|Purchase of stock                                                    |                        |              | 5,420     |            |  |               | 542     |          |  |          | 15,041     |       |  |   |           |          |   |   |          |            |   |   | 15,583     |           
|Cancellation of stock                                                |                        |              | (18,300   | )          |  |               | (1,830  | )        |  |          |           |       |  |   |           |          |   |   | (45,476   | )          |   |   | (47,306    | )         
|Vesting of restricted stock                                          |                        |              |          |            |  |               |        |          |  |          |           |       |  |   |           |          |   |   | 86,625    |            |   |   | 86,625     |           
|Cancellation of restricted stock including a tax
	expense of $27,695 |                        |              | (15,000   | )          |  |               | (1,500  | )        |  |          | (109,820   | )     |  |   |           |          |   |   | 57,750    |            |   |   | (53,570    | )         
|Payment, note receivable                                             |                        |              |          |            |  |               |        |          |  |          | 14,049     |       |  |   |           |          |   |   |          |            |   |   | 14,049     |           
|                                                                     |                        |              |           |            |  |               |         |          |  |          |            |       |  |   |            |          |   |   |           |            |   |   |            |           
|Balance, September 30, 1999                                          |                        |              | 6,154,157 |            |  |               | 615,416 |          |  |          | 16,861,417 |       |  |   | (1,184,070 | )        |   |   | 413,297   |            |   |   | 16,706,060 |           
|Comprehensive loss:                                                  |                        |              |           |            |  |               |         |          |  |          |            |       |  |   |            |          |   |   |           |            |   |   |            |           
|                                                                     | Net loss               |              |           |           |  |               |         |         |  |          |            |      |  |   |            |         |   |   |           | (290,437   | ) |   |            | (290,437   | )
|                                                                     | Translation adjustment |              |           |           |  |               |         |         |  |          |            |      |  |   |            | (784,666 | ) |   |           |           |   |   |            | (784,666   | )
|                                                                     |                        |              |           |            |  |               |         |          |  |          |            |       |  |   |            |          |   |   |           |            |   |   |            |           
|Total comprehensive loss                                             |                        |              |           |            |  |               |         |          |  |          |            |       |  |   |            |          |   |   |           |            |   |   | (1,075,103 | )         
|                                                                     |                        |              |           |            |  |               |         |          |  |          |            |       |  |   |            |          |   |   |           |            |   |   |            |           
|Exercise of stock options, including tax benefit
	of $13,761         |                        |              | 37,983    |            |  |               | 3,798   |          |  |          | 138,449    |       |  |   |           |          |   |   |          |            |   |   | 142,247    |           
|Purchase of stock                                                    |                        |              | 5,838     |            |  |               | 584     |          |  |          | 15,106     |       |  |   |           |          |   |   |          |            |   |   | 15,690     |           
|Vesting of restricted stock                                          |                        |              |          |            |  |               |        |          |  |          |           |       |  |   |           |          |   |   | 86,630    |            |   |   | 86,630     |           
|Cancellation of restricted stock including a tax
	expense of $23,289 |                        |              | (7,000    | )          |  |               | (700    | )        |  |          | (41,402    | )     |  |   |           |          |   |   |          |            |   |   | (42,102    | )         
|Forgiveness of executive officer note                                |                        |              |          |            |  |               |        |          |  |          | 89,814     |       |  |   |           |          |   |   |          |            |   |   | 89,814     |           
|                                                                     |                        |              |           |            |  |               |         |          |  |          |            |       |  |   |            |          |   |   |           |            |   |   |            |           
|Balance, September 30, 2000                                          |                        |              | 6,190,978 |            |  |               | 619,098 |          |  |          | 17,063,384 |       |  |   | (1,968,736 | )        |   |   | 209,490   |            |   |   | 15,923,236 |           
|Comprehensive income:                                                |                        |              |           |            |  |               |         |          |  |          |            |       |  |   |            |          |   |   |           |            |   |   |            |           
|                                                                     | Net income             |              |           |           |  |               |         |         |  |          |            |      |  |   |            |         |   |   |           | 2,149,869  |   |   |            | 2,149,869  |  
|                                                                     | Translation adjustment |              |           |           |  |               |         |         |  |          |            |      |  |   |            | (120,747 | ) |   |           |           |   |   |            | (120,747   | )
|                                                                     |                        |              |           |            |  |               |         |          |  |          |            |       |  |   |            |          |   |   |           |            |   |   |            |           
|Total comprehensive income                                           |                        |              |           |            |  |               |         |          |  |          |            |       |  |   |            |          |   |   |           |            |   |   | 2,029,122  |           
|                                                                     |                        |              |           |            |  |               |         |          |  |          |            |       |  |   |            |          |   |   |           |            |   |   |            |           
|Purchase of stock                                                    |                        |              | 4,410     |            |  |               | 441     |          |  |          | 17,750     |       |  |   |           |          |   |   |          |            |   |   | 18,191     |           
|Cancellation of stock                                                |                        |              | (27,250   | )          |  |               | (2,725  | )        |  |          | (80,520    | )     |  |   |           |          |   |   |          |            |   |   | (83,245    | )         
|Tax benefit related to exercise of stock options                     |                        |              |          |            |  |               |        |          |  |          | 31,885     |       |  |   |           |          |   |   |          |            |   |   | 31,885     |           
|Vesting of restricted stock                                          |                        |              |          |            |  |               |        |          |  |          |           |       |  |   |           |          |   |   | 86,626    |            |   |   | 86,626     |           
|Cancellation of restricted stock including a tax
	expense of $36,927 |                        |              | (7,000    | )          |  |               | (700    | )        |  |          | (65,100    | )     |  |   |           |          |   |   |          |            |   |   | (65,800    | )         
|Forgiveness of executive officer note                                |                        |              |          |            |  |               |        |          |  |          | 42,609     |       |  |   |           |          |   |   |          |            |   |   | 42,609     |           
|                                                                     |                        |              |           |            |  |               |         |          |  |          |            |       |  |   |            |          |   |   |           |            |   |   |            |           
|Balance, September 30, 2001                                          |                        |              | 6,161,138 |            |  | $             | 616,114 |          |  | $        | 17,010,008 |       |  | $ | (2,089,483 | )        |   | $ | 2,445,985 |            |   | $ | 17,982,624 |           
|                                                                     |                        |              |           |            |  |               |         |          |  |          |            |       |  |   |            |          |   |   |           |            |   |   |            |           

See notes to consolidated financial statements.

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##### Table of Contents



CHECK TECHNOLOGY CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                    |                                       |                          |            |            |   |      |           |            |   |   |            |          |  
|--------------------------------------------------------------------------------------------------- | ------------------------------------- | ------------------------ | ---------- | ---------- | - | ---- | --------- | ---------- | - | - | ---------- | -------- | -
|                                                                                                    |                                       |                         
|                                                                                                    |                                       | Year Ended September 30,
|                                                                                                    |                                       |                         
|                                                                                                    |                                       | 2001                     |            | 2000       |   | 1999
|                                                                                                    |                                       |                          |            |            |   |     
|OPERATING ACTIVITIES                                                                                |                                       |                          |            |            |   |      |           |            |   |   |            |         
|Net income (loss)                                                                                   |                                       | $                        | 2,149,869  |            |   | $    | (290,437  | )          |   | $ | (1,614,387 | )       
|Adjustments to reconcile net income (loss) to net
	cash (used in) provided by operating activities: |                                       |                          |            |            |   |      |           |            |   |   |            |         
|                                                                                                    | Depreciation and amortization         |                          |            | 343,870    |   |      |           | 388,145    |   |   |            | 364,261  |  
|                                                                                                    | Forgiveness of executive officer note |                          |            | 135,186    |   |      |           | 89,814     |   |   |            |         |  
|                                                                                                    | Other                                 |                          |            | 82,564     |   |      |           | 71,313     |   |   |            | 91,434   |  
|Changes in operating assets and liabilities:                                                        |                                       |                          |            |            |   |      |           |            |   |   |            |         
|                                                                                                    | Accounts receivable, net              |                          |            | (4,718,577 | ) |      |           | (2,285,884 | ) |   |            | (197,755 | )
|                                                                                                    | Inventory                             |                          |            | (91,073    | ) |      |           | (1,494,726 | ) |   |            | (376,655 | )
|                                                                                                    | Other current assets                  |                          |            | 868,221    |   |      |           | (889,700   | ) |   |            | (41,713  | )
|                                                                                                    | Accounts payable and accrued expenses |                          |            | 1,033,774  |   |      |           | 2,070,076  |   |   |            | (2,399   | )
|                                                                                                    | Deferred revenue                      |                          |            | (2,261,056 | ) |      |           | 2,884,708  |   |   |            | 60,148   |  
|                                                                                                    |                                       |                          |            |            |   |      |           |            |   |   |            |         
|NET CASH (USED IN) PROVIDED BY OPERATING
	ACTIVITIES                                                |                                       |                          | (2,457,222 | )          |   |      | 543,309   |            |   |   | (1,717,066 | )       
|INVESTING ACTIVITIES                                                                                |                                       |                          |            |            |   |      |           |            |   |   |            |         
|Purchase of equipment and fixtures                                                                  |                                       |                          | (526,349   | )          |   |      | (394,533  | )          |   |   | (370,750   | )       
|Proceeds from sale of equipment                                                                     |                                       |                          | 23,321     |            |   |      | 60,387    |            |   |   | 9,193      |         
|Purchase of short-term investments                                                                  |                                       |                          | (132,563   | )          |   |      | (718,519  | )          |   |   | (1,634,700 | )       
|Proceeds from sale of short-term investments                                                        |                                       |                          | 248,663    |            |   |      | 781,252   |            |   |   | 4,068,501  |         
|                                                                                                    |                                       |                          |            |            |   |      |           |            |   |   |            |         
|NET CASH (USED IN) PROVIDED BY INVESTING
	ACTIVITIES                                                |                                       |                          | (386,928   | )          |   |      | (271,413  | )          |   |   | 2,072,244  |         
|FINANCING ACTIVITIES                                                                                |                                       |                          |            |            |   |      |           |            |   |   |            |         
|Issuance of common stock                                                                            |                                       |                          | 18,191     |            |   |      | 157,938   |            |   |   | 44,172     |         
|Repurchase of common stock                                                                          |                                       |                          | (149,045   | )          |   |      | (52,497   | )          |   |   | (183,061   | )       
|Repayment of note receivable from stock sale                                                        |                                       |                          | 11,028     |            |   |      | 10,394    |            |   |   | 14,049     |         
|Borrowing on bank line of credit, net                                                               |                                       |                          | 595,000    |            |   |      |          |            |   |   |           |         
|Repayment of long-term debt and capital leases                                                      |                                       |                          |           |            |   |      | (36,156   | )          |   |   | (12,673    | )       
|                                                                                                    |                                       |                          |            |            |   |      |           |            |   |   |            |         
|NET CASH PROVIDED BY (USED IN) FINANCING
	ACTIVITIES                                                |                                       |                          | 475,174    |            |   |      | 79,679    |            |   |   | (137,513   | )       
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                             |                                       |                          | (83,242    | )          |   |      | (190,439  | )          |   |   | (36,935    | )       
|                                                                                                    |                                       |                          |            |            |   |      |           |            |   |   |            |         
|(DECREASE) INCREASE IN CASH AND EQUIVALENTS                                                         |                                       |                          | (2,452,218 | )          |   |      | 161,136   |            |   |   | 180,730    |         
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                                      |                                       |                          | 3,043,754  |            |   |      | 2,882,618 |            |   |   | 2,701,888  |         
|                                                                                                    |                                       |                          |            |            |   |      |           |            |   |   |            |         
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                                            |                                       | $                        | 591,536    |            |   | $    | 3,043,754 |            |   | $ | 2,882,618  |         
|                                                                                                    |                                       |                          |            |            |   |      |           |            |   |   |            |         
|Supplemental Schedule                                                                               |                                       |                          |            |            |   |      |           |            |   |   |            |         
|Forgiveness of executive officer note                                                               |                                       | $                        | 135,186    |            |   | $    | 89,814    |            |   | $ |           |         

See notes to consolidated financial statements.

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##### Table of Contents



CHECK TECHNOLOGY CORPORATION AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

September 30, 2001


Note A  Summary of Significant
Accounting Policies

Nature of
Operations:Check Technology
Corporations business is the design, manufacture, sale and
service of computerized financial document production systems.
The systems can collate, personalize and encode documents into
packages tailored to the customers requirements. The
systems are sold through the Company and its international
subsidiaries. A significant portion of the total revenues of the
Company is related to service and support provided after the
sale. The Company has a significant presence in the
international check production marketplace in Europe, Australia,
Latin America, Asia and the Middle East.

Principles of
Consolidation:The financial
statements include the accounts of the Company and its wholly
owned subsidiaries, Check Technology Ltd., Check Technology Pty.
Ltd., and Check Technology France S.A. All significant
intercompany accounts and transactions have been eliminated.

Use of Estimates:The preparation of financial statements, in conformity with
accounting principles generally accepted in the United States,
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.

Cash Equivalents and Short-term
Investments:The Company considers all
highly liquid investments with a maturity of three months or
less when purchased to be cash equivalents. Short-term
investments consist principally of held-to-maturity debt
securities. The Company determines the appropriate
classification of debt securities at the time of purchase. Debt
securities are classified as held-to-maturity when the Company
has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized
cost, adjusted for amortization of premiums and accretion of
discounts to maturity. Cash equivalents and short-term
investments are carried at amounts that approximate market
value. Interest on securities is included in interest income.

Inventories:Inventories are carried at the lower of cost or market
determined under the first-in, first-out (FIFO) method.

Equipment and
Fixtures:Equipment and fixtures are
stated on the basis of cost and include the cost of assets held
under capital lease obligations. Demonstration equipment not
expected to be resold is carried in equipment on a cost basis.
Depreciation is provided on the straight-line method over
estimated useful lives of 3 to 5 years for machinery and
equipment and furniture and fixtures and over 10 years for
leasehold improvements. Amortization expense of items under
capital lease is included in depreciation expense.

Revenue Recognition:Revenue is recognized when systems are shipped or services are
rendered. For spares and consumables stored at customer sites,
revenue is recognized when the inventory is used by the
customer. Amounts billed to customers under maintenance
contracts are recorded as deferred revenue and recognized in
income over the term of the maintenance agreement. Customer
billings in advance of system shipment are recorded as deferred
revenue and recognized upon shipment of the system. Revenue on
the Companys PS MICR systems product line,
manufactured by Océ and private-labeled by the Company, is
recorded on a gross basis.

Foreign Currency
Translation:The Companys wholly
owned foreign subsidiaries financial statements are
measured in their functional currency before translating to
U.S. dollars. Gains and losses resulting from the
translation are recorded as a component of shareholders
equity.

Income Taxes:The
liability method is used to account for income tax expense.
Deferred tax assets and liabilities are recorded based on the
differences between financial statement and tax bases of assets
and liabilities and the tax rates in effect when these
differences are expected to reverse. The deferred tax asset is
reduced by a valuation allowance to a net amount which the
Company believes it more likely than not will realize, based on
the Companys estimates of its future earnings and the
expected timing of temporary

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##### Table of Contents



CHECK TECHNOLOGY CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

difference reversals. Investment tax credits are
accounted for under the flow-through, method thereby reducing
income taxes in the year in which the credits are realized.

Stock-Based
Compensation:The Company follows
Accounting Principles Board Opinion 25, Accounting for
Stock Issued to Employees (APB 25), and related
interpretations in accounting for its employee stock options.
Under APB 25, when the exercise price of employee stock
options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized. The
Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS 123).

Earnings per Share:The basic earnings per share amounts are determined based on the
weighted average common shares outstanding, while the diluted
earnings per share amounts also give effect to the common shares
dilutive potential. A reconciliation of the denominator in the
basic and diluted earnings per share calculation is as follows:

|                                                                              |                        |      |           |        |  |      |           |   |  |  |           |   | 
|----------------------------------------------------------------------------- | ---------------------- | ---- | --------- | ------ |  | ---- | --------- | - |  |  | --------- | - | 
|                                                                              |                        | 2001 |           | 2000   |  | 1999
|                                                                              |                        |      |           |        |  |     
|Denominator for basic earnings per share,
	weighted average shares            |                        |      | 6,174,411 |        |  |      | 6,146,630 |   |  |  | 6,129,225 |  
|Effect of dilutive securities:                                                |                        |      |           |        |  |      |           |   |  |  |           |  
|                                                                              | Employee stock options |      |           | 53,313 |  |      |           |  |  |  |           |  | 
|                                                                              |                        |      |           |        |  |      |           |   |  |  |           |  
|Dilutive potential common shares                                              |                        |      | 53,313    |        |  |      |          |   |  |  |          |  
|Denominator for diluted earnings per share,
	adjusted weighted average shares |                        |      | 6,227,724 |        |  |      | 6,146,630 |   |  |  | 6,129,225 |  
|                                                                              |                        |      |           |        |  |      |           |   |  |  |           |  

Employee stock options totaling 139,006 and
10,261 in 2000 and 1999, respectively, were excluded from
diluted weighted average shares because their impact would be
antidilutive.

Comprehensive
Income:As of October 1, 1998,
the Company adopted Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income
(SFAS 130). SFAS 130 establishes standards for the
reporting and display of comprehensive income and its
components; however, the adoption of this Statement had no
impact on the Companys net income or shareholders
equity. SFAS 130 requires foreign currency translation
adjustments, which prior to adoption were reported separately in
shareholders equity, to be included in other
comprehensive income.

Derivatives and Hedging
Activities:As of October 1,
2000, the Company adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivatives and
Similar Financial Instruments and Hedging Activities. The
Statement requires companies to account for derivatives and
hedging activities, including the following two elements:
(i) all derivatives are measured at fair value and
recognized in the balance sheets as assets or liabilities, and
(ii) derivatives meeting certain criteria could be
specifically designated as a hedge. The adoption of this
Statement had no impact on the Companys operating results
or financial position.

Revenue Recognition in Financial
Statements:On December 3, 1999,
the Securities and Exchange Commission issued SEC Staff
Accounting Bulletin Number 101, Revenue Recognition in
Financial Statements (SAB 101). SAB 101 summarizes
certain of the staffs views on applying generally accepted
accounting principles to revenue recognition in financial
statements. SAB 101 was effective for the Company in the
fourth quarter of fiscal 2001 and had no material impact on the
Companys operations or financial position.

New Accounting
Pronouncements:In June 2001, the
Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business
Combinations (SFAS 141) and Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 eliminates
the pooling-of-interests method of accounting for business
combinations, clarifies the criteria for

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CHECK TECHNOLOGY CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

recognizing intangible assets separately from
goodwill and is effective for business combinations completed
subsequent to June 30, 2001. Under SFAS 142, goodwill
and indefinite lived intangible assets are no longer amortized
but are reviewed at least annually for impairment. Separable
intangible assets not deemed to have an indefinite life will
continue to be amortized over their useful lives, but with no
maximum life. The amortization provisions of SFAS 142 apply
immediately to goodwill and intangible assets acquired after
June 30, 2001 and is required to be adopted for all prior
acquisitions in years beginning after October 1, 2002, our
fiscal 2003. The Company believes these Statements will have no
material effect on the Companys results of operations or
financial position.

Reclassification:Certain items in the 2000 and 1999 consolidated financial
statements have been reclassified to conform to the 2001
presentation.

Note B  Income Tax

Income tax expense (benefit) was based on income
(loss) before income taxes as follows:

|                                    |  |                          |           |      |  |      |            |   |  |   |            |  
|----------------------------------- |  | ------------------------ | --------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                    |  |                         
|                                    |  | Year Ended September 30,
|                                    |  |                         
|                                    |  | 2001                     |           | 2000 |  | 1999
|                                    |  |                          |           |      |  |     
|Domestic                            |  | $                        | 2,968,919 |      |  | $    | 575,232    |   |  | $ | (1,573,280 | )
|Foreign                             |  |                          | 332,950   |      |  |      | (1,033,669 | ) |  |   | (368,107   | )
|                                    |  |                          |           |      |  |      |            |   |  |   |            |  
|Earnings (loss) before income taxes |  | $                        | 3,301,869 |      |  | $    | (458,437   | ) |  | $ | (1,941,387 | )
|                                    |  |                          |           |      |  |      |            |   |  |   |            |  

The components of income tax expense (benefit) as
recorded by the Company are as follows:

|                            |         |                          |           |           |   |      |          |          |   |   |          |          |  
|--------------------------- | ------- | ------------------------ | --------- | --------- | - | ---- | -------- | -------- | - | - | -------- | -------- | -
|                            |         |                         
|                            |         | Year Ended September 30,
|                            |         |                         
|                            |         | 2001                     |           | 2000      |   | 1999
|                            |         |                          |           |           |   |     
|Current:                    |         |                          |           |           |   |      |          |          |   |   |          |         
|                            | Federal |                          | $         | 2,135,000 |   |      | $        |         |   |   | $        |         |  
|                            | State   |                          |           | 163,000   |   |      |          | 6,000    |   |   |          | (1,000   | )
|                            | Foreign |                          |           | (245,000  | ) |      |          |         |   |   |          | (38,000  | )
|                            |         |                          |           |           |   |      |          |          |   |   |          |         
|                            |         |                          | 2,053,000 |           |   |      | 6,000    |          |   |   | (39,000  | )       
|                            |         |                          |           |           |   |      |          |          |   |   |          |         
|Deferred:                   |         |                          |           |           |   |      |          |          |   |   |          |         
|                            | Federal |                          |           | (929,000  | ) |      |          | 145,000  |   |   |          | (293,000 | )
|                            | State   |                          |           | (90,000   | ) |      |          | 14,000   |   |   |          | (29,000  | )
|                            | Foreign |                          |           | 118,000   |   |      |          | (333,000 | ) |   |          | 34,000   |  
|                            |         |                          |           |           |   |      |          |          |   |   |          |         
|                            |         |                          | (901,000  | )         |   |      | (174,000 | )        |   |   | (288,000 | )       
|                            |         |                          |           |           |   |      |          |          |   |   |          |         
|Total tax expense (benefit) |         | $                        | 1,152,000 |           |   | $    | (168,000 | )        |   | $ | (327,000 | )       
|                            |         |                          |           |           |   |      |          |          |   |   |          |         

A reconciliation of income tax expense (benefit)
to the statutory rate of 34% is as follows:

|                                         |  |                          |           |      |  |      |          |   |  |   |          |  
|---------------------------------------- |  | ------------------------ | --------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                                         |  |                         
|                                         |  | Year Ended September 30,
|                                         |  |                         
|                                         |  | 2001                     |           | 2000 |  | 1999
|                                         |  |                          |           |      |  |     
|Statutory rate applied to pre-tax income |  | $                        | 1,123,000 |      |  | $    | (156,000 | ) |  | $ | (660,000 | )
|Tax credits                              |  |                          | 125,000   |      |  |      | (72,000  | ) |  |   |         |  
|Change in valuation allowance            |  |                          | (251,000  | )    |  |      | 36,000   |   |  |   | 258,000  |  
|Other                                    |  |                          | 155,000   |      |  |      | 24,000   |   |  |   | 75,000   |  
|                                         |  |                          |           |      |  |      |          |   |  |   |          |  
|Total tax (benefit) expense              |  | $                        | 1,152,000 |      |  | $    | (168,000 | ) |  | $ | (327,000 | )
|                                         |  |                          |           |      |  |      |          |   |  |   |          |  

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CHECK TECHNOLOGY CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Significant components of federal and state
deferred tax assets as of September 30 are as follows:

|                          |                                                                    |               |           |         |  |   |           |           | 
|------------------------- | ------------------------------------------------------------------ | ------------- | --------- | ------- |  | - | --------- | --------- | 
|                          |                                                                    |              
|                          |                                                                    | September 30,
|                          |                                                                    |              
|                          |                                                                    | 2001          |           | 2000   
|                          |                                                                    |               |           |        
|Deferred tax assets:      |                                                                    |               |           |         |  |   |           |          
|                          | Net operating loss                                                 |               | $         | 477,000 |  |   | $         | 1,513,000 | 
|                          | Business credit carryforwards and alternative
	minimum tax credits |               |           | 557,000 |  |   |           | 682,000   | 
|                          | Stock compensation                                                 |               |           |        |  |   |           | 32,000    | 
|                          | Inventory valuation reserves                                       |               |           | 203,000 |  |   |           | 110,000   | 
|                          | Other domestic and foreign differences                             |               |           | 153,000 |  |   |           | 209,000   | 
|                          |                                                                    |               |           |         |  |   |           |          
|Gross deferred tax assets |                                                                    |               | 1,390,000 |         |  |   | 2,546,000 |          
|Valuation allowances      |                                                                    |               | (547,000  | )       |  |   | (802,000  | )        
|                          |                                                                    |               |           |         |  |   |           |          
|Net deferred tax assets   |                                                                    | $             | 843,000   |         |  | $ | 1,744,000 |          
|                          |                                                                    |               |           |         |  |   |           |          

At September 30, 2001, the Company has
foreign tax loss carryforwards of approximately $1,278,000,
which expire in 2004. In addition, the Company has domestic
investment tax credits and research and development credit
carryforwards of approximately $414,000, which are available to
offset future income tax. The credits expire in varying amounts
through September 2020. Domestic alternative minimum tax credits
of approximately $143,000 are available to offset future income
tax with no expiration date. These tax benefits, together with
future tax deductions from the reversal of temporary
differences, comprise the net deferred tax assets. Deferred tax
assets have been offset by a valuation allowance as deemed
necessary based on the Companys estimates of its future
sources of taxable income and the expected timing of temporary
difference reversals.

Undistributed earnings of the Companys
foreign subsidiaries amounted to approximately $896,000 at
September 30, 2001. Those earnings are considered to be
indefinitely reinvested and, accordingly, no provision for U.S.
and state income taxes has been provided thereon. Upon
distribution of those earnings in the form of dividends or
otherwise, the Company would be subject to both U.S. income
taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries.
Determination of the amount of unrecognized deferred
U.S. income tax liability is not practical because of the
complexities of the calculation.

Cash tax payments for the years ended
September 30, 2001 and 2000 were $20,000 and $57,500,
respectively. For the year ended September 30, 1999, cash
tax receipts were $29,000.

Note C  Business, Operations,
and Geographic Information

Effective October 1, 1998, the Company
adopted Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and
Related Information (SFAS 131). SFAS 131
establishes standards for the way public business enterprises
report information about operating segments in financial reports
issued to shareholders. Based on the Companys
organizational structure and the manner in which performance is
assessed and operating decisions are made, the Company operates
in one worldwide business segment  the sale of
printing equipment and related maintenance spares and supplies.
The Company has developed computer-controlled printing systems
to produce a variety of documents for the financial services
industry. Its primary products provide operating flexibility and
efficiency through sophisticated software and paper handling
mechanisms and produce quality alphanumeric and machine-readable
print. The Company is solely dependent on one vendor for the
supply of non-impact alphanumeric print engines used in the
printing systems sold by the Company. The vendor has been able
to meet the Companys delivery schedules to date.

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CHECK TECHNOLOGY CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Companys manufacturing operations are
located in the United States. Sales and service operations are
located in the United States, United Kingdom, France and
Australia. The Companys products are marketed worldwide.
The following is a summary of the Companys revenues and
long-lived assets for the geographic areas in which the Company
has operations:

|                      |                |                               |            |            |  |      |            |            |  |   |            |           | 
|--------------------- | -------------- | ----------------------------- | ---------- | ---------- |  | ---- | ---------- | ---------- |  | - | ---------- | --------- | 
|                      |                |                              
|                      |                | Year Ended September 30, 2000
|                      |                |                              
|                      |                | 2001                          |            | 2000       |  | 1999
|                      |                |                               |            |            |  |     
|Total revenues(a):    |                |                               |            |            |  |      |            |            |  |   |            |          
|                      | United States  |                               | $          | 31,525,592 |  |      | $          | 16,328,127 |  |   | $          | 8,250,760 | 
|                      | United Kingdom |                               |            | 6,805,811  |  |      |            | 6,602,508  |  |   |            | 8,058,088 | 
|                      | France         |                               |            | 3,582,936  |  |      |            | 4,133,805  |  |   |            | 4,060,672 | 
|                      | Australia      |                               |            | 929,543    |  |      |            | 1,717,278  |  |   |            | 1,938,480 | 
|                      |                |                               |            |            |  |      |            |            |  |   |            |          
|Consolidated revenues |                | $                             | 42,843,882 |            |  | $    | 28,781,718 |            |  | $ | 22,308,000 |          
|                      |                |                               |            |            |  |      |            |            |  |   |            |          

|                               |                |                    |           |         |  |      |         |         |  |   |         |         | 
|------------------------------ | -------------- | ------------------ | --------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                               |                |                   
|                               |                | September 30, 2000
|                               |                |                   
|                               |                | 2001               |           | 2000    |  | 1999
|                               |                |                    |           |         |  |     
|Long-lived assets:             |                |                    |           |         |  |      |         |         |  |   |         |        
|                               | United States  |                    | $         | 915,905 |  |      | $       | 684,185 |  |   | $       | 728,691 | 
|                               | United Kingdom |                    |           | 74,086  |  |      |         | 98,543  |  |   |         | 91,866  | 
|                               | France         |                    |           | 27,931  |  |      |         | 25,254  |  |   |         | 31,594  | 
|                               | Australia      |                    |           | 19,887  |  |      |         | 78,415  |  |   |         | 117,862 | 
|                               |                |                    |           |         |  |      |         |         |  |   |         |        
|Consolidated long-lived assets |                | $                  | 1,037,809 |         |  | $    | 886,397 |         |  | $ | 970,013 |        
|                               |                |                    |           |         |  |      |         |         |  |   |         |        



---



|    |  |                                                                                          
|--- |  | -----------------------------------------------------------------------------------------
|(a) |  | Revenues are attributed to countries based on the
	location of each countrys operations.

Export sales to customers were $2,396,000,
$2,963,000 and $3,408,000 for the years ended September 30,
2001, 2000 and 1999, respectively.

In fiscal 2001 and fiscal 2000, sales to one
customer were $24,261,000 and $9,265,000, 57% and 32%,
respectively, of total sales for the fiscal year. At
September 30, 2001 and 2000, accounts receivable from this
customer totaled $5,857,000 and $1,059,000, 58% and 20%,
respectively, of total trade accounts receivable as of that
date. In addition, as of September 30, 2001 and 2000, the
Company recorded deferred revenue of $632,000 and $2,932,000,
respectively, related to this customer. In fiscal 1999, there
were no sales to a single customer in excess of 10% of total
sales.

Note D  Stock Options and Benefit
Plan

During fiscal year 2001, the Company had four
stock option programs, the 1986 Stock Option Plan (the 1986
Plan), the 1991 Stock Plan (the 1991 Plan), the 1997 Stock Plan
(the 1997 Plan) and the 2000 Stock Plan (the 2000 Plan) for its
key employees and non-employee directors. The 1986 Plan was
adopted in October 1986, the 1991 Plan in March 1991, the 1997
Plan in June 1997 and the 2000 Plan in March 2001. Stock options
under the 1986 Plan are non-qualified, while those under the
1991 Plan, the 1997 Plan and the 2000 Plan can be granted as
either non-qualified or incentive stock options. The 1991 Plan,
the 1997 Plan and the 2000 Plan also authorize the granting of
awards in the forms of stock appreciation rights, restricted
stock or deferred stock. In all cases, subject to the provisions
of the plans, the board of directors has complete discretion in
establishing the terms and conditions of each option granted to
the employees of the Company. During fiscal 1995, an executive
officer exercised stock options for a $148,966 interest-bearing
note, collateralized by the underlying stock, described in
detail in NOTE E.

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CHECK TECHNOLOGY CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A summary of outstanding options and shares
reserved under each plan for the last three fiscal years is
as follows:

The 1986
Plan

At September 30, 2001, 2000 and 1999, there
were no options outstanding under the 1986 Plan, with
188,660 shares reserved for future grants.

The 1991
Plan

|                            |                           |            |         |             |  |           |         |         |   |   |      |      | 
|--------------------------- | ------------------------- | ---------- | ------- | ----------- |  | --------- | ------- | ------- | - | - | ---- | ---- | 
|                            |                           |            |         |             |  | Weighted 
|                            |                           | Shares     |         |             |  | Average  
|                            |                           | Reserved   |         |             |  | Exercise 
|                            |                           | for Future |         | Options     |  | Price per
|                            |                           | Grants     |         | Outstanding |  | Share    
|                            |                           |            |         |             |  |          
|Balance, September 30, 1998 |                           |            | 47,050  |             |  |           | 247,194 |         |   | $ | 6.36 |     
|                            | Options exercised         |            |         |            |  |           |         | (17,500 | ) |   |      | 2.46 | 
|                            | Restricted stock canceled |            |         | 6,000       |  |           |         |        |   |   |      |     | 
|                            | Options canceled          |            |         | 17,000      |  |           |         | (17,000 | ) |   |      | 5.99 | 
|                            |                           |            |         |             |  |           |         |         |   |   |      |     
|Balance, September 30, 1999 |                           |            | 70,050  |             |  |           | 212,694 |         |   |   | 6.71 |     
|                            | Options exercised         |            |         |            |  |           |         | (17,700 | ) |   |      | 3.65 | 
|                            | Options canceled          |            |         | 47,160      |  |           |         | (47,160 | ) |   |      | 7.26 | 
|                            |                           |            |         |             |  |           |         |         |   |   |      |     
|Balance, September 30, 2000 |                           |            | 117,210 |             |  |           | 147,834 |         |   |   | 6.91 |     
|                            | Options exercised         |            |         |            |  |           |         |        |   |   |      |      | 
|                            | Options canceled          |            |         | 3,000       |  |           |         | (3,000  | ) |   |      | 8.88 | 
|                            |                           |            |         |             |  |           |         |         |   |   |      |     
|Balance, September 30, 2001 |                           |            | 120,210 |             |  |           | 144,834 |         |   | $ | 6.87 |     
|                            |                           |            |         |             |  |           |         |         |   |   |      |     

At September 30, 2001, 2000 and 1999, there
were 144,834, 140,709 and 176,569 options, respectively,
currently exercisable under the 1991 Plan at prices of $4.38 to
$9.63 per share. No options were granted under the 1991
Plan in 2001, 2000 or 1999; total compensation expense for
stock-based compensation was $86,626, $86,630 and $86,625 in
each of the three years, respectively.

30



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CHECK TECHNOLOGY CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The 1997
Plan

|                            |                   |            |         |             |   |           |         |         |   |   |      |      | 
|--------------------------- | ----------------- | ---------- | ------- | ----------- | - | --------- | ------- | ------- | - | - | ---- | ---- | 
|                            |                   |            |         |             |   | Weighted 
|                            |                   | Shares     |         |             |   | Average  
|                            |                   | Reserved   |         |             |   | Exercise 
|                            |                   | for Future |         | Options     |   | Price per
|                            |                   | Grants     |         | Outstanding |   | Share    
|                            |                   |            |         |             |   |          
|Balance, September 30, 1998 |                   |            | 662,500 |             |   |           | 87,500  |         |   | $ | 4.90 |     
|                            | Options granted   |            |         | (405,000    | ) |           |         | 405,000 |   |   |      | 2.62 | 
|                            | Options canceled  |            |         | 58,800      |   |           |         | (58,800 | ) |   |      | 3.20 | 
|                            |                   |            |         |             |   |           |         |         |   |   |      |     
|Balance, September 30, 1999 |                   |            | 316,300 |             |   |           | 433,700 |         |   |   | 3.00 |     
|                            | Options exercised |            |         |            |   |           |         | (20,283 | ) |   |      | 3.15 | 
|                            | Options granted   |            |         | (108,500    | ) |           |         | 108,500 |   |   |      | 2.77 | 
|                            | Options canceled  |            |         | 75,167      |   |           |         | (75,167 | ) |   |      | 2.78 | 
|                            |                   |            |         |             |   |           |         |         |   |   |      |     
|Balance, September 30, 2000 |                   |            | 282,967 |             |   |           | 446,750 |         |   |   | 2.99 |     
|                            | Options granted   |            |         | (182,700    | ) |           |         | 182,700 |   |   |      | 4.01 | 
|                            | Options canceled  |            |         | 4,100       |   |           |         | (4,100  | ) |   |      | 3.39 | 
|                            |                   |            |         |             |   |           |         |         |   |   |      |     
|Balance, September 30, 2001 |                   |            | 104,367 |             |   |           | 625,350 |         |   | $ | 3.28 |     
|                            |                   |            |         |             |   |           |         |         |   |   |      |     

At September 30, 2001, 2000 and 1999, there
were 237,858, 70,767 and 60,625 options, respectively, currently
exercisable under the 1997 Plan, at prices of $2.63 to
$6.50 per share.

The 2000
Plan

On March 22, 2001, the shareholders approved
adoption of the 2000 Stock Plan. Common shares available for
distribution under the Plan were 1,250,000. As of
September 30, 2001, no shares had been issued under the
Plan.

Total shares under all plans reserved for options
and restricted stock are 1,183,421 shares.

Pro forma information regarding net income and
earnings per share is required by SFAS 123, and has been
determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement.

The fair value of each option grant is
established on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions
for 2001, 2000 and 1999:

|                                |  |      |         |      |  |      |         |   |  |  |         |  
|------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                                |  | 2001 |         | 2000 |  | 1999
|                                |  |      |         |      |  |     
|Expected dividend yield         |  |      | 0       | %    |  |      | 0       | % |  |  | 0       | %
|Expected stock price volatility |  |      | 49      |      |  |      | 50      |   |  |  | 49      |  
|Risk-free interest rate         |  |      | 6.6     |      |  |      | 5.92    |   |  |  | 6.18    |  
|Expected life of options        |  |      | 7 years |      |  |      | 7 years |   |  |  | 7 years |  

The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price
volatility. Because the Companys employee stock options
have characteristics significantly different from those of
traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of its employee stock options.

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CHECK TECHNOLOGY CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over
the options vesting periods. The Companys pro forma
net loss or income, and net loss or earnings per share, for each
of the three years ended September 30, 2001, 2000 and 1999,
respectively, were as follows:

|                                                                |  |                          |           |      |  |      |          |   |  |   |            |  
|--------------------------------------------------------------- |  | ------------------------ | --------- | ---- |  | ---- | -------- | - |  | - | ---------- | -
|                                                                |  |                         
|                                                                |  | Year Ended September 30,
|                                                                |  |                         
|                                                                |  | 2001                     |           | 2000 |  | 1999
|                                                                |  |                          |           |      |  |     
|Net income (loss), pro forma                                    |  | $                        | 1,916,402 |      |  | $    | (400,180 | ) |  | $ | (1,830,483 | )
|Basic and diluted earnings (loss) per share, pro
	forma         |  |                          | 0.31      |      |  |      | (0.07    | ) |  |   | (0.30      | )
|Weighted average fair value of options granted
	during the year |  |                          | 2.40      |      |  |      | 1.68     |   |  |   | 1.69       |  

The following table summarizes information
concerning currently outstanding and exercisable options:

|                         |  |                     |         |                     |  |           |      |             |  |           |      |  |  |  |         |  |  |   |      | 
|------------------------ |  | ------------------- | ------- | ------------------- |  | --------- | ---- | ----------- |  | --------- | ---- |  |  |  | ------- |  |  | - | ---- | 
|                         |  |                     |         |                    
|                         |  | Options Outstanding |         | Options Exercisable
|                         |  |                     |         |                    
|                         |  |                     |         | Weighted            |  | Weighted  |      |             |  | Weighted 
|                         |  |                     |         | Average             |  | Average   |      |             |  | Average  
|                         |  |                     |         | Remaining           |  | Exercise  |      |             |  | Exercise 
|                         |  | Number              |         | Contractual         |  | Price     |      | Number      |  | Price    
|Range of Exercise Prices |  | Outstanding         |         | Life in Years       |  | per Share |      | Outstanding |  | per Share
|                         |  |                     |         |                     |  |           |      |             |  |          
|$1.750-4.750             |  |                     | 622,684 |                     |  |           | 5.37 |             |  | $         | 3.24 |  |  |  | 239,192 |  |  | $ | 3.08 | 
|5.063-7.750              |  |                     | 107,000 |                     |  |           | 3.11 |             |  |           | 6.11 |  |  |  | 103,000 |  |  |   | 6.14 | 
|8.125-9.625              |  |                     | 40,500  |                     |  |           | 3.37 |             |  |           | 9.34 |  |  |  | 40,500  |  |  |   | 9.34 | 
|                         |  |                     |         |                     |  |           |      |             |  |           |      |  |  |  |         |  |  |   |      | 
|$1.750-9.625             |  |                     | 770,184 |                     |  |           | 4.95 |             |  | $         | 3.96 |  |  |  | 382,692 |  |  | $ | 4.57 | 

The 401(k)
Plan

The Company has a defined contribution salary
deferral plan covering substantially all United States employees
under Section 401(k) of the Internal Revenue Code. The plan
allows eligible employees to make contributions up to the
maximum amount provided under the Code. The Company makes an
annual minimum contribution equal to 50% of the
participants before-tax contributions up to 6% of base
salary. The expense related to the plan was $126,651, $119,811
and $124,455, for the years ended September 30, 2001, 2000
and 1999, respectively.

Note E  Executive Loan

During fiscal 1995, the President and Chief
Executive Officer exercised 40,000 options to purchase common
stock at $2.00 per share, by executing a $148,996,
five-year, full recourse note, bearing interest at a floating
rate, under the Executive Loan Program. The purpose of the loan
was to provide cash for the exercise of the options and to pay
the related income taxes. When exercised, the Companys
stock had a market value of $6.375 per share. In 1998, the
loan terms were amended to change the loan from full-recourse to
non-recourse, and the floating rate was fixed at 5.25%. In May
of fiscal 2000, acknowledging the President and Chief Executive
Officers contribution to the Company, and the depressed
value of the underlying stock securing the loan, the Company
extended the term of the loan to May 2001 and granted
forgiveness of the loan ratably over the extension period. These
modifications resulted in the options being treated as a fixed
stock award. The Company recognized the fair market value of the
stock award of $225,000 over the extension period, which
concluded in the third quarter of fiscal 2001. Compensation
expense of $135,186 and $89,814 was recognized in the years
ended September 30, 2001 and 2000, respectively. Over the
life of the loan total principal payments were $54,671.

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CHECK TECHNOLOGY CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note F  Closure of the
Companys Australian Subsidiary

In February 2001, the Company committed to a plan
to close its subsidiary in Australia, developed a formal exit
plan to cease operations effective September 30, 2001, and
communicated the plan to all 14 full- and part-time
employees of the subsidiary. The Company determined that
operations in the market served by the Australian subsidiary
could be more profitably served by alternative means, including
independent distributors and sales agents. At the commitment
date, exit costs were estimated at $115,000, comprised solely of
termination benefits, which were included with selling, general
administrative expenses in the Consolidated Statements of
Operation and with employee compensation and related taxes in
the Consolidated Balance Sheets. Customer service and transition
issues have delayed the office closing until the first quarter
of fiscal 2002. As a result of this delay and refinement of
closing cost estimates, an additional charge of $100,000 was
recorded in the fourth quarter of fiscal 2001, bringing the
total one-time charge to $215,000. As summarized below, the
incremental $100,000 was comprised of additional employee
termination benefits, leasehold demolition and space restoration
expenses, and lease termination fees not previously anticipated,
and a loss on disposal of fixed assets, originally expected to
be sold at net book value. The fourth quarter charge was
included with selling, general administrative expenses in the
Consolidated Statements of Operation, and in the Consolidated
Balance Sheets, $56,000 in employee compensation and related
taxes, $28,000 in accounts payable and a $16,000 reduction of
leasehold improvements. As of September 30, 2001, $22,000
has been paid out in employee termination benefits and recorded
against the related accrual, leaving a reserve balance at the
end of the fiscal year of $177,000. Nine full- and part-time
employees remain as of September 30, 2001. Activity in the
fiscal year ended September 30, 2001 was as follows:

|                                     |  |                   |         |               |  |         |         |         |  |                    |         |   |  |   |         |   |  |   |         | 
|------------------------------------ |  | ----------------- | ------- | ------------- |  | ------- | ------- | ------- |  | ------------------ | ------- | - |  | - | ------- | - |  | - | ------- | 
|                                     |  |                   |         | Additional    |  | Charges |         |         |  | Remaining         
|                                     |  | Initial Reserve   |         | Restructuring |  | Against |         | Asset   |  | Reserve           
|                                     |  | February 19, 2001 |         | Charges       |  | Reserve |         | Reserve |  | September 30, 2001
|                                     |  |                   |         |               |  |         |         |         |  |                   
|Severance                            |  | $                 | 115,000 |               |  | $       | 56,000  |         |  | $                  | (22,000 | ) |  |   |         |   |  | $ | 149,000 | 
|Lease termination and other expenses |  |                   |        |               |  |         | 28,000  |         |  |                    |         |   |  |   |         |   |  |   | 28,000  | 
|Loss on disposal of fixed assets     |  |                   |        |               |  |         | 16,000  |         |  |                    |         |   |  |   | (16,000 | ) |  |   |        | 
|                                     |  |                   |         |               |  |         |         |         |  |                    |         |   |  |   |         |   |  |   |         | 
|                                     |  | $                 | 115,000 |               |  | $       | 100,000 |         |  | $                  | (22,000 | ) |  | $ | (16,000 | ) |  | $ | 177,000 | 
|                                     |  |                   |         |               |  |         |         |         |  |                    |         |   |  |   |         |   |  |   |         | 

Note G  Commitments and
Contingencies

Building, equipment and automobile rentals under
operating leases were $1,033,956, $1,235,598 and $1,249,909 for
the years ended September 30, 2001, 2000 and 1999,
respectively.

The Company leases its corporate offices under a
fifteen-year agreement expiring on September 15, 2010.
Annual rental under the lease is $420,000, increasing to
$481,000 in the eleventh year and thereafter. The Company is
obligated to pay operating expenses and real estate taxes
incurred by the landlord. The Company has the right to terminate
such lease at the end of the tenth lease year, subject to a
termination fee.

The Companys subsidiary in the United
Kingdom leases office space under a lease expiring in 2013.
Annual rental under the lease is $180,000, subject to adjustment
every five years, plus a pro rata share of operating expenses
incurred by the landlord.

Total future minimum rental commitments for
operating leases of facilities, sales offices, equipment and
automobiles are $8,360,199 and are due as follows: fiscal years
ending September 30, 2002  $980,275;
2003  $943,031; 2004  $898,872;
2005  $863,504; 2006  $866,388;
thereafter  $3,808,129.

In April 1999, the Company completed an agreement
with Océ Printing Systems GmbH for worldwide exclusive
rights to private label, sell and service the PS75 MICR product.
The Company guarantees to

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CHECK TECHNOLOGY CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

purchase a minimum quantity of PS75 product. The
Company is subject to a minimum commitment fee, contingent on
quantities sold, not to exceed DM 700,000. The Company expects
sales to fall short of the minimum for the measurement period
and has accrued the estimated commitment fee in cost of sales
for the year ended September 30, 2001.

Note H  Line of Credit and Notes
Payable

The Company has a $2,500,000 revolving line of
credit with a bank, secured by the Companys accounts
receivable, inventory, equipment and general intangibles.
Advances under the line of credit bear interest at the
banks reference rate; a commitment fee at the annual rate
of 0.2% applies to any unused portion of the line.

The line of credit agreement places certain
restrictions on the Company, including, among others,
requirements as to profitability and minimum levels of tangible
net worth. On September 30, 2001, borrowings under the line
of credit were $595,000, at an interest rate of 6.0%, and the
Company was in compliance with the covenants under the agreement.

In addition to the line of credit agreement, the
Companys United Kingdom subsidiary has a guarantee
facility with a bank to provide a VAT Deferred Bond. There is no
security deposit requirement under the agreement.

Cash interest payments, principally comprised of
interest on the line of credit for the year ended
September 30, 2001, and facility fees on the line of credit
for the years ended September 30, 2000 and 1999, were
$50,175, $6,421 and $6,480, respectively.

Note I  Subsequent Event

At the end of November 2001, the Company signed a
definitive purchase agreement with Xerox to acquire, in a cash
transaction, the North American assets of Delphax, the
sole-source supplier of the print engines used in the
Companys systems since the Companys inception. In
addition to giving the Company ownership of its core print
technology and associated expertise, the Companys and
Delphaxs product lines are highly complementary. The
transaction is expected to close in late December 2001. As of
September 30, 2001, costs related to the purchase totaled
$431,000 and were included in Other Current Assets on the
Balance Sheet as of that date.

Note J  Summarized Quarterly
Financial Information (Unaudited)

|                                  |  |               |            |          |  |         |            |              |  |   |            |  |  |   |            |  
|--------------------------------- |  | ------------- | ---------- | -------- |  | ------- | ---------- | ------------ |  | - | ---------- |  |  | - | ---------- | -
|                                  |  |              
|                                  |  | Quarter Ended
|                                  |  |              
|                                  |  | December 31   |            | March 31 |  | June 30 |            | September 30
|                                  |  |               |            |          |  |         |            |             
|Fiscal 2001                       |  |               |            |          |  |         |            |              |  |   |            |  |  |   |            |  
|Net sales                         |  | $             | 10,905,661 |          |  | $       | 10,834,706 |              |  | $ | 10,894,686 |  |  | $ | 10,208,829 |  
|Gross profit                      |  |               | 5,051,592  |          |  |         | 5,425,819  |              |  |   | 5,258,110  |  |  |   | 5,425,079  |  
|Net income                        |  |               | 510,559    |          |  |         | 178,222    |              |  |   | 452,016    |  |  |   | 1,009,072  |  
|Basic earnings per share          |  |               | 0.08       |          |  |         | 0.03       |              |  |   | 0.07       |  |  |   | 0.16       |  
|Diluted earnings per share        |  |               | 0.08       |          |  |         | 0.03       |              |  |   | 0.07       |  |  |   | 0.16       |  
|                                 
|Fiscal 2000                       |  |               |            |          |  |         |            |              |  |   |            |  |  |   |            |  
|Net sales                         |  | $             | 6,345,437  |          |  | $       | 6,864,600  |              |  | $ | 7,117,615  |  |  | $ | 8,454,066  |  
|Gross profit                      |  |               | 3,491,819  |          |  |         | 3,336,314  |              |  |   | 3,594,138  |  |  |   | 4,252,929  |  
|Net (loss) income                 |  |               | (119,855   | )        |  |         | (207,513   | )            |  |   | 131,471    |  |  |   | (94,540    | )
|Basic (loss) earnings per share   |  |               | (0.02      | )        |  |         | (0.03      | )            |  |   | 0.02       |  |  |   | (0.02      | )
|Diluted (loss) earnings per share |  |               | (0.02      | )        |  |         | (0.03      | )            |  |   | 0.02       |  |  |   | (0.02      | )

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##### Table of Contents



CHECK TECHNOLOGY CORPORATION AND
SUBSIDIARIES

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS AND RESERVES

|                                                   |                               |            |   |            |  |            |  |              |  |            |  |         |      |  |  |         |   |  |   |         | 
|-------------------------------------------------- | ----------------------------- | ---------- | - | ---------- |  | ---------- |  | ------------ |  | ---------- |  | ------- | ---- |  |  | ------- | - |  | - | ------- | 
|                                                   |                               | Balance at |   | Charged to |  | Charged to |  |              |  | Balance at
|                                                   |                               | Beginning  |   | Costs and  |  | Other      |  |              |  | End of    
|Description                                        |                               | of Period  |   | Expenses   |  | Accounts   |  | (Deductions) |  | Period    
|                                                   |                               |            |   |            |  |            |  |              |  |           
|I. Allowance for doubtful accounts                 |                               |            |   |            |  |            |  |              |  |            |  |         |      |  |  |         |   |  |   |        
|                                                   | Year ended September 30, 2001 |            | $ | 51,697     |  |            |  |             |  |            |  | 52      | (a)  |  |  |        |   |  | $ | 51,749  | 
|                                                   | Year ended September 30, 2000 |            | $ | 50,000     |  |            |  | 1,697        |  |            |  |        |      |  |  |        |   |  | $ | 51,697  | 
|                                                   | Year ended September 30, 1999 |            | $ | 50,000     |  |            |  |             |  |            |  |        |      |  |  |        |   |  | $ | 50,000  | 
|II. Reserve for obsolete and slow moving inventory |                               |            |   |            |  |            |  |              |  |            |  |         |      |  |  |        
|                                                   | Year ended September 30, 2001 |            | $ | 495,000    |  |            |  | 302,000      |  |            |  | 7,000   | (a)  |  |  |        |   |  | $ | 804,000 | 
|                                                   | Year ended September 30, 2000 |            | $ | 480,000    |  |            |  | 1,000        |  |            |  | 61,000  | (a)  |  |  | (47,000 | ) |  | $ | 495,000 | 
|                                                   | Year ended September 30, 1999 |            | $ | 400,000    |  |            |  | 104,000      |  |            |  | (18,000 | )(a) |  |  | (6,000  | ) |  | $ | 480,000 | 



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|    |                                                       
|--- | ------------------------------------------------------
|(a) | Reflects the effects of foreign currency
	fluctuations

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