<PAGE>

                                    FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

         [X]    Annual report pursuant to section 13 or 15(d) of the
                      Securities and Exchange Act of 1934

                  For the fiscal year ended September 30, 1998

                         Commission File Number: 0-10691

                          CHECK TECHNOLOGY CORPORATION
           ----------------------------------------------------------
             (Exact name of registrant as specified in its charter)


              Minnesota                                  41-1392000
----------------------------------------    ------------------------------------
  (State or other jurisdiction              (I.R.S. Employer Identification No.)
of incorporation or organization)                   

12500 Whitewater Drive, Minnetonka, Minnesota             55343-9420
---------------------------------------------    -------------------------------
  (Address of principal executive offices)                (Zip Code)

Registrant's telephone number, including area code:  (612) 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)

                             --------------------

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   X         NO
    -----          -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 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. [ X ]

The aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $19,126,877 at December 1, 1998 when the closing
price of such stock, as reported by NASDAQ, was $3.25.

There were 6,166,240 shares outstanding of Registrant's $.10 par value common
stock as of December 1, 1998.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions of the definitive proxy statement to be filed with the Commission
     within 120 days after the end of the registrant's fiscal year are
     incorporated by reference into Part III

This Form 10-K consists of 48 pages (including exhibits). The index is set forth
on page 15.

                                       1
<PAGE>

                                     PART I
ITEM 1. BUSINESS

COMPANY BACKGROUND

Check Technology Corporation (the Company) was formed in 1981 to design and
manufacture a sophisticated printing system. The original product concept for
the Company was a computerized financial document production system, which
integrated many of the functions required for the production of checkbooks.
These functions included (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. Shipments of its first system,
the Model 2000 CHECKTRONIC -Registered Trademark-, began in 1983.

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. These are called "Checkwriting" applications by the
Company. 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 was found to result in the cost effective production of the
small check order sizes common to most markets outside the United States. The
production cost reductions for orders of 25-100 checks, as well as the
improvement in printing quality, created a demand for the Company's systems in
many international markets. In order to manage this demand and to provide the
necessary technical support of the products after installation in the field, the
Company opened its first subsidiary, Check Technology Limited, in England in
1983. The Company opened its French and Australian subsidiaries in 1987. At
September 30, 1998, the Company had an installed base of over 400 systems
located in 49 countries.

BUSINESS

The Company'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 customer's
requirements. The systems are sold through the Company and its international
subsidiaries.

PRODUCTS

Check Technology sells a complete family of electronic production systems for
use in both cut-sheet and continuous forms production environments. These
systems can be 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 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. During fiscal 1998, the Company launched 
commercially the IMAGGIA MG20-Registered Trademark- product. Designed to 
respond to the changing demands of security printers and on-demand 
applications worldwide, the IMAGGIA system utilizes state-of-the-art digital, 
non-impact technology, offering print quality that is visually 
indistinguishable from offset print. The Company's other cut-sheet system is 
the CHECKTRONIC series. The CHECKTRONIC series uses a combination of 
ion-deposition and impact technology. The Company markets four CHECKTRONIC 
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 
series can be purchased with advanced security/audit capability. The 
Company's CHECKTRONIC systems provide their owners with the flexibility, 
reliability and consistency to produce high quality documents while reducing 
production costs.

Continuous Form Production Systems. The Company's CheckPrinter series consists
of continuous form systems. These systems 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 Unit. In addition to the document production systems, the Company
offers a finishing system to complement its cut-sheet product line. The
FOLIOTRONIC -Registered Trademark- system incorporates a blend of proven
concepts with new designs and advanced microprocessor controls. The FOLIOTRONIC
system consists of a guillotine and stitcher/binder module. Its rated throughput
is up to 

                                       2
<PAGE>

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 revenue results 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
consumed in the printing of each MICR code line and toner, which is consumed in
the personalization of each document. The Company believes that its service
network and spare parts business operated profitably for the years ended
September 30, 1998, 1997 and 1996, based upon the economies of scale achieved
from the expansion of the installed base of the Company's financial document
production equipment.

The Company employs customer engineers at each of its operating units. 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. While
the Company believes it will have a similar experience with the IMAGGIA, it does
not yet have the experience base to determine if this will be the case.

SALES AND MARKETING

Organization. The Company's system sales are made predominately 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 in order 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
five years. The Company believes that 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 is difficult to predict. It is estimated
that other documents produced by the Company's systems have shown higher growth
rates over the same period. These documents include payment coupons, tax payment
and other installment payment products.

Disbursement activities, such as insurance claims and payroll operations
(collectively called Checkwriting applications by the Company) 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 U.S. disbursement activities over the next ten years.

The Company's systems have also 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.

                                       3
<PAGE>

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 that the sale of the IMAGGIA family of check
production systems is critical to its ability to remain competitive in the
markets it serves. 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 Check Technology Corporation. Competitive standards for
alphanumeric print quality, MICR print quality and delivery time in this segment
are established by these major players. All of these market standards must be
met or surpassed by any new market competitor or production technology in order
to capture a substantial share of the United States personal check market. To
date, the Company has been able to establish itself only in the production of
new account kits, money market checkbooks and other applications which do not
require offset or letterpress quality. The IMAGGIA family of check production
systems has been designed to provide entry into the US check production market.
See "Research and Development".

The Company has had success in the United States folio production segment
involved in 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), Cummins Allison (Indianapolis) and Venture
Encoding (Dallas). 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 (United States) and Siemens
(West Germany) 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 family of products 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, Xerox, Siemens and
Nipson Bull.

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, Siemens, 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 1, 1998, the Company had a backlog of approximately $3,000,000 as
compared to a backlog of $3,500,000 as of December 1, 1997. 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. The Company's equipment is
manufactured to orders received, and to date the Company has never been in a
position where it was unable to meet a scheduled shipment date because of
excessive order backlog. During fiscal year 1998, there were periods when the
Company had only a nominal backlog. The Company expects that it will continue to
have periods during which there will be little or no backlog.

                                       4
<PAGE>

MANUFACTURING AND SOURCES OF SUPPLY

Since the Company has not developed a sustained backlog, it 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 personnel. 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 printer 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.

The non-impact alphanumeric printers and associated spare parts and consumables
for both the CHECKTRONIC and the IMAGGIA systems are supplied to the Company by
Delphax Systems, which has its manufacturing facilities in Toronto, Canada.
Delphax has been the supplier of the printers 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
acquired the remaining equity of Delphax. In connection with this acquisition,
Xerox has advised the Company that its intention is to have Delphax comply with
all of Delphax's existing contractual obligations to the Company, that Xerox
hopes to expand Delphax's relationship with the Company in the future and that
Xerox does not anticipate that the competitive relationship between the Company
and Xerox will be a factor in the relationship of Delphax with the Company. The
expressed intentions of Xerox could change to the detriment of the Company. No
assurance can be given at this time that the Company will be able to secure a
replacement source of supply for the alphanumeric printers supplied by Delphax.

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 is completing development of a new family of check production systems,
called Imaggia, which is targeted at the high volume U.S. check market as well
as offering potential for increasing the Company's international business. The
Company is using Delphax Systems Gemini digital printing technology as the
initial print engine for the Imaggia system. Delays have occurred in introducing
the system, due in part to development delays associated with the Gemini print
engine and finalization of the engine's toner formulation, which are outside of
the Company's control. No assurances can be given that the product will be
successful in the market place or that further product engineering delays will
not occur.

During fiscal 1998 the Company has continued product engineering on the Imaggia
system to improve its performance to meet market demands. The Company expects
that product engineering efforts seeking further improvements and enhancements
will be on-going. The Company has also continued product engineering on its
established product lines. The Company's research and development expenditures
were $2,728,000, $2,521,000 and $2,206,000 for the years ended September 30,
1998, 1997 and 1996 respectively.

PATENTS

In July 1997, the Company received a patent covering certain aspects of its
IMAGGIA printing system. In prior years, the Company has received patents
covering the Model 2000 CHECKTRONIC printing 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 personnel rather than on patents. The Company cannot be assured
that its printing system, or any components of such system, will not be covered
in whole or part by existing patents. Although the Company is not presently
aware of such patents, the Company could be required to obtain patent licenses
in order to conduct its business.

                                       5
<PAGE>

EMPLOYEES

As of December 1, 1998, the Company had 181 full-time employees, including 31 in
executive and administrative positions, 33 in electronic engineering and product
development, 31 in manufacturing, 15 in sales and marketing and 71 in customer
service.

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.

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
$387,000, increasing to $481,000 on September 15, 2005, and thereafter, plus
operating expenses and real estate taxes.

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 $198,000, subject to adjustment every five years, plus
a pro rata portion of the operating expenses. The Company leases smaller office
premises for its operations in Australia and France.

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 is 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 MATTER 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, 1998.


                                       6
<PAGE>

                       EXECUTIVE OFFICERS OF THE COMPANY

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

<TABLE>
<CAPTION>
Name                          Position                                             Age
----                          --------                                             ---
<S>                           <C>                                                  <C>
Jay A. Herman                 President and Chief Executive Officer                51
Peter J. Wood                 Vice President of Engineering                        56
Dieter P. Schilling           Vice President of Operations and                     43
                              Customer Service
Paul W.B. Stephenson          Vice President - Chief Financial Officer             44
</TABLE>

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. HERMAN joined the Company as Executive Vice President and Chief Financial
Officer in May of 1988 and was promoted to President in June 1989. 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.

PETER J. WOOD joined the Company as Vice President of 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.

DIETER P. SCHILLING was promoted to Vice President of Operations and Customer
Service in October of 1989. From October 1986 until October 1989 he held the
position of Vice President of Customer Service. Mr. Schilling joined Check
Technology 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.

PAUL W.B. STEPHENSON joined the Company as Vice President of Finance and
Administration in March 1992 and became Chief Financial Officer in 1998. Prior
to joining the Company, he was manager of Audit for Honeywell, Inc. from 1989 to
1992. From 1987 to 1989 he was Controller, Communications Division for Space
Center, Inc. From 1976 to 1987 he held a number of positions with Peat, Marwick,
Mitchell and Co. in England and the United States. He is a Certified Public
Accountant and a Chartered Accountant.

                                       7
<PAGE>

                                     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.

<TABLE>
<CAPTION>
                                                           High           Low
<S>                                                      <C>           <C>
YEAR ENDED SEPTEMBER 30, 1998
                                  First Quarter          $  5  3/8     $  3   1/8
                                  Second Quarter         $  5  1/2     $  3 11/16
                                  Third Quarter          $  5  3/8     $  3   3/8
                                  Fourth Quarter         $  4 5/16     $  1   1/2

YEAR ENDED SEPTEMBER 30, 1997
                                  First Quarter          $  10 7/8     $  7 1/2
                                  Second Quarter         $   8 7/8     $  5 5/8
                                  Third Quarter          $   8         $  5 1/4
                                  Fourth Quarter         $   7 7/8     $  3 7/8
</TABLE>

STOCK REPURCHASE PROGRAM

In September 1998, the Company announced a stock repurchase program of up to 
500,000 shares of common stock. At September 30, 1998, the Company had 
repurchased 152,200 shares at a cost of $387,000.

HOLDERS

As of December 1, 1998, the Company had 365 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.

                                       8
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                            September 30,     September 30,     September 30,     September 30,     September 30,
Year Ended                      1998              1997              1996              1995              1994
----------                  -------------     -------------     -------------     -------------     -------------
<S>                         <C>               <C>               <C>               <C>               <C>
Consolidated
Statement of
Operations Data:

   Net sales                 $23,739,528       $22,866,676       $24,718,974       $24,360,654       $22,975,589
   Net income                    198,862           325,979         2,245,713         2,052,986         1,792,519
   Earnings per common
     share                          0.03              0.05              0.36              0.34              0.31
   Earnings per common
     share assuming
     dilution                       0.03              0.05              0.36              0.33              0.30

Weighted average
  number of shares
  outstanding during
  the period (1)               6,273,756         6,224,797         6,170,778         6,007,917         5,764,701
Weighted average
  number of shares and
  equivalents outstanding
  during the period -
  assuming dilution (2)        6,289,872         6,295,073         6,286,049         6,178,377         6,056,175

<CAPTION>

                            September 30,     September 30,     September 30,     September 30,     September 30,
Year Ended                      1998              1997              1996              1995              1994
----------                  -------------     -------------     -------------     -------------     -------------
Consolidated
Balance Sheet Data:

   Working capital           $17,634,271       $17,588,576       $17,310,488       $14,585,803       $12,544,594
   Total assets               22,319,507        22,971,493        22,277,856        20,103,557        17,603,636
   Long term liabilities          35,059            78,903            55,615           106,405           143,104
   Stockholders' equity       18,567,126        18,679,662        18,408,486        15,692,230        13,567,806
</TABLE>

(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.

(2)  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 and
     equivalents outstanding during the period.


                                       9
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

RESULTS OF OPERATIONS

The Company's revenues consist of (i) sales of document production systems and
related equipment, and (ii) maintenance contracts, spare parts, supplies and
consumable items. For the year ended September 30, 1998, (fiscal 1998) sales of
document production equipment increased 16% over the year ended September 30,
1997 (fiscal 1997) compared to a decrease of 26% in fiscal 1997 over the year
ended September 30, 1996 (fiscal 1996). The increase in 1998 arose primarily
from the first sales of the Company's new Imaggia product, together with
increased Checktronic sales into Latin America offset by reduced sales by the
Company's Australian and United Kingdom subsidiaries. The Company has held for
some time a dominant market position in many of the international markets in
which the Checktronic is sold. Demand for the Checktronic product line has
softened in these established 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 recessionary environments in Asia,
South America and other 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
decreased 3% in fiscal 1998 over fiscal 1997 compared to a 6% increase in fiscal
1997 over fiscal 1996. The decrease in fiscal 1998 was primarily due to a
reduction in maintenance and consumables revenue from Pacific Rim customers. The
increase in fiscal 1997 over fiscal 1996 was primarily due to increased volumes
of consumable sales.

The gross margin percentage in fiscal 1998 was 58% compared to 60% in fiscal
1997 and 61% in fiscal 1996. The decreases are primarily due to differences in
product mix, increased pricing pressure and costs associated with introducing
the IMAGGIA product line. The Company anticipates that its gross margin
percentage in fiscal 1999 may be somewhat lower than in fiscal 1998 as revenue
from the IMAGGIA line constitutes a larger portion of the Company's total
revenues.

Selling, general and administrative expenses were flat in fiscal 1998 as
compared to fiscal 1997 and increased 3% in fiscal 1997 over fiscal 1996 due
primarily to higher marketing and personnel expense.

Research and development expenses increased 8% in fiscal 1998 over fiscal 1997
and 14% in fiscal 1997 over fiscal 1996. The increases in both years were
primarily due to expenditures on the Company's Imaggia product development
program.

Net interest income was $334,000 in fiscal 1998 compared to $389,000 in fiscal
1997 and $377,000 in fiscal 1996. The decrease in fiscal 1998 was due to lower
cash balances available for investment and lower interest rates.

The income tax rate was 33% in fiscal 1998 compared to 32% in fiscal 1997 and
12% in fiscal 1996. During the fourth quarter of fiscal 1996 the Company
recorded certain previously unrecognized deferred tax assets amounting to
$693,000. 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.
Further information about income taxes is provided in Note B to the consolidated
financial statements.

Net income for the year amounted to $0.03 per share as compared to $0.05 per
share in fiscal 1997 and $0.35 per share in fiscal 1996. The decrease in fiscal
1998 was primarily attributable to the effect of reduced gross margins and
increased research and development expenditures, offset by the favorable effects
of foreign currency exchange rate swings. The decrease in net income in fiscal
1997 was primarily due to the decrease in the level of document production
systems revenue, as well as the negative effects of foreign currency exchange
rate swings and a higher tax rate.

MARKET RISK

The Company presently has three foreign subsidiaries, located in England, France
and Australia, does business in 49 countries and generates approximately 80% 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 experiences foreign currency gains and losses, which are reflected
on the Company's income statement, due to the strengthening and weakening of the
U.S. dollar against the currencies of the Company's three foreign subsidiaries
and the resulting effect on the valuation of the intercompany accounts and
certain assets of the subsidiaries, which are denominated in U.S. dollars. The
net exchange gain arising from this was $132,000 in fiscal 1998, compared to a
loss of $72,000 in fiscal 1997 and a gain of $51,000 in fiscal 1996. The Company
anticipates that it will continue to have exchange gains or losses from foreign
operations in the future.

The Company's net investment in its foreign subsidiaries was $8,681,000 and
$7,429,000 at September 30, 1998 and 1997 translated into US dollars using the
year end exchange rates. The potential loss in value resulting from a
hypothetical 10% 

                                       10
<PAGE>

change in foreign currency exchange rates is not material in 1998 and 1997. 
The impact of the stronger US dollar on the translation of foreign currency 
denominated sales and related gross profit thereon was not material in 1998 
and 1997.

FACTORS AFFECTING RESULTS OF OPERATIONS

The Company is continuing development of the Imaggia system. The Company is
using the Gemini digital print technology, which is being developed by Delphax
Systems, as the print engine for the IMAGGIA system. Over the course of the
development, the Company has experienced delays due in part to development
delays associated with the Gemini print engine and finalization of the engine's
toner formulation, which are outside of the Company's control. No assurance can
be given that further delays will not occur, that IMAGGIA will gain market
acceptance or that product development or warranty expenses will not be higher
than anticipated. Achievement of the Company's future revenue plans depends upon
the successful market acceptance of the IMAGGIA system. The Company's revenues
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 can 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.

YEAR 2000

The Company began evaluating the potential impact of the Year 2000 date
conversion on its operations in 1997. This evaluation included three major
elements: (i) information technology (IT) systems, (ii) non-IT, or embedded
technology systems and (iii) relationships with its key business suppliers.

For its IT systems, the Company has assessed its hardware and applications
(software and operating systems) and has substantially finalized its plans to
address all assessed risks. The Company is in the process of completing an
upgrade to its IT systems, which among other benefits is intended to ensure that
the Company's IT systems are Year 2000 compliant. The Company presently expects
this upgrade to be complete by mid 1999.

As a result of its internal evaluation the Company believes that its embedded
technology systems are currently Year 2000 compliant. The Company has identified
its key business partners and has been advised by them that they have programs
in place to ensure that their operations will be Year 2000 compliant in an
appropriate timeframe.

The Company believes it has planned for the most reasonably likely worst case
scenarios. It anticipates that its IT systems will be ready for the Year 2000,
although it may experience isolated incidences of non-compliance. During 1999 it
will continue to follow up with critical business partners to assess their
readiness and establish appropriate contingency plans if necessary. The
Company's cost for achieving Year 2000 compliance is part of the cost of an
overall upgrade of its information technology systems. The Company estimates
that the approximate cost of this upgrade will be $300,000, of which
approximately $200,000 was incurred in fiscal 1998.

LIQUIDITY AND CAPITAL RESOURCES

Working capital was unchanged at $17.6 million at September 30, 1998 and 1997.
The Company's inventory levels increased from $8 million at September 30, 1997,
to $10.2 million at September 30, 1998 primarily due to an increase in Imaggia
finished goods inventory. Cash and short-term investments amounted to $5.3
million at September 30, 1998, compared to $8.5 million at September 30, 1997.

Stockholders' equity was $18.6 million at September 30, 1998 compared to $18.7
million at September 30, 1997. In September 1998, the Company announced a stock
repurchase program of up to 500,000 shares. At September 30, 1998, the Company
had repurchased 152,500 shares of the Company's common stock at a cost of
$387,000. Stockholders' equity was also affected in 1998 by a negative change of
$67,000 in the foreign currency adjustment arising from the translation of the
assets and liabilities of the Company's subsidiaries from their functional
currencies into U.S. dollars.

The Company's long-term debt to equity ratio was less than 0.01 at September 30,
1998 and September 30, 1997. The Company maintains a $2.5 million unsecured bank
line of credit. At September 30, 1998, the line was unused. The credit agreement
expires March 31, 1999 and the Company presently expects to negotiate a new bank
line of credit. The Company believes that its current financial arrangements and
anticipated level of internally generated funds will be sufficient to fund its
working capital requirements in fiscal 1999.

At September 30, 1998, the Company had no material commitments for capital
expenditures.

                                       11
<PAGE>

CAUTIONARY STATEMENT

Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, in Company's Annual Report, elsewhere in
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 stockholders, 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. Examples of such forward-looking statements
include (i) the last paragraph under the heading "Business - Research and
Development" in the Form 10-K, concerning the development and timing of the
introduction of the Imaggia system, (ii) the last sentence of the second
paragraph under the subheading "Market Risk" concerning unrealized
gains or losses from foreign operations, and (iii) the last two sentences of the
third paragraph under the subheading "Liquidity and Capital Resources"
concerning adequacy of working capital. 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 cause the Company's actual
financial performance to differ materially from that expressed in any
forward-looking statement.





                                       12
<PAGE>

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.







                                       13
<PAGE>

                                    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 stockholders on or
about January 31, 1998, and filed with the Securities and Exchange Commission.

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 stockholders on or
about January 31, 1999, 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 "Principal Holders of CTC Capital
Shares" included in the Company's definitive proxy statement to be mailed to
stockholders on or about January 31, 1999, and filed with the Securities and
Exchange Commission.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.



                                       14
<PAGE>

                                     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.

<TABLE>
<CAPTION>
Description                                                                                                Page
-----------                                                                                                ----
<S>                                                                                                        <C>
Report of Independent Auditors                                                                              20

Consolidated Balance Sheets--September 30, 1998 and 1997                                                    21

Consolidated Statements of Operations--The years ended September 30, 1998, 1997, and 1996                   23

Consolidated Statements of Stockholders' Equity--The years ended September 30, 1998, 1997, and  1996        24

Consolidated Statements of Cash Flows--The years ended September 30, 1998, 1997, 1996                       26

Notes to Consolidated Financial Statements--September 30, 1998                                              27
</TABLE>


FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
Number             Description                                           Page
------             -----------                                           ----
<S>                <C>                                                   <C>
Schedule II        Valuation and Qualifying Accounts and Reserves         41
</TABLE>

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.

REPORTS OF FORM 8-K

The Company did not file any reports on Form 8-K during the three months ended
September 30, 1998

Exhibits
--------
<TABLE>
<CAPTION>
Number     Description                               Page or Incorporated by Reference From
------     -----------                               --------------------------------------
<S>        <C>                                       <C>
  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                 Exhibit 4(b) to Registration Statement on Form
           Common Stock Certificates                 S-1 (No. 2-97193)
       
  4.2      Statement of Rights and Preferences       Exhibit A to Current Report on Form 8-K dated
           of Capital Stock                          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, 1998      42


                                       15
<PAGE>

<CAPTION>

Number     Description                               Page or Incorporated by Reference From
------     -----------                               --------------------------------------

  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    Exhibit 10.10 to Form 10-K for fiscal year ended
           the Company has entered into with         September 30, 1987
           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)

  10.5     Employment  Agreement as of October 1,    Exhibit 10.7 to Form 10-K for fiscal year ended
           1994, between the Company and Jay A.      September 30, 1994
           Herman

  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,        Exhibit 10.9 to Form 10-K for fiscal year ended
           Minnesota                                 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

   11      Computation of Per Share Earnings         46

   21      List of Subsidiaries                      47

  23.1     Consent of Independent Auditors           48
</TABLE>


                                       16
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15 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


Dated:  December  17, 1998             By: /s/ Jay A. Herman
                                          --------------------------------------
                                                      Jay A. Herman
                                                       President


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.

<TABLE>
<CAPTION>
SIGNATURE                          TITLE                                          DATE
---------                          -----                                          ----
<S>                                <C>                                            <C>
/s/ Robert Reznick                 Chairman of the Board                          December 17, 1998
-----------------------------
Robert Reznick

/s/Jay A. Herman                   President, Director                            December 17, 1998
-----------------------------      (Principal Executive Officer)
Jay A. Herman                      

/s/ Paul Stephenson                Vice President, Chief Financial Officer        December 17, 1998
-----------------------------      (Principal Financial & Accounting Officer)
Paul Stephenson                    

/s/ Gary Holland                   Director                                       December 17, 1998
-----------------------------
Gary Holland

/s/ Thomas H. Garrett III          Director                                       December 17, 1998
-----------------------------
Thomas H. Garrett III

/s/ Oscar Victor                   Director                                       December 17, 1998
-----------------------------
Oscar Victor
</TABLE>




                                       17
<PAGE>

                           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, 1998

                          Check Technology Corporation

                              Minnetonka, Minnesota









                                       18
<PAGE>

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, 1998 and 1997

          Consolidated Statements of Operations -- The years ended September 30,
          1998, 1997 and 1996

          Consolidated Statements of Stockholders' Equity - The years ended
          September 30, 1998, 1997 and 1996

          Consolidated Statements of Cash Flows -- The years ended September 30,
          1998, 1997 and 1996

          Notes to Consolidated Financial Statements -- September 30, 1998

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

<TABLE>
<CAPTION>
          Number                  Description
          ------                  -----------
          <S>                     <C>
          Schedule II             Valuation and Qualifying Accounts 
                                  and Reserves
</TABLE>

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
<PAGE>

Original Document on                                       1400 Pillsbury Center
Ernst & Young LLP Letterhead                              Minneapolis, MN  55402
                                                             Phone: 612/343-1000



                         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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1998, in conformity with generally
accepted accounting principles. 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, 1998


                                       20
<PAGE>

CONSOLIDATED BALANCE SHEETS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                       September 30,
                                                                  1998              1997
                                                                  ----              ----
<S>                                                            <C>               <C>
ASSETS

CURRENT ASSETS
      Cash and cash equivalents                                $ 2,701,888       $ 3,165,601
      Short-term investments                                     2,582,475         5,293,849
      Accounts receivable less allowance for doubtful
          accounts of $50,000                                    3,446,982         3,526,551
      Inventories:
          Raw materials and component parts                      6,038,828         5,700,807
          Work - in - progress                                     367,160           461,529
          Finished goods                                         3,819,433         1,887,380
                                                               -----------       -----------
                                                                10,225,421         8,049,716
      Deferred income taxes                                      1,309,448         1,092,259
      Other current assets                                       1,085,379           673,528
                                                               -----------       -----------
      TOTAL CURRENT ASSETS                                      21,351,593        21,801,504

EQUIPMENT AND FIXTURES
      Machinery and equipment                                    2,049,557         2,107,739
      Furniture and fixtures                                     1,761,984         1,737,969
      Leasehold improvements                                       293,906           252,685
                                                               -----------       -----------
                                                                 4,105,447         4,098,393

      Less accumulated depreciation
          and amortization                                       3,137,533         2,928,404
                                                               -----------       -----------
                                                                   967,914         1,169,989
                                                               -----------       -----------
TOTAL ASSETS                                                   $22,319,507       $22,971,493
                                                               -----------       -----------
                                                               -----------       -----------
</TABLE>

See notes to consolidated financial statements.

                                       21
<PAGE>

CONSOLIDATED BALANCE SHEETS

CHECK  TECHNOLOGY CORPORATION AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                 September 30,
                                                                          1998                   1997
                                                                          ----                   ----
<S>                                                                    <C>                    <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
      Accounts payable and accrued expenses                            $ 2,322,696            $ 2,603,516
      Employee compensation and related taxes                              681,465                672,492
      Income taxes payable                                                 317,884                425,868
      Deferred revenue                                                     383,556                469,127
      Current portion of capital lease obligations                          11,721                 41,925
                                                                       -----------            -----------
      TOTAL CURRENT LIABILITIES                                          3,717,322              4,212,928

CAPITAL LEASE OBLIGATIONS - less current portion                            35,059                 78,903
                                                                       -----------            -----------
      TOTAL LIABILITIES                                                  3,752,381              4,291,831

STOCKHOLDERS' EQUITY

            Common  stock  -- par  value  $.10  per share --
            Authorized  25,000,000  shares;  issued and
            Outstanding 1998 - 6,178,120 shares;
            1997 -- 6,338,135 shares                                       617,812                633,814

      Additional paid-in capital                                        16,938,385             17,151,182
      Foreign currency translation adjustment                             (917,856)              (851,225)
      Retained earnings                                                  1,928,785              1,745,891
                                                                       -----------            -----------
      TOTAL STOCKHOLDERS' EQUITY                                        18,567,126             18,679,662
                                                                       -----------            -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                             $22,319,507            $22,971,493
                                                                       -----------            -----------
                                                                       -----------            -----------
</TABLE>

See notes to consolidated financial statements.

                                       22
<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                             Year Ended September 30,
                                                               1998                   1997                   1996
<S>                                                        <C>                    <C>                    <C>
Sales:                                                         ----                   ----                   ----
      Printing equipment                                   $ 9,145,553            $ 7,885,584            $10,636,518
      Maintenance, spares and supplies                      14,593,975             14,981,092             14,082,456
                                                           -----------            -----------            -----------
        NET SALES                                           23,739,528             22,866,676             24,718,974
Costs and Expenses:
      Cost of sales                                         10,078,505              9,047,708              9,578,116
      Selling, general and administrative                   11,101,002             11,136,029             10,818,900
      Research and development                               2,728,547              2,521,073              2,206,444
                                                           -----------            -----------            -----------
                                                            23,908,054             22,704,810             22,603,460
                                                           -----------            -----------            -----------
(LOSS) INCOME FROM SYSTEM SALES
   AND SERVICE                                                (168,526)               161,866              2,115,514

Interest expense                                                18,910                 22,813                 26,110
Interest (income)                                             (353,307)              (411,531)              (402,539)
Unrealized exchange (gain) loss                               (131,991)                71,605                (50,770)
                                                           -----------            -----------            -----------
      INCOME BEFORE TAXES                                      297,862                478,979              2,542,713

Income taxes                                                    99,000                153,000                297,000
                                                           -----------            -----------            -----------
      NET INCOME                                           $   198,862            $   325,979            $ 2,245,713
                                                           -----------            -----------            -----------
                                                           -----------            -----------            -----------

Basic and diluted earnings per common share                $      0.03            $      0.05            $      0.36

Weighted average number of shares and
     equivalents outstanding during the period               6,273,756              6,224,797              6,170,778

Weighted average number of shares and
     equivalents outstanding during the period -
     assuming dilution                                       6,289,872              6,295,073              6,286,049
</TABLE>

See notes to consolidated financial statements.

                                       23
<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                               Common Stock
                                                        Shares           Amount
                                                       ---------        --------
<S>                                                    <C>              <C>
Balance September 30, 1995                             6,112,279        $611,228
    Net income                                               ---             ---
    Exercise of stock options, including tax             105,448          10,545
     benefit of $345,000
    Issuance of restricted stock                          20,000           2,000
    Vesting of restricted stock                              ---             ---
    Payment - note receivable                                ---             ---
    Foreign currency translation                             ---             ---
                                                       ---------        --------
Balance September 30, 1996                             6,237,727         623,773
    Net income                                               ---             ---
    Exercise of stock options, including tax
     benefit of $17,000                                   20,408           2,041
    Issuance of restricted stock                          80,000           8,000
    Vesting of restricted stock                              ---             ---
    Payment - note receivable                                ---             ---
    Foreign currency translation                             ---             ---
                                                       ---------        --------
Balance September 30, 1997                             6,338,135         633,814
    Net Income                                               ---             ---
     Options exercised, including tax
        benefit of $41,491                                15,000           1,500
     Purchase of stock                                  (153,590)        (15,359)
     Vesting of restricted stock                             ---             ---
     Cancellation of restricted stock                    (21,425)         (2,143)
     Payment - note receivable                               ---             ---
     Foreign currency translation                            ---             ---
                                                       ---------        --------
Balance September 30, 1998                             6,178,120        $617,812
                                                       ---------        --------
                                                       ---------        --------
</TABLE>

See notes to consolidated financial statements.

                                       24
<PAGE>

<TABLE>
<CAPTION>
                                      Foreign
              Additional              Currency                 Retained
               Paid-In              Translation                Earnings
               Capital               Adjustment               (Deficit)
            ---------------        ---------------          ---------------
            <S>                    <C>                      <C>
              $15,743,703              $(453,275)              $ (209,426)
                      ---                    ---                2,245,713

                  417,540                    ---                      ---
                  228,000                    ---                 (230,000)
                      ---                    ---                   96,500
                    6,646                    ---                      ---
                      ---                (60,688)                     ---
              -----------              ---------               ----------
               16,395,889               (513,963)               1,902,787
                      ---                    ---                  325,979

                  (12,320)                   ---                      ---
                  762,000                    ---                 (770,000)
                      ---                    ---                  287,125
                    5,613                    ---                      ---
                      ---               (337,262)                     ---
              -----------              ---------               ----------
               17,151,182               (851,225)               1,745,891
                      ---                    ---                  198,862

                   (5,491)                   ---                      ---
                   (6,464)                   ---                 (371,842)
                      ---                    ---                  146,986
                 (206,745)                   ---                  208,888
                    5,903                    ---                      ---
                      ---                (66,631)                     ---
              -----------              ---------               ----------
              $16,938,385              $(917,856)              $1,928,785
              -----------              ---------               ----------
              -----------              ---------               ----------
</TABLE>

                                       25
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                            Year Ended September 30,
                                                                1998                  1997                   1996
                                                            -----------           ------------           ------------
<S>                                                         <C>                   <C>                    <C>
OPERATING ACTIVITIES
    Net income                                              $   198,862           $    325,979           $  2,245,713
       Adjustments to reconcile net income to net
      cash provided by operating activities:
         Depreciation and amortization                          369,059                402,272                438,275
         Other                                                  (46,328)                81,746               (111,001)
    Changes in operating assets and liabilities:
         Accounts receivable                                     33,864               (128,305)             1,282,909
         Inventories                                         (2,226,009)            (1,705,446)              (745,111)
         Other current assets                                  (660,347)              (658,170)              (402,574)
         Accounts payable and accrued expenses                 (396,471)               734,802               (520,939)
         Deferred revenue                                       (67,055)               (15,866)               (29,216)
                                                            -----------           ------------           ------------

NET CASH (USED IN) PROVIDED BY
         OPERATING ACTIVITIES                               $(2,794,425)              (962,988)             2,158,056

INVESTING ACTIVITIES
    Purchase of equipment and fixtures                         (246,498)              (505,626)              (442,118)
    Proceeds from sale of equipment                              53,236                 67,802                 82,092
    Purchase of short term investments                       (8,926,101)           (25,269,275)           (10,651,726)
    Proceeds from sale of short term investments             11,907,089             25,079,552              9,931,000
                                                            -----------           ------------           ------------
NET CASH PROVIDED BY (USED IN)
    INVESTING ACTIVITIES                                    $ 2,787,726               (627,547)            (1,080,752)

FINANCING ACTIVITIES
    Repurchase/Issuance of common stock                        (438,107)               (10,279)               428,085
    Addition of capital leases                                        0                 85,757                 40,101
    Repayment of note receivable from stock sale                  5,903                  5,613                  6,646
    Repayment of long-term debt and
        capital leases                                          (57,265)              (100,784)               (90,070)
                                                            -----------           ------------           ------------
NET CASH (USED IN) PROVIDED BY
     FINANCING ACTIVITIES                                   $  (489,469)               (19,693)               384,762

EFFECT OF EXCHANGE RATE CHANGES
     ON CASH                                                     32,455                (75,454)                (1,139)
                                                            -----------           ------------           ------------
(DECREASE) INCREASE IN CASH AND
    EQUIVALENTS                                                (463,713)            (1,685,682)             1,460,927

CASH AND CASH EQUIVALENTS AT
    BEGINNING OF YEAR                                         3,165,601              4,851,283              3,390,356
                                                            -----------           ------------           ------------
CASH AND CASH EQUIVALENTS AT
    END OF YEAR                                             $ 2,701,888           $  3,165,601           $  4,851,283
                                                            -----------           ------------           ------------
                                                            -----------           ------------           ------------
</TABLE>

See notes to consolidated financial statements 

                                       26
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 1998


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. In excess of 50% of the total
revenues of the Company are 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 
generally accepted accounting principles 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.

The Company provides for depreciation and amortization of equipment and fixtures
by charges to operations at rates calculated to amortize the cost of the
property over its estimated useful life using the straight-line method.
Amortization expense of items under capital lease is included in depreciation
expense.

Deferred Revenue: Amounts billed to customers under maintenance contracts are
recognized in income over the term of the maintenance agreement.

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 stockholders' equity.

Foreign Exchange Contracts: From time to time the Company enters into foreign
exchange contracts as a hedge against specific foreign currency receivables.
Market value gains and losses are recognized, and the resulting credit or debit
offsets foreign exchange gains or losses on those receivables.

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 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.

                                       27
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 1998

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued


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 equal 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 (Statement
123).

Long-Lived Assets: In Fiscal 1998, the Company adopted SFAS 121, ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
This Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The adoption of SFAS 121 had no impact on the Company's
consolidated financial statements.

Earnings per Share: In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings Per Share, (Statement 128). Statement 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes the dilutive effect of stock options and other
dilutive securities. Dilutive earnings per share is very similar to the
preciously reported fully diluted earnings per share. All earnings per share
amounts for all periods presented have been restated, where necessary, to
conform to the Statement 128 requirements. A reconciliation of the denominator
in the basic and diluted earnings per share calculation is as follows:

<TABLE>
<CAPTION>
                                                      1998               1997               1996
<S>                                                 <C>                <C>                <C>
Denominator for Basic earnings per share
   Weighted average shares                          6,273,756          6,224,797          6,170,778

Effect of dilutive securities:
   Employee stock options                              11,753             66,051            114,614
   Employee stock grants                                4,363              4,225                656
                                                    ---------          ---------          ---------
Dilutive potential common shares                       16,116             70,276            115,270

Denominator for Diluted earnings per share
   Adjusted weighted average shares                 6,289,872          6,295,073          6,286,048
                                                    ---------          ---------          ---------
</TABLE>

Comprehensive Income: In June 1997, the Financial Accounting Standards Board
issued Statement No. 130, REPORTING COMPREHENSIVE INCOME. SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The new rules
are effective for the Company in fiscal 1999. The adoption of this Statement is
not expected to have a significant impact on the Company.

Segment Reporting: In June 1997, the Financial Accounting Standards Board issued
Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. This Statement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements. The Statement requires additional disclosure only, and
will not impact net income or stockholders' equity of the Company. The Statement
is effective for the Company's fiscal year ended September 30, 1999. The Company
is currently assessing the impact of the Statement on its segment disclosure.

Reclassification: Certain items in the 1997 and 1996 consolidated financial
statements have been reclassified to conform to the 1998 presentation.

                                       28
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 1998


NOTE B - INCOME TAX

At September 30, 1998, the Company has domestic tax loss carryforwards of
approximately $892,000 which expire in 2012 and foreign tax loss carryforwards
of approximately $555,000 which expire in 2003. In addition, the Company has
domestic investment tax credits and research and development credit
carryforwards of approximately $416,000 which are available to offset future
income tax. The credits expire in varying amounts through September 2013.
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. The deferred tax asset has 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.

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

FEDERAL AND STATE NET DEFERRED TAX ASSETS (LIABILITIES):

<TABLE>
<CAPTION>
                                                             1998                  1997
                                                             ----                  ----
<S>                                                      <C>                   <C>
Deferred Tax Assets:
         Net operating loss                              $   533,000           $   517,000
         Business credit carryforwards and
                alternative minimum tax credits              559,000               582,000
         Stock compensation                                  111,000               138,000
         Inventory valuation reserves                        112,000               102,000
         Other U.S. and foreign differences                  502,000               262,000
                                                         -----------           -----------
Gross Deferred Tax Asset                                   1,817,000             1,601,000
Less Valuation Allowances                                   (508,000)             (508,000)
                                                         -----------           -----------
Net Deferred Tax Asset                                   $ 1,309,000           $ 1,093,000
                                                         -----------           -----------
                                                         -----------           -----------
</TABLE>

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

<TABLE>
<CAPTION>
                                      1998              1997              1996
                                      ----              ----              ----
<S>                                <C>               <C>               <C>
Current Tax Expense:
              Federal              $        0        $  (25,000)       $    3,000
              State                    10,000             6,000            16,000
              Foreign                 347,000           555,000           626,000
                                   ----------        ----------        ----------
              Total                   357,000           536,000           645,000
Deferred Tax Expense:
              Federal                  28,000          (258,000)         (231,000)
              State                         0           (14,000)          (18,000)
              Foreign                (286,000)         (111,000)          (99,000)
                                   ----------        ----------        ----------
              Total                  (258,000)         (383,000)         (348,000)
                                   ----------        ----------        ----------
Total Tax Expense                  $   99,000        $  153,000        $  297,000
                                   ----------        ----------        ----------
                                   ----------        ----------        ----------
</TABLE>


                                       29
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 1998

NOTE B - INCOME TAX - CONTINUED

A reconciliation of tax expense to the statutory rate of 34% is as follows:

<TABLE>
<CAPTION>
                                                        1998               1997                 1996
                                                        ----               ----                 ----
<S>                                                  <C>                 <C>                 <C>
Statutory rate applied to pre-tax income             $ 101,000           $ 163,000           $ 865,000

Net operating loss and tax credits utilized                  0                   0            (220,000)

Change in valuation allowance                                0                   0            (348,000)

Other                                                   (2,000)            (10,000)                  0
                                                     ---------           ---------           ---------
                                                     $  99,000           $ 153,000           $ 297,000
                                                     ---------           ---------           ---------
                                                     ---------           ---------           ---------
</TABLE>

Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $3,898,000 at September 30, 1998. Those earnings are considered to
be indefinitely reinvested and, accordingly, no provision for U.S. Federal 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, 1998, 1997, and 1996 were
$653,000, $671,000 and $570,000 respectively.


NOTE C - FINANCIAL INSTRUMENTS

Foreign Currency Instruments and Hedging Activities: From time to time, the
Company may enter into foreign exchange contracts to manage its exposure to
fluctuations in foreign currency exchange rates. These contracts involve the
exchange of foreign currencies for U.S. dollars at future dates. Counterparties
to these contracts are major international financial institutions. Maturities of
these instruments are typically one year or less from the transaction date.
Gains or losses from these contracts are included in other expense and are
intended to partially offset fluctuations in net sales due to currency rate
changes.

No foreign exchange contracts were outstanding at September 30, 1998 and 1997.

                                       30
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 1998

NOTE D--BUSINESS, OPERATIONS, AND FOREIGN SUBSIDIARIES

The Company operates in one business segment, which is 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 printers used in the printing systems sold by the Company.

The Company's manufacturing operations are located in the United States. Sales
and service operations are located in the United Kingdom, France, and Australia.
Foreign operations include the activities of the three foreign subsidiaries.

<TABLE>
<CAPTION>
                                                      Domestic            Foreign
Year Ended September 30, 1998                        Operations          Operations         Eliminations        Consolidated
---------------------------------------------      -------------        ------------        ------------        ------------
<S>                                                <C>                  <C>                 <C>                 <C>
Sales to unaffiliated customers                     $  9,057,846        $ 14,681,682        $        ---        $ 23,739,528
Sales to foreign subsidiaries                          4,171,584                 ---          (4,171,584)                ---
                                                    ------------        ------------        ------------        ------------
Net sales                                           $ 13,229,430        $ 14,681,682        $ (4,171,584)       $ 23,739,528
                                                    ------------        ------------        ------------        ------------
                                                    ------------        ------------        ------------        ------------
(Loss) Income from system sales
  and service                                       $   (110,209)       $    460,064        $   (518,381)       $   (168,526)

Less:
      Interest (income)                                 (237,632)           (115,675)                ---            (353,307)
      Interest expense                                     5,000              42,618             (28,708)             18,910
      Unrealized exchange loss                               ---            (131,991)                ---            (131,991)
                                                    ------------        ------------        ------------        ------------
      Income before taxes                                122,423             665,112            (489,673)            297,862
      Income taxes                                        38,000              61,000                 ---              99,000
                                                    ------------        ------------        ------------        ------------
Net income                                          $     84,423        $    400,112        $   (285,673)       $    198,862
                                                    ------------        ------------        ------------        ------------
                                                    ------------        ------------        ------------        ------------
Identifiable assets                                 $ 19,306,172        $ 12,890,128        $ (9,876,793)       $ 22,319,507
                                                    ------------        ------------        ------------        ------------
                                                    ------------        ------------        ------------        ------------
Total liabilities                                   $  2,153,610        $  5,621,222        $ (4,022,451)       $  3,752,381
                                                    ------------        ------------        ------------        ------------
                                                    ------------        ------------        ------------        ------------
</TABLE>

                                       31
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 1998

NOTE D--BUSINESS, OPERATIONS, AND FOREIGN SUBSIDIARIES--CONTINUED

<TABLE>
<CAPTION>
                                                      Domestic            Foreign
Year Ended September 30, 1997                        Operations          Operations         Eliminations        Consolidated
---------------------------------------------      -------------        ------------        ------------        ------------
<S>                                                <C>                  <C>                 <C>                 <C>
Sales to unaffiliated customers                     $  7,426,624        $ 15,440,052        $        ---        $ 22,866,676
Sales to foreign subsidiaries                          4,239,162                 ---          (4,239,162)                ---
                                                    ------------        ------------        ------------        ------------
Net sales                                           $ 11,665,786        $ 15,440,052        $ (4,239,162)       $ 22,866,676
                                                    ------------        ------------        ------------        ------------
                                                    ------------        ------------        ------------        ------------
(Loss) income from system sales and                                                                             
service                                             $   (751,599)       $    912,005        $      1,460        $    161,866

Less:                                                                                                           
      Interest (income)                                 (377,960)            (97,303)             63,732            (411,531)
      Interest expense                                     5,002              82,358             (64,547)             22,813
      Unrealized exchange loss (gain)                        ---              71,117                 488              71,605
                                                    ------------        ------------        ------------        ------------
      Income (loss) before taxes                        (378,641)            855,833               1,787             478,979
      Income taxes                                      (291,000)            444,000                 ---             153,000
                                                    ------------        ------------        ------------        ------------
Net income (loss)                                   $    (87,641)       $    411,833        $      1,787        $    325,979
                                                    ------------        ------------        ------------        ------------
                                                    ------------        ------------        ------------        ------------
Identifiable assets                                 $ 20,282,967        $ 12,463,933        $ (9,775,407)       $ 22,971,493
                                                    ------------        ------------        ------------        ------------
                                                    ------------        ------------        ------------        ------------
Total liabilities                                   $  2,342,860        $  5,610,139        $ (3,661,168)       $  4,291,831
                                                    ------------        ------------        ------------        ------------
                                                    ------------        ------------        ------------        ------------
</TABLE>

                                       32
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 1998

NOTE D--BUSINESS, OPERATIONS, AND FOREIGN SUBSIDIARIES - -CONTINUED

<TABLE>
<CAPTION>
                                                      Domestic            Foreign
Year Ended September 30, 1996                        Operations          Operations         Eliminations        Consolidated
---------------------------------------------      -------------        ------------        ------------        ------------
<S>                                                <C>                  <C>                 <C>                 <C>
Sales to unaffiliated customers                    $  7,279,398         $ 17,439,576        $        ---        $ 24,718,974
Sales to foreign subsidiaries                         5,435,350                  ---          (5,435,350)                ---
                                                   ------------         ------------        ------------        ------------
Net sales                                          $ 12,714,748         $ 17,439,576        $ (5,435,350)       $ 24,718,974
                                                   ------------         ------------        ------------        ------------
                                                   ------------         ------------        ------------        ------------
Income from system sales and service               $    557,288         $  1,426,266        $    131,960        $  2,115,514

Less:
         Interest (income)                             (401,552)             (50,077)             49,090            (402,539)
         Interest expense                                 6,072               69,128             (49,090)             26,110
         Unrealized exchange loss (gain)                 18,999              (69,769)                ---             (50,770)
                                                   ------------         ------------        ------------        ------------
         Income before taxes                            933,769            1,476,984             131,960           2,542,713
         Income taxes                                  (230,464)             527,464                 ---             297,000
                                                   ------------         ------------        ------------        ------------
Net income                                         $  1,164,233         $    949,520        $    131,960        $  2,245,713
                                                   ------------         ------------        ------------        ------------
                                                   ------------         ------------        ------------        ------------
Identifiable assets                                $ 19,692,227         $ 10,342,786        $ (7,757,157)       $ 22,277,856
                                                   ------------         ------------        ------------        ------------
                                                   ------------         ------------        ------------        ------------
Total liabilities                                  $  1,798,567         $  3,916,837        $ (1,846,034)       $  3,869,370
                                                   ------------         ------------        ------------        ------------
                                                   ------------         ------------        ------------        ------------
</TABLE>

The Company's products are marketed worldwide. Domestic operations include
export sales of $ 4,697,278, $3,920,419 and $3,383,495 for the periods ended
September 30, 1998, 1997, and 1996, respectively.

There were no sales to a single customer in excess of 10% of total sales in
1998, 1997 or in 1996.

                                       33
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 1998

NOTE E--LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

<TABLE>
<CAPTION>
                                                                                       September 30,
                                                                                   1998              1997
                                                                                 --------          --------
<S>                                                                              <C>               <C>
Capital lease obligations on automobiles and equipment, due in monthly
    installments varying from $478 to $551, including interest at 
    9.2% to 11.6%; automobile and equipment financed under the lease 
    serve as security to the lease obligation                                    $ 46,780          $120,828

Less current portion of lease obligation                                           11,721            41,925
                                                                                 --------          --------
                                                                                 $ 35,059          $ 78,903
                                                                                 --------          --------
                                                                                 --------          --------
</TABLE>

Cash payments of interest were $18,910 in 1998, $22,639 in 1997 and $24,304 in
1996.

Equipment and fixtures includes the following amounts under the capitalized
lease obligations:

<TABLE>
<CAPTION>
                                                                                 September 30,
                                                                              1998            1997
                                                                            --------       ---------
   <S>                                                                      <C>            <C>
   Office furniture, fixtures and equipment                                 $ 65,885       $ 176,125
   Less allowance for amortization                                            19,562          45,273
                                                                            --------       ---------
                                                                            $ 46,323       $ 130,852
                                                                            --------       ---------
                                                                            --------       ---------
</TABLE>

Future payments for the capital lease obligations (including interest) as of
September 30, 1998 are:

<TABLE>
<CAPTION>
                                           Capital Lease
                                            Obligations
                                           -------------
<S>                                        <C>
Year ending September 30:
                              1999           $  15,672
                              2000              35,947
                              2001                   0
                                             ---------
                    Total Payments              51,619
Less amounts representing interest               4,839
                                             ---------
Present value of lease payments              $  46,780
                                             ---------
                                             ---------
</TABLE>

                                       34
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 1998

NOTE F--STOCK OPTIONS AND BENEFIT PLAN

During fiscal year 1998, the Company had three stock option programs, the 1986
Stock Option Plan (the 1986 Plan), the 1991 Stock Plan (the 1991 Plan), and the
1997 Stock Plan (the 1997 Plan), for its key employees and non-employee
directors. The 1986 Plan was adopted in October 1986, the 1991 Plan in March
1991 and the 1997 Plan in June 1997. Stock options under the 1986 Plan are
non-qualified while those under the 1991 Plan and the 1997 Plan can be granted
as either non-qualified or incentive stock options. The 1991 Plan and the 1997
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 year 1995, an officer exercised stock options for a
$148,966 note. The note is interest bearing, collateralized by the underlying
stock.

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

THE 1986 PLAN

<TABLE>
<CAPTION>
                                     Shares                               Weighted
                                    Reserved                              Average
                                   For Future          Options        Exercise Price
                                     Grants          Outstanding         Per Share
                                   ----------        -----------      --------------
<S>                                <C>               <C>              <C>
Balance September 30, 1995           188,660           156,250           $   2.28
    Options exercised                    ---          (103,500)              2.11
                                     -------          --------
Balance September 30, 1996           188,660            52,750               2.63
     Options exercised                   ---           (52,750)              2.63
                                     -------          --------
Balance September 30, 1997           188,660               ---                ---
     Options exercised
                                     -------          --------
Balance September 30, 1998           188,660               ---           $    ---
                                     -------          --------
                                     -------          --------
</TABLE>

At September 30, 1998, 1997 and 1996 there were 0, 0, and 52,750 options,
respectively, currently exercisable under the 1986 Plan at prices of $2.00 to
$2.625 per share.

                                       35
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 1998

NOTE F--STOCK OPTIONS AND BENEFIT PLAN--CONTINUED

       1991 Plan
       ---------
<TABLE>
<CAPTION>
                                         Shares                                Weighted
                                        Reserved                               Average
                                       For Future           Options         Exercise Price
                                         Grants           Outstanding         Per Share
                                      ------------       -------------     ----------------
<S>                                   <C>                <C>               <C>
Balance September 30, 1995               231,750            181,660              3.93
     Options granted                     (63,500)            63,500              8.88
     Options exercised                       ---            (28,508)             2.81
     Restricted Stock granted            (20,000)               ---               ---
     Restricted Stock canceled             4,250                ---               ---
     Options canceled                      5,625             (5,625)             8.08
                                      ------------       -------------

Balance September 30, 1996               158,125            211,027              5.45
     Options granted                     (76,000)            76,000              8.72
     Options exercised                       ---             (1,333)             2.50
     Restricted Stock granted            (80,000)               ---               ---
                                      ------------       -------------

Balance September 30, 1997                 2,125            285,694              6.34
     Options exercised                                      (15,000)             2.50
     Restricted Stock canceled            21,425                ---               ---
     Options canceled                     23,500            (23,500)             8.51
                                      ------------       -------------

Balance September 30, 1998                47,050            247,194              6.36
                                      ------------       -------------
                                      ------------       -------------
</TABLE>

At September 30, 1998, 1997 and 1996 there were 164,611, 139,152 and 98,777 
options, respectively, currently exercisable under the 1991 Plan at prices of 
$1.75 to $9.63 per share. The Company issued 0, 80,000 and 20,000 shares at 
weighted average fair values of $0, $770,000 and 230,000 in 1998, 1997 and 
1996, respectively. Total compensation expense for stock-based compensation 
was $146,987, $287,125 and $96,500 in 1998, 1997 and 1996, respectively.
<TABLE>
<CAPTION>

1997 Plan
---------                              Shares                                Weighted
                                      Reserved                               Average
                                     For Future           Options         Exercise Price
                                       Grants           Outstanding         Per Share
                                    ------------       -------------     ----------------
<S>                                 <C>                <C>               <C>
Shares reserved at inception           750,000                ---
     Options granted                   (10,000)            10,000              6.50
                                    ------------       -------------

Balance September 30, 1997             740,000             10,000              6.50
     Options granted                   (97,500)            97,500              4.70
     Options canceled                   20,000            (20,000)             4.75
                                    ------------       -------------

Balance September 30, 1998             662,500             87,500              4.90
                                    ------------       -------------
                                    ------------       -------------
</TABLE>

At September 30, 1998 and 1997 there were 2,500 and 0 options, respectively, 
currently exercisable under the 1997 plan, at a price of $6.50 per share.

Total shares reserved for options and restricted stock are 1,379,229 shares.


                                     36

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 1998

NOTE F--STOCK OPTIONS AND BENEFIT PLAN--CONTINUED

Pro forma information regarding net income and earnings per share is required 
by Statement of Financial Accounting Standards No. 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 1998 and 1997:

<TABLE>
<CAPTION>
                                                               1998            1997            1996
                                                           -------------   ------------    ------------
<S>                                                        <C>             <C>             <C>
Expected dividend yield                                               0%             0%              0%
Expected stock price volatility                                      51%            40%             40%
Risk - free interest rate                                          4.37%          6.11%           6.60%
Expected life of options                                         7 years        7 years         7 years
</TABLE>

The Black-Scholes option valuation model was developed for use in estimating 
the fair value of traded options which 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.

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 earnings and earnings per share were as follows:

<TABLE>
<CAPTION>
                                                              1998                 1997                  1996
                                                           ----------          -----------          -------------
<S>                                                        <C>                 <C>                  <C>
Net earnings (loss)- pro forma                             $   83,046          $   193,475          $   2,195,045

Earnings (loss) per share - pro forma                            0.01                 0.03                   0.34

Weighted  average  fair value of options  granted
during the year                                                  3.37                 4.44                   4.68
</TABLE>

The pro forma effect on net income and earnings per share is not 
representative of the pro forma net earnings in future years because it does 
not take into consideration pro forma compensation expense related to grants 
made prior to 1996.


                                    37

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 1998

NOTE F--STOCK OPTIONS AND BENEFIT PLAN--CONTINUED

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

<TABLE>
<CAPTION>
                                               Options Outstanding                             Options Exercisable
                              ----------------------------------------------------     -------------------------------------
                                                   Weighted Avg.        Weighted                                  Weighted
                                                     Remaining          Average                                  Average
        Range of                  Number            Contractual         Exercise             Number               Exercise
    Exercise Prices            Outstanding         Life (Years)           Price           Exercisable              Price
   ------------------         -------------       ---------------     ------------     ----------------        -------------
   <S>                        <C>                 <C>                 <C>              <C>                     <C>
   $   1.750 - 4.750              146,194              4.46            $      4.06             73,694            $     3.46
       5.063 - 7.750              112,500              5.83                   6.20             61,250                  5.76
       8.125 - 9.625               76,000              6.22                   9.35             32,167                  9.31
   ------------------         -------------       ---------------     ------------     ----------------        -------------
   $   1.750 - 9.625              334,694              5.32            $      5.98            167,111            $     5.43
</TABLE>

The Company has a defined contribution salary deferral plan covering 
substantially all U.S. 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 cost of the plan was $106,594, $82,766, and $78,326 
for the years ended September 30, 1998, 1997 and 1996, respectively.


                                     38

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 1998

NOTE G--RENTAL COMMITMENTS

Building, equipment and automobile rentals under operating leases were 
$1,234,065, $1,184,701 and $1,039,439 for the years ended September 30, 1998, 
1997 and 1996, respectively.

The Company leases its corporate offices under a fifteen-year agreement 
expiring on September 15, 2010. Annual rental under the lease is $387,000 
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 
10th 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 $198,000, 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 $11,427,342 and are due as 
follows: fiscal year ending September 30, 1999 -- $1,162,817; 2000 -- 
$958,088; 2001 --$858,749; 2002 -- $855,406; 2003 -- $855,823; thereafter -- 
$6,736,459.

NOTE H--LINE OF CREDIT AND NOTES PAYABLE

The Company has a $2,500,000 revolving line of credit with a bank. At 
September 30, 1998, the entire line was unused. The line of credit agreement 
is in the form of an unsecured note. Advances under the line of credit bear 
interest at the bank's reference rate. The line has a .20% annual commitment 
fee.

The line of credit agreement places certain restrictions on the Company 
including requirements as to maintenance for minimum levels of tangible net 
worth and specified others. The Company was in compliance with these 
covenants at September 30, 1998. The line of credit expires March 31, 1999.

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.


                                     39

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 1998

NOTE I-- SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>

1998 Quarter Ended                  December 31            March 31              June 30           September 30
------------------                  -----------            --------              -------           ------------
<S>                                 <C>                   <C>                  <C>                 <C>
Net Sales                           $ 5,152,740           $ 6,329,148          $ 6,333,606          $ 5,924,034

Gross Profit                          3,117,051             3,629,066            3,580,078            3,334,828

Net Income                             (148,105)               87,802              188,089               71,076

Basic Earnings per Share            $     (0.02)          $      0.01          $      0.03          $      0.01

Diluted Earnings per Share          $     (0.02)          $      0.01          $      0.03          $      0.01


1997 Quarter Ended                  December 31            March 31              June 30           September 30
------------------                  -----------            --------              -------           ------------

Net Sales                           $ 5,487,892          $ 6,201,197          $ 6,507,436          $ 4,670,151

Gross Profit                          3,416,637            3,720,231            3,821,358            2,860,742

Net Income                              100,000              241,703              271,870             (287,594)

Basic Earnings per Share            $      0.02          $      0.04          $      0.04          $     (0.05)

Diluted Earnings per Share          $      0.02          $      0.04          $      0.04          $     (0.05)

</TABLE>



                                               40

<PAGE>

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                            Balance at       Charged to         Charged to                          Balance at
                                            Beginning         Cost and            Other                               End
      Description                           Of Period         Expenses           Accounts          (Deductions)     Of Period
<C>   <S>                                  <C>               <C>                <C>                <C>             <C>
1.    Allowance for doubtful
      accounts

      Year ended September 30, 1998        $    50,000                0                    0                  0     $   50,000

      Year ended September 30, 1997        $    50,000                0                    0                  0     $   50,000

      Year ended September 30, 1996        $    50,000                0                    0                  0     $   50,000


II.   Reserve for obsolete
      And slow moving
      Inventories

      Year ended September 30, 1998        $   360,000           56,000                    0           (16,000)     $  400,000

      Year ended September 30, 1997        $   334,000           30,000                    0            (4,000)     $  360,000

      Year ended September 30, 1996        $   303,000           95,000                    0           (64,000)     $  334,000
</TABLE>



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