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

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

For the fiscal year ended September 30, 2000

Commission File Number: 0-10691

CHECK TECHNOLOGY CORPORATION

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

Registrants telephone number, including area code: (952) 939-9000

____________________

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

None

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

Common Stock ($.10 par value)
(Title of Class)
____________________

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  NO

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

The aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $22,652,490 at December 1, 2000 when the closing
price of such stock, as reported by NASDAQ, was $3.750.

There were 6,188,388 shares outstanding of Registrants $.10 par value common
stock as of December 1, 2000.

DOCUMENTS INCORPORATED BY REFERENCE



|1. |  | Portions of the definitive proxy statement to be filed with the
Commission by the end of January 2001 are incorporated by reference into
Part III
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

This Form 10-K consists of 49 pages (including exhibits). The index is set
forth on page 14.

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TABLE OF CONTENTS



|                                  |  |  |  |  |  |  |  | 
|--------------------------------- |  |  |  |  |  |  |  | 
|PART I                           
|Executive Officers of the Company
|PART II                          
|PART III                         
|PART IV                          
|REPORT OF INDEPENDENT AUDITORS   
|Bank Line of Credit Agreement    
|Employment Agreement             
|List of Subsidiaries             
|Consent of Independent Auditors  
|Financial Data Schedule          




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®, began in 1983.

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

The Company has had a significant presence in the international check
production marketplace since 1983. The integration of the check production
functions described above 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 between 25 and 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.

During fiscal 1998, the Company launched the Imaggia MG20® system
in commercial markets in response to the changing demands of security printers
and on-demand printing applications worldwide. In April 1999, the Company
completed an agreement with Océ Printing Systems GmbH for worldwide exclusive
rights to sell (on a private label basis) and service the PS75 MICR product
manufactured by Océ. In addition, the Company obtained certain non-exclusive
rights to sell and service other Océ high-performance sheet-fed MICR and
non-MICR printing systems.

At September 30, 2000, the Company had an installed base of 432 systems located
in 53 countries.

Business

The Companys business is the design, manufacture, sale and service of
computerized financial document production systems. These systems can collate,
personalize and encode documents into packages tailored to the customers
requirements.

Products

Check Technology sells a 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. The Companys premier cut-sheet system is the
Imaggia MG20® system. The Imaggiasystem utilizes
state-of-the-art digital, non-impact technology, offering print quality that is
visually indistinguishable from offset print. The Company markets the Imaggia
system to customers with high volume folio production and print-on-demand
applications. The Imaggia MG20system operates at a rated speed of 228 pages
per minute and accommodates varying paper sizes up to 18.75 inches in width and
22 inches in length. The Imaggiasystem can be purchased with various input
and output paper handling options and provides a high level of flexibility,
reliability, and the consistency required to produce high quality documents
while reducing production costs. The Companys other manufactured cut-sheet
system is the Checktronicseries. The Checktronicseries 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, and 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
Checktronicseries can be purchased with advanced security/audit capability.
The Company has an agreement with Océ Printing Systems GmbH for worldwide
exclusive rights to private label, sell, and service the PS75 MICR

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

Continuous Form Production Systems. The Companys CheckPrinter 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 Units. In addition to the document production systems, the Company
offers a finishing system to complement its cut-sheet product line. The
Foliotronic® system incorporates a blend of proven concepts with
new designs and advanced microprocessor controls. The Foliotronicsystem
consists of a guillotine and stitcher/binder module. Its rated throughput is
up to 2,000 books per hour. When used with the Companys electronic production
systems, the Foliotronicsystem 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, which is consumed in the printing of each MICR code line, and toner,
which is consumed in the printing of each document. The Company believes that
its service network and spare parts business operated profitably for the years
ended September 30, 2000, 1999 and 1998, based upon the economies of scale
achieved from the expansion of the installed base of Company 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.

Sales and Marketing

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

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

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

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penetrating the largest personal check production markets outside of the
United States. These include Australia, Brazil, France, Mexico, Spain and the
United Kingdom.

Competition

The Companys products are sold into a number of different market segments.
Competition will differ depending on the segment and application in which the
Company competes. Many of the Companys competitors are well established and
have significantly greater access to financial, technical and personnel
resources. The Company believes sales of the Imaggiasystem are 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. These major players
establish competitive standards for alphanumeric print quality, MICR print
quality and delivery time in this segment. 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. In the past, the Company was 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 Imaggiasystem was
designed to provide entry into the United States check production market. See
Research and Development. In January 2000, the Company accepted a three-year
equipment and service contract for its Imaggiasystem to be used in the
manufacture of checkbooks in the United States.

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, Alabama), Cummins Allison (Indianapolis,
Indiana) and Venture Encoding (Dallas, Texas). The predominant personal
checkbook manufacturers discussed above also produce payment books. The
Companys products have found market acceptance in this segment because they
provide the efficiency, reliability and production flexibility sought by this
segment. Xerox (United States) and Océ (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 Checktronicfamily 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
(United States), Xerox, Océ and Nipson Bull (France).

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

Backlog

At December 1, 2000, the Company had a backlog of approximately $13,590,000,
compared to a backlog of $4,082,000 as of December 1, 1999. The Company
defines its backlog as purchase orders which are unfilled. Because of customer
changes in delivery schedules and potential cancellation of orders, the
Companys backlog as of any particular date may not be representative of the
Companys actual sales for any succeeding fiscal period. During most of fiscal
2000, the Company had a significant backlog due to the January 2000 acceptance
of a three-year Imaggiasystem and service contract, valued at approximately
$40.0 million. Backlog declined throughout the year as scheduled deliveries
were met. 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. The Company
expects that from time to time it will continue to have periods during which
there may be little or no backlog.

Manufacturing and Sources of Supply

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

The components of the Companys financial document production systems are
manufactured by outside vendors, tested and then incorporated into the systems
by Company personnel. While the Company uses only one source for many of the
key components

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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 Checktronicand the Imaggiasystems are supplied to the Company by
Delphax Systems (Delphax), 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 advised the Company that its intention is to have
Delphax comply with all of Delphaxs existing contractual obligations to the
Company and expand Delphaxs relationship with the Company in the future,
indicating that the competitive relationship between the Company and Xerox will
not be a factor in the relationship of Delphax with the Company. The expressed
intentions of Xerox could change to the detriment of the Company. In February
2000, the Company finalized a purchase agreement with Delphax for the worldwide
exclusive rights to sell the Gemini digital printing technology in the blank
check and check folio production market until May 25, 2003. 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 continues to develop features for the Imaggiasystem,
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 Imaggiasystem. Delays 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, were outside of the Companys
control.

During fiscal 2000, the Company has continued product engineering on the
Imaggiasystem to improve its performance to meet market demands. The Company
expects that product engineering efforts seeking further improvements and
enhancements will be ongoing. The Company has also continued product
engineering on its established product lines. The Companys research and
development expenditures were $2,722,000, $2,710,000 and $2,729,000 for the
years ended September 30, 2000, 1999 and 1998, respectively.

Patents

In July 1997, the Company received a patent covering certain aspects of its
Imaggiasystem. In prior years, the Company has received patents covering the
Model 2000 Checktronicprinting system, its fusing process and the autotaper
for the Foliotronicsystem. 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 systems, or any components of such systems, 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.

Employees

As of December 1, 2000, the Company had 207 full-time employees, including 36
in executive and administrative positions, 28 in research and development, 32
in manufacturing, 17 in sales and marketing and 94 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.

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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
$418,000, increasing to $481,000 on September 15, 2005 and thereafter, plus
operating expenses and real estate taxes incurred by the landlord.

In addition, the Company leases office space for its European sales and service
center in Crawley, England, under a lease which expires in 2013 and provides
for annual lease payments of $189,000, subject to adjustment every five years,
plus a pro rata portion of the operating expenses incurred by the landlord.
The Company leases smaller office premises for its operations in 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 are a party to, nor is any of their
property the subject of, any material pending legal proceedings. From time to
time, the Company and its subsidiaries receive complaints from customers with
respect to product performance and occasionally such complaints evolve into
litigation. The Company regards these matters as routine litigation incidental
to its business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 2000.

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

|                    |  |                                         |  |     |    | 
|------------------- |  | --------------------------------------- |  | --- | -- | 
|Name                |  | Position                                |  | Age
|                    |  |                                         |  |    
|Jay A. Herman       |  | President and Chief Executive Officer   |  |     | 53 | 
|                   
|                   
|                   
|                   
|Peter J. Wood       |  | Vice President of Engineering           |  |     | 58 | 
|                   
|                   
|                   
|                   
|Dieter P. Schilling |  | Vice President of Operations            |  |     | 45 | 
|                   
|                   
|                   
|                   
|Robert M. Barniskis |  | Vice President, Chief Financial Officer |  |     | 37 | 

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

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

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ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

|                              |                |  |      |       |     |  |   |       | 
|----------------------------- | -------------- |  | ---- | ----- | --- |  | - | ----- | 
|                              |                |  | High |       | Low
|                              |                |  |      |       |    
|Year ended September 30, 2000
|                             
|                             
|                             
|                             
|                              | First quarter  |  | $    | 4.313 |     |  | $ | 1.875 | 
|                             
|                             
|                             
|                             
|                              | Second quarter |  |      | 8.375 |     |  |   | 3.563 | 
|                             
|                             
|                             
|                             
|                              | Third quarter  |  |      | 6.375 |     |  |   | 4.250 | 
|                             
|                             
|                             
|                             
|                              | Fourth quarter |  |      | 5.625 |     |  |   | 4.250 | 
|                             
|                             
|                             
|                             
|Year ended September 30, 1999
|                             
|                             
|                             
|                             
|                              | First quarter  |  |      | 3.875 |     |  |   | 2.188 | 
|                             
|                             
|                             
|                             
|                              | Second quarter |  |      | 3.000 |     |  |   | 2.125 | 
|                             
|                             
|                             
|                             
|                              | Third quarter  |  |      | 2.563 |     |  |   | 1.500 | 
|                             
|                             
|                             
|                             
|                              | Fourth quarter |  |      | 3.188 |     |  |   | 2.188 | 

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, 2000, the Company had
repurchased 170,500 shares at a cost of $434,400.

Holders

As of December 1, 2000, the Company had 329 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.

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ITEM 6. SELECTED FINANCIAL DATA

|                                           |                                                                                                        |  |                          |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|------------------------------------------ | ------------------------------------------------------------------------------------------------------ |  | ------------------------ | ---------- | ---- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- |  |  | - | ---------- | 
|                                           |                                                                                                        |  | Year Ended September 30,
|                                           |                                                                                                        |  |                         
|                                           |                                                                                                        |  | 2000                     |            | 1999 |  | 1998 |            | 1997 |  | 1996
|                                           |                                                                                                        |  |                          |            |      |  |      |            |      |  |     
|Consolidated
Statement of
Operations Data:
|                                          
|                                          
|                                          
|                                          
|                                           | Net sales                                                                                              |  | $                        | 28,781,718 |      |  | $    | 22,308,000 |      |  | $    | 23,739,528 |  |  | $ | 22,866,674 |  |  | $ | 24,718,914 | 
|                                          
|                                          
|                                          
|                                          
|                                           | Net (loss) income                                                                                      |  |                          | (290,437   | )    |  |      | (1,614,387 | )    |  |      | 198,862    |  |  |   | 325,979    |  |  |   | 2,245,713  | 
|                                          
|                                          
|                                          
|                                          
|                                           | (Loss) earnings per
common share(1)                                                                    |  |                          | (0.05      | )    |  |      | (0.26      | )    |  |      | 0.03       |  |  |   | 0.05       |  |  |   | 0.36       | 
|                                          
|                                          
|                                          
|                                          
|                                           | (Loss) earnings per
common share
assuming dilution(2)                                                  |  |                          | (0.05      | )    |  |      | (0.26      | )    |  |      | 0.03       |  |  |   | 0.05       |  |  |   | 0.36       | 
|                                          
|                                          
|                                          
|                                          
|                                           | Weighted average
number of shares
outstanding during
the period (1)                                    |  |                          | 6,146,630  |      |  |      | 6,129,225  |      |  |      | 6,273,756  |  |  |   | 6,224,797  |  |  |   | 6,170,778  | 
|                                          
|                                          
|                                          
|                                          
|                                           | Weighted average
number of shares
and equivalents
outstanding during
the period,
assuming dilution (2) |  |                          | 6,146,630  |      |  |      | 6,129,225  |      |  |      | 6,289,872  |  |  |   | 6,295,073  |  |  |   | 6,286,049  | 
|                                          
|                                          
|                                          
|                                          
|Consolidated
Balance Sheet Data:          
|                                          
|                                          
|                                          
|                                          
|                                           | Working capital                                                                                        |  | $                        | 15,036,839 |      |  | $    | 15,736,047 |      |  | $    | 17,634,271 |  |  | $ | 17,588,576 |  |  | $ | 17,310,488 | 
|                                          
|                                          
|                                          
|                                          
|                                           | Total assets                                                                                           |  |                          | 24,365,873 |      |  |      | 20,455,869 |      |  |      | 22,319,507 |  |  |   | 22,971,493 |  |  |   | 22,277,856 | 
|                                          
|                                          
|                                          
|                                          
|                                           | Long-term liabilities                                                                                  |  |                          |           |      |  |      |           |      |  |      | 35,059     |  |  |   | 78,903     |  |  |   | 56,615     | 
|                                          
|                                          
|                                          
|                                          
|                                           | Stockholders equity                                                                                   |  |                          | 15,923,236 |      |  |      | 16,706,060 |      |  |      | 18,567,126 |  |  |   | 18,679,662 |  |  |   | 18,408,486 | 



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

9



---



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, 2000 (fiscal 2000), sales
of document production equipment increased 101% over the year ended September
30, 1999 (fiscal 1999), compared to a decrease of 15% in fiscal 1999 over the
year ended September 30, 1998 (fiscal 1998). The increase in fiscal 2000 arose
primarily from the increased North American sales of the Imaggiasystem. The
Company completed the sale of twenty-two Imaggiasystems in fiscal 2000,
compared to seven in fiscal 1999, and as of December 1, 2000, had an order
backlog of approximately $11.5 million for its Imaggiasystem, which it expects
to ship in fiscal 2001. The decrease in sales of document production equipment
in fiscal 1999 was due primarily to the strategic decision to limit sales of
its Imaggiaproduct, as well as lower Checktronicsales in Latin America and
Asia. For some time, the Company has held a dominant position in many of the
international markets in which its Checktronicequipment is sold. Demand for
the Checktronicproduct line has softened in these international markets and
revenues from this product line are now largely dependent on sales to emerging
markets such as Latin America, Asia and Africa. The present uncertain economic
environment in many of the countries within these emerging markets has limited
the Companys current opportunities to sell high-end capital equipment into
those regions.

Revenues from maintenance contracts, spare parts, supplies and consumable items
decreased 9% in fiscal 2000 over fiscal 1999, compared to a 1% decrease in
fiscal 1999 over fiscal 1998. The $1.4 million decrease in fiscal 2000 was due
to three evenly distributed factors. First, approximately a third of the
fiscal 2000 revenue decline was due to the impact of the stronger U.S. dollar
on the translation of foreign currency denominated sales. Second, approximately
a third of the fiscal 2000 revenue decline was due to the continued reduction
in maintenance and consumables revenue from Pacific Rim customers. The
remainder of the fiscal 2000 revenue decline was due to the reduction in
consumable revenues from Western European customers. The decrease in fiscal
1999 over fiscal 1998 was primarily due to a reduction in maintenance and
consumables revenue from Pacific Rim customers. The Company expects domestic
revenues from maintenance contracts, spare parts, supplies and consumable items
to increase in fiscal 2001 with the projected growth of the Imaggiaproduct
line, offsetting the projected decline in international maintenance and
consumable revenues.

The Companys gross margin percentage in fiscal 2000 was 51%, compared to 53%
in fiscal 1999 and 58% in fiscal 1998. The decreases in gross margin
percentage each year were primarily due to the shift in the product mix from
the Checktronicproduct line to the Imaggiaproduct line and the decreased
revenue from the sale of maintenance, spares and supplies. The Company
anticipates that its gross margin percentage in fiscal 2001 will be somewhat
lower than fiscal 2000 as revenue from the Imaggiaand Océ lines constitutes a
larger portion of the Companys total revenues.

Selling, general and administrative expenses increased $1.3 million in fiscal
2000, compared to fiscal 1999 and were flat in fiscal 1999 as compared to
fiscal 1998. The increase in fiscal 2000 was due to the increase in personnel
and associated expenses required to support the increase in total revenues.
The Company anticipates that its selling, general and administrative expenses
in fiscal 2001 may continue to increase to support the projected growth in
total revenues, but at a rate less than the projected total revenue rate of
growth.

Research and development expenses were flat in fiscal 2000, compared to fiscal
1999 and fiscal 1998.

Net interest income was $117,000 in fiscal 2000, compared to $114,000 in fiscal
1999 and $334,000 in fiscal 1998. The decrease in fiscal 1999 was due to lower
cash balances available for investment and lower interest rates.

The Company recorded an income tax benefit of 37% in fiscal 2000, compared to
an income tax benefit of 17% in fiscal 1999 and an income tax expense of 33% in
fiscal 1998. The fiscal 2000 income tax benefit reflects the recording of
approximately $174,000 in deferred tax assets from the net operating losses and
tax credits generated in fiscal 2000. The 1999 income tax benefit reflects the
recording of approximately $261,000 in deferred tax assets from the net
operating losses and tax credits generated in fiscal 1999. Despite the
reported cumulative net loss for fiscal 2000, the Company believes recorded net
deferred tax assets are more likely than not to be recoverable, based upon its
estimates of future sources of taxable income and the expected timing of
temporary difference reversals. The Company believes it will generate
sufficient future taxable income to recover its net deferred tax assets from
increased sales of its Imaggiaproduct line, sales of the Océ product line and
continued sales of maintenance, spares and supplies. Further information about
income taxes is provided in Note B to the consolidated financial statements.

The net loss for fiscal 2000 amounted to $0.05 per share, compared to a net
loss of $0.26 per share in fiscal 1999 and net income of $0.03 per share in
fiscal 1998. The improvement in the net loss in fiscal 2000 was due to the
increase in document production systems revenue, offset by the effect of
reduced gross margins, increased selling, general and administrative expenses,
and the unfavorable effects of foreign currency exchange rate fluctuations.
The net loss in fiscal 1999 was primarily due to the decrease in

10



---



the level of
document production systems revenue, the effect of reduced gross margins, and
the unfavorable effects of foreign currency exchange rate fluctuations.

Market Risk

The Company presently has three foreign subsidiaries, located in England,
France and Australia, does business in 53 countries, and generates
approximately 44% of its revenue 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 these markets.

The Company experiences foreign currency gains and loss, which are reflected in
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 loss arising from this was $293,000 in fiscal 2000, compared to a
loss of $120,000 in fiscal 1999 and a gain of $132,000 in fiscal 1998. 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 $7,006,000 and
$8,443,000 at September 30, 2000 and 1999, respectively, translated into U.S.
dollars using the year-end exchange rates. The potential loss value resulting
from a hypothetical 10% change in foreign currency exchange rates was not
material in 2000 and 1999. In fiscal 2000 the Company experienced
approximately $877,000 in reduced revenues due to the impact of the stronger
U.S. dollar on the translation of foreign currency denominated sales and a
reduction of approximately $414,000 in related gross profit. The impact of the
stronger U.S. dollar on the translation of foreign currency denominated sales
and related gross profit thereon was not material in 1999 and 1998.

Factors Affecting Results of Operations

The Company is continuing development of the Imaggiasystem, including
improving its overall reliability and robustness. The Company is using the
Gemini digital print technology, developed by Delphax, as the print engine for
the Imaggiasystem. 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 or that product development or warranty expenses will not
be higher than anticipated.

In January 2000, the Company accepted a three-year equipment and service
contract, valued at approximately $40.0 million, for its Imaggiasystem. The
contract value includes the sale of document production systems and related
equipment, maintenance, spare parts, supplies and consumable items for the
three-year period. Equipment deliveries under the contract began in the second
quarter of fiscal 2000, with delivery completion expected during the fourth
quarter of fiscal 2001. Achievement of the Companys future revenue plans
depends upon the successful completion of the three-year contract and continued
market acceptance of the Imaggiasystem.

During fiscal 2000, the Company affirmed its agreement with Océ Printing
Systems GmbH for worldwide exclusive rights to private label, sell and service
the PS75 MICR product. In addition, the Company obtained certain non-exclusive
rights to private label, sell and service other Océ high-performance sheet-fed
MICR and non-MICR printing systems. The Company anticipates that sales of the
Océproducts will comprise a larger portion of its document production systems
revenue in fiscal 2001.

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
change with minimal notice and affect the timing and size of orders. Because
the Companys operating expenses are based on anticipated revenue levels and a
high percentage of the Companys operating costs are relatively fixed,
variations in the timing of revenue recognition could result in significant
fluctuations in operating results from period to period.

Euro Conversion

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

11



---



Revenue Recognition

On December 3, 1999, the Securities and Exchange Commission issued SEC Staff
Accounting Bulletin Number 101 Revenue Recognition in Financial Statements(SAB
101). SAB 101 summarizes certain of the staffs views on applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB 101 will be effective for the Company in the fourth quarter of fiscal 2001.
The Company is in the process of determining the impact of this Bulletin.

Liquidity and Capital Resources

Working capital was $15.0 million at September 30, 2000, compared to $15.7
million at September 30, 1999. The decline is primarily due to an increase in
accounts receivable and work-in-progress inventory, which was more than offset
by increases in accounts payable and deferred revenue. The Companys inventory
levels increased from $10.5 million at September 30, 1999, to $11.8 million at
September 30, 2000, primarily due to an increase in Imaggiarelated inventory.
Cash and short-term investments amounted to $3.2 million at September 30, 2000,
compared to $3.0 million at September 30, 1999. Deferred revenue increased
from $448,000 as of September 30, 1999, to $3,316,000 as of September 30, 2000,
primarily due to contractually agreed billing in advance of equipment shipment
to one customer. Stockholders equity was $15.9 million at September 30, 2000,
compared to $16.7 million at September 30, 1999. In September 1998, the
Company announced a stock repurchase program of up to 500,000 shares. At
September 30, 2000, the Company had repurchased 170,500 shares at a cost of
$434,000. Stockholders equity was also affected in 2000 by a negative change
of $785,000 in the foreign currency adjustment, arising from the translation of
the assets and liabilities of the Companys subsidiaries from their functional
currencies to U.S. dollars.

The Company had no long-term debt as of September 30, 2000 and 1999. The
Company maintains a $2.5 million unsecured bank line of credit. The line of
credit agreement places certain restrictions on the Company including, among
others, requirements as to maintenance for minimum levels of tangible net
worth. As of September 30, 2000, the entire line was unused, and the Company
was granted a compliance waiver with respect to the total liabilities to
tangible net worth covenant as of that date. The credit agreement expires
April 30, 2001, and the Company expects to negotiate a new bank line of credit.
The Company believes that its current capital resources, unused financing
source, and anticipated level of internally generated funds will be sufficient
to fund its working capital requirements in fiscal 2001.

As of September 30, 2000, the Company had committed to purchase certain leased
office furniture and equipment from the lessor for approximately $61,000.

Cautionary Statement

Statements included in this Managements Discussion and Analysis of Financial
Condition and Results of Operations, in the Companys Annual Report, 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 sentence of the second paragraph under the
subheading Market Risk concerning unrealized gains or losses from foreign
operations, and (ii) the last sentence of the second 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 affect the Companys actual results and could cause the Companys
actual financial performance to differ materially from that expressed in any
forward-looking statement.

12



---



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.




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, 2001, 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, 2001, 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, 2001, and filed with the Securities and
Exchange Commission.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

13



---



ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

Financial Statements

The following consolidated financial statements of Check Technology Corporation
and subsidiaries are submitted in a separate financial statement section of
this report.

|                                                                                                  |  |      |    | 
|------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|Description                                                                                       |  | Page
|                                                                                                  |  |     
|Report of Independent Auditors                                                                    |  |      | 19 | 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Consolidated Balance SheetsSeptember 30, 2000 and 1999                                           |  |      | 20 | 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Consolidated Statements of OperationsThe years ended September 30, 2000, 1999 and 1998           |  |      | 22 | 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Consolidated Statements of Stockholders EquityThe years ended September 30, 2000, 1999 and 1998 |  |      | 23 | 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Consolidated Statements of Cash FlowsThe years ended September 30, 2000, 1999 and 1998           |  |      | 24 | 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Notes to Consolidated Financial StatementsSeptember 30, 2000                                     |  |      | 25 | 

Financial Statement Schedules

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

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

Reports on Form 8-K.

The Company did not file any reports on Form 8-K during the three months ended September 30, 2000.

Exhibits

|       |      |             |  |                                                                |  |                                                                        
|------ | ---- | ----------- |  | -------------------------------------------------------------- |  | -----------------------------------------------------------------------
|Number |      | Description |  | Page or Incorporated by Reference From                        
|       |      |             |  |                                                               
|       | 3.1  |             |  | Restated Articles of Incorporation                             |  | Exhibit 3.1 to Form 10-K for fiscal year ended
September 30, 1987      
|      
|      
|      
|      
|       | 3.2  |             |  | Amended Bylaws                                                 |  | Exhibit 3.2 to Form 10-K for fiscal year ended
September 30, 1994      
|      
|      
|      
|      
|       | 4.1  |             |  | Specimen of the Companys
Common Stock Certificates            |  | Exhibit 4(b) to Registration Statement on
Form S-1 (No. 2-97193)       
|      
|      
|      
|      
|       | 4.2  |             |  | Statement of Rights and Preferences
of Capital Stock           |  | Exhibit A to Current Report on Form 8-K dated
May 15, 1990             
|      
|      
|      
|      
|       | 10.1 |             |  | Lease for Offices in Crawley, England
Bank                     |  | Exhibit 10.9 to Form 10-K for the eight
months ended September 30, 1985
|      
|      
|      
|      
|       | 10.2 |             |  | Line of Credit Agreement,
as amended, effective March 31, 2000 |  | Exhibit 10.2 filed herewith                                            

14



---



|       |      |             |  |                                                                                                                                                                                                                                                                   |  |                                                                    
|------ | ---- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------
|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 the
Company has entered into with officers and directors. Such agreement recites the
provisions of Minnesota Statutes Section
302A.521 and the Company Bylaw provisions
(which are substantially identical to the
statute) |  | Exhibit 10.10 to Form 10-K for fiscal year
ended September 30, 1987
|      
|      
|      
|      
|      
|      
|      
|      
|       | 10.5 |             |  | Employment Agreement as of
October 1, 2000, between the Company and Jay A. Herman                                                                                                                                                                                 |  | Exhibit 10.5 filed herewith                                        
|      
|      
|      
|      
|       | 10.6 |             |  | 1991 Stock Plan                                                                                                                                                                                                                                                   |  | Exhibit 10.10 to Form 10-K for fiscal year
ended September 30, 1991
|      
|      
|      
|      
|       | 10.7 |             |  | Lease of Facilities in Minnetonka, Minnesota                                                                                                                                                                                                                      |  | Exhibit 10.9 to Form 10-K for fiscal year
ended September 30, 1994 
|      
|      
|      
|      
|       | 10.8 |             |  | 1997 Stock Plan                                                                                                                                                                                                                                                   |  | Exhibit 10.8 to Form 10-K for fiscal year
ended September 30, 1997 
|      
|      
|      
|      
|       | 10.9 |             |  | Executive Loan Program as Amended                                                                                                                                                                                                                                 |  | Exhibit 10.9 to Form 10-K for fiscal year
ended September 30, 1997 
|      
|      
|      
|      
|       | 21   |             |  | List of Subsidiaries                                                                                                                                                                                                                                              |  | Exhibit 21 filed herewith                                          
|      
|      
|      
|      
|       | 23.1 |             |  | Consent of Independent Auditors                                                                                                                                                                                                                                   |  | Exhibit 23.1 filed herewith                                        
|      
|      
|      
|      
|       | 27   |             |  | Financial Data Schedule                                                                                                                                                                                                                                           |  | Exhibit 27 filed herewith                                          

15



---



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 5, 2000 |  |  | 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.

|                          |  |                                            |  |                  
|------------------------- |  | ------------------------------------------ |  | -----------------
|SIGNATURE                 |  | TITLE                                      |  | DATE             
|                          |  |                                            |  |                  
|                          |  | President, Director                        |  |                  
|/s/ Jay A. Herman         |  | (Principal Executive Officer)              |  | December 5, 2000 
|                          |  |                                            |  |                  
|Jay A. Herman             |  |                                           
|                         
|                         
|                         
|                         
|                          |  | Vice President, Chief Financial Officer    |  |                  
|/s/ Robert M. Barniskis   |  | (Principal Financial & Accounting Officer) |  | December, 5, 2000
|                          |  |                                            |  |                  
|Robert M. Barniskis       |  |                                           
|                         
|                         
|                         
|                         
|                          |  |                                            |  |                  
|                         
|                         
|                         
|                         
|                         
|                         
|                         
|                         
|                         
|                         
|                         
|                         
|/s/ Gary Holland          |  | Director                                   |  | December 5, 2000 
|                          |  |                                            |  |                  
|Gary Holland             
|                         
|                         
|                         
|                         
|                          |  |                                            |  |                  
|                         
|                         
|                         
|                         
|                         
|                         
|                         
|                         
|                         
|                         
|                         
|                         
|/s/ Thomas H. Garrett III |  | Director                                   |  | December 5, 2000 
|                          |  |                                            |  |                  
|Thomas H. Garrett III    
|                         
|                         
|                         
|                         
|                          |  |                                            |  |                  
|                         
|                         
|                         
|                         
|                         
|                         
|                         
|                         
|                         
|                         
|                         
|                         
|/s/ R. Stephen Armstrong  |  | Director                                   |  | December 5, 2000 
|                          |  |                                            |  |                  
|R. Stephen Armstrong     

16



---



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, 2000

Check Technology Corporation

Minnetonka, Minnesota

17



---



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, 2000 and 1999

Consolidated Statements of Operations  The years ended September 30, 2000, 1999 and 1998

Consolidated Statements of Stockholders Equity The years ended September 30, 2000, 1999 and 1998

Consolidated Statements of Cash Flows  The years ended September 30, 2000, 1999 and 1998

Notes to Consolidated Financial Statements  September 30, 2000

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

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

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

18



---



Board of Directors
Check Technology Corporation

We have audited the accompanying consolidated balance sheets of Check
Technology Corporation and subsidiaries as of September 30, 2000 and 1999, and
the related consolidated statements of operations, stockholders equity and
cash flows for each of the three years in the period ended September 30, 2000.
Our audits also included the financial statement schedule listed in the Index
at Item 14(a). These financial statements and schedule are the responsibility
of the Companys management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Check
Technology Corporation and subsidiaries at September 30, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 2000, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

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

Minneapolis, Minnesota
November 22, 2000

19



---



CONSOLIDATED BALANCE SHEETS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

|                       |                                                                                                                                  |                                   |            |               |           |      |            |           |           | 
|---------------------- | -------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ---------- | ------------- | --------- | ---- | ---------- | --------- | --------- | 
|                       |                                                                                                                                  |                                   |            | September 30,
|                       |                                                                                                                                  |                                   |            |              
|                       |                                                                                                                                  |                                   |            | 2000          |           | 1999
|                       |                                                                                                                                  |                                   |            |               |           |     
|ASSETS                
|                      
|                      
|                      
|                      
|CURRENT ASSETS        
|                      
|                      
|                      
|                      
|                       | Cash and cash equivalents                                                                                                        |                                   | $          | 3,043,754     |           |      | $          | 2,882,618 |          
|                      
|                      
|                      
|                      
|                       | Short-term investments                                                                                                           |                                   |            | 108,760       |           |      |            | 164,380   |          
|                      
|                      
|                      
|                      
|                       | Accounts receivable, less allowance for doubtful
accounts of $51,697 and $50,000 as of
September 30, 2000 and 1999, respectively |                                   |            | 5,398,986     |           |      |            | 3,542,350 |          
|                      
|                      
|                      
|                      
|                       | Inventory:                                                                                                                      
|                      
|                      
|                      
|                      
|                       |                                                                                                                                  | Raw materials and component parts |            |               | 6,318,199 |      |            |           | 6,128,748 | 
|                      
|                      
|                      
|                      
|                       |                                                                                                                                  | Work-in-progress                  |            |               | 1,217,165 |      |            |           | 107,622   | 
|                      
|                      
|                      
|                      
|                       |                                                                                                                                  | Finished goods                    |            |               | 4,269,391 |      |            |           | 4,218,621 | 
|                       |                                                                                                                                  |                                   |            |               |           |      |            |          
|                       |                                                                                                                                  |                                   | 11,804,755 |               |           |      | 10,454,991 |          
|                      
|                      
|                      
|                      
|                       | Deferred income taxes                                                                                                            |                                   |            | 1,743,519     |           |      |            | 1,570,884 |          
|                      
|                      
|                      
|                      
|                       | Other current assets                                                                                                             |                                   |            | 1,379,702     |           |      |            | 870,633   |          
|                       |                                                                                                                                  |                                   |            |               |           |      |            |          
|TOTAL CURRENT ASSETS   |                                                                                                                                  |                                   | 23,479,476 |               |           |      | 19,485,856 |          
|                       |                                                                                                                                  |                                   |            |               |           |      |            |          
|EQUIPMENT AND FIXTURES
|                      
|                      
|                      
|                      
|                       | Machinery and equipment                                                                                                          |                                   |            | 1,983,899     |           |      |            | 2,005,512 |          
|                      
|                      
|                      
|                      
|                       | Furniture and fixtures                                                                                                           |                                   |            | 2,169,434     |           |      |            | 1,985,732 |          
|                      
|                      
|                      
|                      
|                       | Leasehold improvements                                                                                                           |                                   |            | 315,995       |           |      |            | 316,850   |          
|                       |                                                                                                                                  |                                   |            |               |           |      |            |          
|                       |                                                                                                                                  |                                   | 4,469,328  |               |           |      | 4,308,094  |          
|                      
|                      
|                      
|                      
|                       | Less accumulated depreciation and
amortization                                                                                   |                                   |            | 3,582,931     |           |      |            | 3,338,081 |          
|                       |                                                                                                                                  |                                   |            |               |           |      |            |          
|                       |                                                                                                                                  |                                   | 886,397    |               |           |      | 970,013    |          
|                       |                                                                                                                                  |                                   |            |               |           |      |            |          
|TOTAL ASSETS           |                                                                                                                                  | $                                 | 24,365,873 |               |           | $    | 20,455,869 |          
|                       |                                                                                                                                  |                                   |            |               |           |      |            |          

See notes to consolidated financial statements.

20



---



CONSOLIDATED BALANCE SHEETS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

| |                                            |                                                                                                 |                                                                         |            |               |         |      |            |            |         | 
| | ------------------------------------------ | ----------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ---------- | ------------- | ------- | ---- | ---------- | ---------- | ------- | 
| |                                            |                                                                                                 |                                                                         |            | September 30,
| |                                            |                                                                                                 |                                                                         |            |              
| |                                            |                                                                                                 |                                                                         |            | 2000          |         | 1999
| |                                            |                                                                                                 |                                                                         |            |               |         |     
| | LIABILITIES AND STOCKHOLDERS EQUITY      
|
|
|
|
| | CURRENT LIABILITIES                       
|
|
|
|
| |                                            | Accounts payable and accrued expenses                                                           |                                                                         | $          | 4,242,943     |         |      | $          | 2,533,952  |        
|
|
|
|
| |                                            | Employee compensation and related taxes                                                         |                                                                         |            | 868,362       |         |      |            | 553,185    |        
|
|
|
|
| |                                            | Income taxes payable                                                                            |                                                                         |            | 15,247        |         |      |            | 175,449    |        
|
|
|
|
| |                                            | Deferred revenue                                                                                |                                                                         |            | 3,316,085     |         |      |            | 448,335    |        
|
|
|
|
| |                                            | Current portion of capital lease obligations                                                    |                                                                         |            |              |         |      |            | 38,888     |        
| |                                            |                                                                                                 |                                                                         |            |               |         |      |           
| | TOTAL CURRENT LIABILITIES                  |                                                                                                 |                                                                         | 8,442,637  |               |         |      | 3,749,809  |           
| |                                            |                                                                                                 |                                                                         |            |               |         |      |           
| | TOTAL LIABILITIES                          |                                                                                                 |                                                                         | 8,442,637  |               |         |      | 3,749,809  |           
|
|
|
|
| | STOCKHOLDERS EQUITY                      
|
|
|
|
| |                                            | Common stock  par value $.10 per share  authorized
25,000,000 shares; issued and outstanding:
|
|
|
|
| |                                            |                                                                                                 | 6,190,978 and 6,154,157 as of September 30,
2000 and 1999, respectively |            |               | 619,098 |      |            |            | 615,416 | 
|
|
|
|
| |                                            | Additional paid-in capital                                                                      |                                                                         |            | 17,063,384    |         |      |            | 16,861,417 |        
|
|
|
|
| |                                            | Accumulated other comprehensive loss                                                            |                                                                         |            | (1,968,736    | )       |      |            | (1,184,070 | )      
|
|
|
|
| |                                            | Retained earnings                                                                               |                                                                         |            | 209,490       |         |      |            | 413,297    |        
| |                                            |                                                                                                 |                                                                         |            |               |         |      |           
| | TOTAL STOCKHOLDERS EQUITY                 |                                                                                                 |                                                                         | 15,923,236 |               |         |      | 16,706,060 |           
| |                                            |                                                                                                 |                                                                         |            |               |         |      |           
| | TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                 | $                                                                       | 24,365,873 |               |         | $    | 20,455,869 |           
| |                                            |                                                                                                 |                                                                         |            |               |         |      |            |            |        

See notes to consolidated financial statements.

21



---



CONSOLIDATED STATEMENTS OF OPERATIONS
CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

|                                                                                                   |                                     |   |            |            |      |   |                          |            |  |   |            |            | 
|-------------------------------------------------------------------------------------------------- | ----------------------------------- | - | ---------- | ---------- | ---- | - | ------------------------ | ---------- |  | - | ---------- | ---------- | 
|                                                                                                   |                                     |   |            |            |      |   | Year Ended September 30,
|                                                                                                   |                                     |   |            |            |      |   |                         
|                                                                                                   |                                     |   | 2000       |            | 1999 |   | 1998                    
|                                                                                                   |                                     |   |            |            |      |   |                         
|Sales:                                                                                            
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Printing equipment                  |   | $          | 15,625,836 |      |   | $                        | 7,790,870  |  |   | $          | 9,145,553  | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Maintenance, spares and supplies    |   |            | 13,155,882 |      |   |                          | 14,517,130 |  |   |            | 14,593,975 | 
|                                                                                                   |                                     |   |            |            |      |   |                          |            |  |   |            |            | 
|NET SALES                                                                                          |                                     |   | 28,781,718 |            |      |   | 22,308,000               |            |  |   | 23,739,528 |           
|                                                                                                   |                                     |   |            |            |      |   |                          |            |  |   |            |            | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Costs and Expenses:                                                                               
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Cost of sales                       |   |            | 14,106,518 |      |   |                          | 10,583,208 |  |   |            | 10,078,505 | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Selling, general and administrative |   |            | 12,235,438 |      |   |                          | 10,949,967 |  |   |            | 11,101,002 | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Research and development            |   |            | 2,722,404  |      |   |                          | 2,709,716  |  |   |            | 2,728,547  | 
|                                                                                                   |                                     |   |            |            |      |   |                          |            |  |   |            |            | 
|                                                                                                   |                                     |   | 29,064,360 |            |      |   | 24,242,891               |            |  |   | 23,908,054 |           
|                                                                                                   |                                     |   |            |            |      |   |                          |            |  |   |            |            | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|(LOSS) FROM SYSTEM SALES AND SERVICE                                                               |                                     |   | (282,642   | )          |      |   | (1,934,891               | )          |  |   | (168,526   | )         
|Interest expense                                                                                   |                                     |   | 8,214      |            |      |   | 10,900                   |            |  |   | 18,910     |           
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Interest (income)                                                                                  |                                     |   | (125,243   | )          |      |   | (124,469                 | )          |  |   | (353,307   | )         
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Unrealized exchange loss (gain)                                                                    |                                     |   | 292,824    |            |      |   | 120,065                  |            |  |   | (131,991   | )         
|                                                                                                   |                                     |   |            |            |      |   |                          |            |  |   |            |            | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|(LOSS) INCOME BEFORE TAXES                                                                         |                                     |   | (458,437   | )          |      |   | (1,941,387               | )          |  |   | 297,862    |           
|Income tax (benefit) expense                                                                       |                                     |   | (168,000   | )          |      |   | (327,000                 | )          |  |   | 99,000     |           
|                                                                                                   |                                     |   |            |            |      |   |                          |            |  |   |            |            | 
|NET (LOSS) INCOME                                                                                  |                                     | $ | (290,437   | )          |      | $ | (1,614,387               | )          |  | $ | 198,862    |           
|                                                                                                   |                                     |   |            |            |      |   |                          |            |  |   |            |            | 
|Basic and diluted (loss) earnings per common share                                                 |                                     | $ | (0.05      | )          |      | $ | (0.26                    | )          |  | $ | 0.03       |           
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Weighted average number of shares and equivalents
outstanding during the period                    |                                     |   | 6,146,630  |            |      |   | 6,129,225                |            |  |   | 6,273,756  |           
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Weighted average number of shares and equivalents
outstanding during the period, assuming dilution |                                     |   | 6,146,630  |            |      |   | 6,129,225                |            |  |   | 6,289,872  |           
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|See notes to consolidated financial statements                                                    

22



---



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

|                                                            |                        |  |              |   |         |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |            |  
|----------------------------------------------------------- | ---------------------- |  | ------------ | - | ------- | - | ------------- | - | -------- | - | ---------- | - | ----- | - | ----------- | -------- | - | - | --------- | ---------- | - | - | ---------- | ---------- | -
|                                                            |                        |  |              |   |         |   |               |   |          |   |            |   |       |   | Accumulated
|                                                            |                        |  |              |   |         |   |               |   |          |   | Additional |   | Other
|                                                            |                        |  | Common Stock |   | Paid-in |   | Comprehensive |   | Retained
|                                                            |                        |  |              |   |         |   |               |   |          |   |            |   |      
|                                                            |                        |  | Shares       |   | Amount  |   | Capital       |   | Income   |   | Earnings   |   | Total
|                                                            |                        |  |              |   |         |   |               |   |          |   |            |   |      
|Balance, September 30, 1997                                 |                        |  | 6,338,135    |   |         | $ | 633,814       |   |          | $ | 17,151,182 |   |       | $ | (851,225    | )        |   | $ | 1,745,891 |            |   | $ | 18,679,662 |           
|                                                           
|                                                           
|                                                           
|                                                           
|Comprehensive income:                                      
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Net income             |  |              |  |         |   |               |  |          |   |            |  |       |   |             |         |   |   |           | 198,862    |   |   |            | 198,862    |  
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Translation adjustment |  |              |  |         |   |               |  |          |   |            |  |       |   |             | (66,631  | ) |   |           |           |   |   |            | (66,631    | )
|                                                            |                        |  |              |   |         |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           
|                                                           
|                                                           
|                                                           
|                                                           
|Total comprehensive income                                  |                        |  |              |   |         |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   | 132,231    |           
|                                                            |                        |  |              |   |         |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           
|                                                           
|                                                           
|                                                           
|                                                           
|Exercise of stock options,
Including tax benefit of $41,491 |                        |  | 15,000       |   |         |   | 1,500         |   |          |   | (5,491     | ) |       |   |            |          |   |   |          |            |   |   | (3,991     | )         
|                                                           
|                                                           
|                                                           
|                                                           
|Purchase of stock                                           |                        |  | (153,590     | ) |         |   | (15,359       | ) |          |   | (6,464     | ) |       |   |            |          |   |   | (371,842  | )          |   |   | (393,665   | )         
|                                                           
|                                                           
|                                                           
|                                                           
|Vesting of restricted stock                                 |                        |  |             |   |         |   |              |   |          |   |           |   |       |   |            |          |   |   | 146,986   |            |   |   | 146,986    |           
|                                                           
|                                                           
|                                                           
|                                                           
|Cancellation of restricted stock                            |                        |  | (21,425      | ) |         |   | (2,143        | ) |          |   | (206,745   | ) |       |   |            |          |   |   | 208,888   |            |   |   |           |           
|                                                           
|                                                           
|                                                           
|                                                           
|Payment, note receivable                                    |                        |  |             |   |         |   |              |   |          |   | 5,903      |   |       |   |            |          |   |   |          |            |   |   | 5,903      |           
|                                                            |                        |  |              |   |         |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           
|Balance, September 30, 1998                                 |                        |  | 6,178,120    |   |         |   | 617,812       |   |          |   | 16,938,385 |   |       |   | (917,856    | )        |   |   | 1,928,785 |            |   |   | 18,567,126 |           
|                                                           
|                                                           
|                                                           
|                                                           
|Comprehensive income:                                      
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Net loss               |  |              |  |         |   |               |  |          |   |            |  |       |   |             |         |   |   |           | (1,614,387 | ) |   |            | (1,614,387 | )
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Translation adjustment |  |              |  |         |   |               |  |          |   |            |  |       |   |             | (266,214 | ) |   |           |           |   |   |            | (266,214   | )
|                                                            |                        |  |              |   |         |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           
|                                                           
|                                                           
|                                                           
|                                                           
|Total comprehensive loss                                    |                        |  |              |   |         |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   | (1,880,601 | )         
|                                                            |                        |  |              |   |         |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           
|                                                           
|                                                           
|                                                           
|                                                           
|Exercise of stock options,
including tax benefit of $26,649 |                        |  | 3,917        |   |         |   | 392           |   |          |   | (23,933    | ) |       |   |            |          |   |   |          |            |   |   | (23,541    | )         
|                                                           
|                                                           
|                                                           
|                                                           
|Purchase of stock                                           |                        |  | (21,880      | ) |         |   | (2,188        | ) |          |   | (9,934     | ) |       |   |            |          |   |   | (45,476   | )          |   |   | (57,598    | )         
|                                                           
|                                                           
|                                                           
|                                                           
|Vesting of restricted stock                                 |                        |  |             |   |         |   |              |   |          |   |           |   |       |   |            |          |   |   | 86,625    |            |   |   | 86,625     |           
|                                                           
|                                                           
|                                                           
|                                                           
|Cancellation of restricted stock                            |                        |  | (6,000       | ) |         |   | (600          | ) |          |   | (57,150    | ) |       |   |            |          |   |   | 57,750    |            |   |   |           |           
|                                                           
|                                                           
|                                                           
|                                                           
|Payment, note receivable                                    |                        |  |             |   |         |   |              |   |          |   | 14,049     |   |       |   |            |          |   |   |          |            |   |   | 14,049     |           
|                                                            |                        |  |              |   |         |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           
|Balance, September 30, 1999                                 |                        |  | 6,154,157    |   |         |   | 615,416       |   |          |   | 16,861,417 |   |       |   | (1,184,070  | )        |   |   | 413,297   |            |   |   | 16,706,060 |           
|                                                           
|                                                           
|                                                           
|                                                           
|Comprehensive income:                                      
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Net loss               |  |              |  |         |   |               |  |          |   |            |  |       |   |             |          |   |   |           | (290,437   | ) |   |            | (290,437   | )
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Translation adjustment |  |              |  |         |   |               |  |          |   |            |  |       |   |             | (784,666 | ) |   |           |           |   |   |            | (784,666   | )
|                                                            |                        |  |              |   |         |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           
|                                                           
|                                                           
|                                                           
|                                                           
|Total comprehensive loss                                    |                        |  |              |   |         |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   | (1,075,103 | )         
|                                                            |                        |  |              |   |         |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           
|                                                           
|                                                           
|                                                           
|                                                           
|Exercise of stock options,
including tax benefit of $13,761 |                        |  | 37,983       |   |         |   | 3,798         |   |          |   | 115,160    |   |       |   |            |          |   |   |          |            |   |   | 118,958    |           
|                                                           
|                                                           
|                                                           
|                                                           
|Purchase of stock                                           |                        |  | (1,162       | ) |         |   | (116          | ) |          |   | (3,007     | ) |       |   |            |          |   |   |          |            |   |   | (3,123     | )         
|                                                           
|                                                           
|                                                           
|                                                           
|Vesting of restricted stock                                 |                        |  |             |   |         |   |              |   |          |   |           |   |       |   |            |          |   |   | 86,630    |            |   |   | 86,630     |           
|                                                           
|                                                           
|                                                           
|                                                           
|Forgiveness of executive officer
note                       |                        |  |             |   |         |   |              |   |          |   | 89,814     |   |       |   |            |          |   |   |          |            |   |   | 89,814     |           
|                                                            |                        |  |              |   |         |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           
|Balance, September 30, 2000                                 |                        |  | 6,190,978    |   |         | $ | 619,098       |   |          | $ | 17,063,384 |   |       | $ | (1,968,736  | )        |   | $ | 209,490   |            |   | $ | 15,923,236 |           
|                                                            |                        |  |              |   |         |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|See notes to consolidated
financial statements             

23



---



CONSOLIDATED STATEMENTS OF CASH FLOWS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

|                                                                                         |                                       |   |                          |            |      |   |            |            |   |   |            |            |  
|---------------------------------------------------------------------------------------- | ------------------------------------- | - | ------------------------ | ---------- | ---- | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                                                                         |                                       |   | Year Ended September 30,
|                                                                                         |                                       |   |                         
|                                                                                         |                                       |   | 2000                     |            | 1999 |   | 1998      
|                                                                                         |                                       |   |                          |            |      |   |           
|OPERATING ACTIVITIES                                                                    
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Net (loss) income                                                                        |                                       | $ | (290,437                 | )          |      | $ | (1,614,387 | )          |   | $ | 198,862    |           
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Depreciation and amortization         |   |                          | 388,145    |      |   |            | 364,261    |   |   |            | 369,059    |  
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Provision for bad debts               |   |                          | (1,862     | )    |   |            |           |   |   |            |           |  
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Forgiveness of executive officer note |   |                          | 89,814     |      |   |            |           |   |   |            |           |  
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Other                                 |   |                          | 71,313     |      |   |            | 91,434     |   |   |            | (46,328    | )
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Changes in operating assets and liabilities:                                            
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Accounts receivable                   |   |                          | (2,284,022 | )    |   |            | (197,755   | ) |   |            | 33,864     |  
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Inventory                             |   |                          | (1,494,726 | )    |   |            | (376,655   | ) |   |            | (2,226,009 | )
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Other current assets                  |   |                          | (889,700   | )    |   |            | (41,713    | ) |   |            | (660,347   | )
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Accounts payable and accrued expenses |   |                          | 2,070,076  |      |   |            | (2,399     | ) |   |            | (396,471   | )
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | Deferred revenue                      |   |                          | 2,884,708  |      |   |            | 60,148     |   |   |            | (67,055    | )
|                                                                                         |                                       |   |                          |            |      |   |            |            |   |   |            |           
|NET CASH PROVIDED BY (USED IN) OPERATING                                                
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | ACTIVITIES                            |   |                          | 543,309    |      |   |            | (1,717,066 | ) |   |            | (2,794,425 | )
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|INVESTING ACTIVITIES                                                                    
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Purchase of equipment and fixtures                                                       |                                       |   | (394,533                 | )          |      |   | (370,750   | )          |   |   | (246,498   | )         
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Proceeds from sale of equipment                                                          |                                       |   | 60,387                   |            |      |   | 9,193      |            |   |   | 53,236     |           
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Purchase of short-term investments                                                       |                                       |   | (718,519                 | )          |      |   | (1,634,700 | )          |   |   | (8,926,101 | )         
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Proceeds from sale of short-term investments                                             |                                       |   | 781,252                  |            |      |   | 4,068,501  |            |   |   | 11,907,089 |           
|                                                                                         |                                       |   |                          |            |      |   |            |            |   |   |            |           
|NET CASH (USED IN) PROVIDED BY INVESTING                                                
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | ACTIVITIES                            |   |                          | (271,413   | )    |   |            | 2,072,244  |   |   |            | 2,787,726  |  
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|FINANCING ACTIVITIES                                                                    
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Repurchase/issuance of common stock                                                      |                                       |   | 105,441                  |            |      |   | (138,889   | )          |   |   | (438,107   | )         
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Repayment of note receivable from stock sale                                             |                                       |   | 10,394                   |            |      |   | 14,049     |            |   |   | 5,903      |           
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Repayment of long-term debt and capital leases                                           |                                       |   | (36,156                  | )          |      |   | (12,673    | )          |   |   | (57,265    | )         
|                                                                                         |                                       |   |                          |            |      |   |            |            |   |   |            |           
|NET CASH PROVIDED BY (USED IN) FINANCING                                                
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | ACTIVITIES                            |   |                          | 79,679     |      |   |            | (137,513   | ) |   |            | (489,469   | )
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                  |                                       |   | (190,439                 | )          |      |   | (36,935    | )          |   |   | 32,455     |           
|                                                                                         |                                       |   |                          |            |      |   |            |            |   |   |            |           
|INCREASE (DECREASE) IN CASH AND EQUIVALENTS                                              |                                       |   | 161,136                  |            |      |   | 180,730    |            |   |   | (463,713   | )         
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|CASH AND CASH EQUIVALENTS AT                                                            
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | BEGINNING OF YEAR                     |   |                          | 2,882,618  |      |   |            | 2,701,888  |   |   |            | 3,165,601  |  
|                                                                                         |                                       |   |                          |            |      |   |            |            |   |   |            |           
|CASH AND CASH EQUIVALENTS AT                                                            
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                         | END OF YEAR                           |   | $                        | 3,043,754  |      |   | $          | 2,882,618  |   |   | $          | 2,701,888  |  
|                                                                                         |                                       |   |                          |            |      |   |            |            |   |   |            |           
|Supplemental Schedule                                                                   
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Forgiveness of executive officer note                                                    |                                       | $ | 89,814                   |            |      | $ |           |            |   | $ |           |           

See notes to consolidated financial statements.

24



---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 2000

NOTE A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

Use of Estimates: The preparation of financial statements, in conformity with
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. Depreciation is provided on the straight-line method over estimated
useful lives of 3 to 5 years for machinery and equipment and furniture and
fixtures and over 10 years for leasehold improvements. Amortization expense of
items under capital lease is included in depreciation expense.

Revenue Recognition: Revenue is recognized when systems are shipped or
services are rendered. Amounts billed to customers under maintenance contracts
are recorded as deferred revenue and recognized in income over the term of the
maintenance agreement. Customer billings in advance of system shipment are
recorded as deferred revenue and recognized upon shipment of the system.

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.

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.

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

25



---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 2000

NOTE A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Continued

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

|                                                                             |                        |  |           |   |      |  |           |   |  |  |           |        | 
|---------------------------------------------------------------------------- | ---------------------- |  | --------- | - | ---- |  | --------- | - |  |  | --------- | ------ | 
|                                                                             |                        |  | 2000      |   | 1999 |  | 1998     
|                                                                             |                        |  |           |   |      |  |          
|Denominator for basic earnings per share,
weighted average shares            |                        |  | 6,146,630 |   |      |  | 6,129,225 |   |  |  | 6,273,756 |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Effect of dilutive securities:                                              
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Employee stock options |  |           |  |      |  |           |  |  |  |           | 11,753 | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Employee stock grants  |  |           |  |      |  |           |  |  |  |           | 4,363  | 
|                                                                             |                        |  |           |   |      |  |           |   |  |  |           |       
|Dilutive potential common shares                                             |                        |  |          |   |      |  |          |   |  |  | 16,116    |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Denominator for diluted earnings per share,
adjusted weighted average shares |                        |  | 6,146,630 |   |      |  | 6,129,225 |   |  |  | 6,289,872 |       
|                                                                             |                        |  |           |   |      |  |           |   |  |  |           |       

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

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

Derivatives and Hedging Activities: In June 1998, The FASB issued Statement No.
133, Accounting for Derivatives and Similar Financial Instruments and Hedging
Activities. The Statement will significantly change the way companies account
for derivatives and hedging activities, including the following two elements:
(i) all derivatives will be measured at fair value and recognized in the
balance sheets as assets or liabilities, and (ii) derivatives meeting certain
criteria could be specifically designated as a hedge. The Statement is
effective for the Company in fiscal 2001, and the Company does not believe
adoption will have either a significant cumulative effect or a material impact
on current operating results.

Revenue Recognition in Financial Statements: On December 3, 1999, the
Securities and Exchange Commission issued SEC Staff Accounting Bulletin Number
101, Revenue Recognition in Financial Statements(SAB 101). SAB 101 summarizes
certain of the staffs views on applying generally accepted accounting
principles to revenue recognition in financial statements. SAB 101 will be
effective for the Company in the fourth quarter of fiscal 2001. The Company is
in the process of determining the impact of this Bulletin.

Reclassification: Certain items in the 1999 and 1998 consolidated financial
statements have been reclassified to conform to the 2000 presentation.

26



---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 2000

NOTE B  INCOME TAX

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

|                                  |  |                          |            |      |  |      |            |   |  |   |         | 
|--------------------------------- |  | ------------------------ | ---------- | ---- |  | ---- | ---------- | - |  | - | ------- | 
|                                  |  | Year Ended September 30,
|                                  |  |                         
|                                  |  | 2000                     |            | 1999 |  | 1998
|                                  |  |                          |            |      |  |     
|Domestic                          |  | $                        | 575,232    |      |  | $    | (1,573,280 | ) |  | $ | 122,423 | 
|Foreign                           |  |                          | (1,033,669 | )    |  |      | (368,107   | ) |  |   | 175,439 | 
|                                  |  |                          |            |      |  |      |            |   |  |   |         | 
|(Loss) income before income taxes |  | $                        | (458,437   | )    |  | $    | (1,941,387 | ) |  | $ | 297,862 | 
|                                  |  |                          |            |      |  |      |            |   |  |   |         | 

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

|                                   |         |   |                          |          |      |   |          |          |   |   |          |          |  
|---------------------------------- | ------- | - | ------------------------ | -------- | ---- | - | -------- | -------- | - | - | -------- | -------- | -
|                                   |         |   | Year Ended September 30,
|                                   |         |   |                         
|                                   |         |   | 2000                     |          | 1999 |   | 1998    
|                                   |         |   |                          |          |      |   |         
|Current:                          
|                                  
|                                  
|                                  
|                                  
|                                   | Federal |   | $                        |         |      |   | $        |         |   |   | $        |         |  
|                                  
|                                  
|                                  
|                                  
|                                   | State   |   |                          | 6,000    |      |   |          | (1,000   | ) |   |          | 10,000   |  
|                                  
|                                  
|                                  
|                                  
|                                   | Foreign |   |                          |         |      |   |          | (38,000  | ) |   |          | 347,000  |  
|                                   |         |   |                          |          |      |   |          |          |   |   |          |          |  
|                                   |         |   | 6,000                    |          |      |   | (39,000  | )        |   |   | 357,000  |         
|                                  
|                                  
|                                  
|                                  
|Deferred:                         
|                                  
|                                  
|                                  
|                                  
|                                   | Federal |   |                          | 145,000  |      |   |          | (293,000 | ) |   |          | 25,000   |  
|                                  
|                                  
|                                  
|                                  
|                                   | State   |   |                          | 14,000   |      |   |          | (29,000  | ) |   |          | 3,000    |  
|                                  
|                                  
|                                  
|                                  
|                                   | Foreign |   |                          | (333,000 | )    |   |          | 34,000   |   |   |          | (286,000 | )
|                                   |         |   |                          |          |      |   |          |          |   |   |          |          |  
|                                   |         |   | (174,000                 | )        |      |   | (288,000 | )        |   |   | (258,000 | )       
|                                  
|                                  
|                                  
|                                  
|Total income tax (benefit) expense |         | $ | (168,000                 | )        |      | $ | (327,000 | )        |   | $ | 99,000   |         
|                                   |         |   |                          |          |      |   |          |          |   |   |          |          |  

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

|                                         |  |  |                          |          |      |  |      |          |   |  |   |         |  
|---------------------------------------- |  |  | ------------------------ | -------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                         |  |  | Year Ended September 30,
|                                         |  |  |                         
|                                         |  |  | 2000                     |          | 1999 |  | 1998
|                                         |  |  |                          |          |      |  |     
|Statutory rate applied to pre-tax income |  |  | $                        | (156,000 | )    |  | $    | (660,000 | ) |  | $ | 101,000 |  
|                                        
|                                        
|                                        
|                                        
|Tax credits                              |  |  |                          | (72,000  | )    |  |      |         |   |  |   |        |  
|                                        
|                                        
|                                        
|                                        
|Change in valuation allowance            |  |  |                          | 36,000   |      |  |      | 258,000  |   |  |   |        |  
|                                        
|                                        
|                                        
|                                        
|Other                                    |  |  |                          | 24,000   |      |  |      | 75,000   |   |  |   | (2,000  | )
|                                         |  |  |                          |          |      |  |      |          |   |  |   |         |  
|Total income tax (benefit) expense       |  |  | $                        | (168,000 | )    |  | $    | (327,000 | ) |  | $ | 99,000  |  
|                                         |  |  |                          |          |      |  |      |          |   |  |   |         |  

27



---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 2000

NOTE B  INCOME TAX  Continued

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

|                          |                                                                   |   |               |           |      |   |           |           | 
|------------------------- | ----------------------------------------------------------------- | - | ------------- | --------- | ---- | - | --------- | --------- | 
|                          |                                                                   |   | September 30,
|                          |                                                                   |   |              
|                          |                                                                   |   | 2000          |           | 1999
|                          |                                                                   |   |               |           |     
|Deferred tax assets:     
|                         
|                         
|                         
|                         
|                          | Net operating loss                                                |   | $             | 1,513,000 |      |   | $         | 1,265,000 | 
|                         
|                         
|                         
|                         
|                          | Business credit carryforwards and
alternative minimum tax credits |   |               | 682,000   |      |   |           | 610,000   | 
|                         
|                         
|                         
|                         
|                          | Stock compensation                                                |   |               | 32,000    |      |   |           | 32,000    | 
|                         
|                         
|                         
|                         
|                          | Inventory valuation reserves                                      |   |               | 110,000   |      |   |           | 121,000   | 
|                         
|                         
|                         
|                         
|                          | Other domestic and foreign differences                            |   |               | 209,000   |      |   |           | 308,000   | 
|                          |                                                                   |   |               |           |      |   |           |           | 
|Gross deferred tax assets |                                                                   |   | 2,546,000     |           |      |   | 2,336,000 |          
|                         
|                         
|                         
|                         
|Valuation allowances      |                                                                   |   | (802,000      | )         |      |   | (766,000  | )        
|                          |                                                                   |   |               |           |      |   |           |           | 
|Net deferred tax assets   |                                                                   | $ | 1,744,000     |           |      | $ | 1,570,000 |          
|                          |                                                                   |   |               |           |      |   |           |           | 

At September 30, 2000, the Company has domestic tax loss carryforwards of
approximately $2,315,000, which expire in 2015, and foreign tax loss
carryforwards of approximately $1,743,000, which expire in 2005. In addition,
the Company has domestic investment tax credits and research and development
credit carryforwards of approximately $539,000, which are available to offset
future income tax. The credits expire in varying amounts through September
2019. Domestic alternative minimum tax credits of approximately $143,000 are
available to offset future income tax with no expiration date. These tax
benefits, together with future tax deductions from the reversal of temporary
differences, comprise the net deferred tax assets. Deferred tax assets have
been offset by a valuation allowance as deemed necessary based on the Companys
estimates of its future sources of taxable income and the expected timing of
temporary difference reversals. Despite the reported cumulative net loss for
fiscal 2000, 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.

Undistributed earnings of the Companys foreign subsidiaries amounted to
approximately $2,223,000 at September 30, 2000. Those earnings are considered
to be indefinitely reinvested and, accordingly, no provision for U.S. and state
income taxes has been provided thereon. Upon distribution of those earnings in
the form of dividends or otherwise, the Company would be subject to both U.S.
income taxes (subject to an adjustment for foreign tax credits) and withholding
taxes payable to the various foreign countries. Determination of the amount of
unrecognized deferred U.S. income tax liability is not practical because of the
complexities of the calculation.

Cash tax payments (receipts) for the years ended September 30, 2000, 1999 and
1998 were $57,500, $(29,000) and $653,000, respectively.

28



---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 2000

NOTE C  BUSINESS, OPERATIONS, AND GEOGRAPHIC INFORMATION

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

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

|                      |                |   |                               |            |      |   |            |           |  |   |            |           | 
|--------------------- | -------------- | - | ----------------------------- | ---------- | ---- | - | ---------- | --------- |  | - | ---------- | --------- | 
|                      |                |   | Year Ended September 30, 2000
|                      |                |   |                              
|                      |                |   | 2000                          |            | 1999 |   | 1998      
|                      |                |   |                               |            |      |   |           
|Total revenues (a):  
|                     
|                     
|                     
|                     
|                      | United States  |   | $                             | 16,328,127 |      |   | $          | 8,250,760 |  |   | $          | 9,057,847 | 
|                     
|                     
|                     
|                     
|                      | United Kingdom |   |                               | 6,602,508  |      |   |            | 8,058,088 |  |   |            | 7,581,151 | 
|                     
|                     
|                     
|                     
|                      | France         |   |                               | 4,133,805  |      |   |            | 4,060,672 |  |   |            | 4,972,730 | 
|                     
|                     
|                     
|                     
|                      | Australia      |   |                               | 1,717,278  |      |   |            | 1,938,480 |  |   |            | 2,127,800 | 
|                      |                |   |                               |            |      |   |            |           |  |   |            |           | 
|Consolidated revenues |                | $ | 28,781,718                    |            |      | $ | 22,308,000 |           |  | $ | 23,739,528 |          
|                      |                |   |                               |            |      |   |            |           |  |   |            |           | 

|                               |                |   |                    |         |      |   |         |         |  |   |         |         | 
|------------------------------ | -------------- | - | ------------------ | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                               |                |   | September 30, 2000
|                               |                |   |                   
|                               |                |   | 2000               |         | 1999 |   | 1998   
|                               |                |   |                    |         |      |   |        
|Long-lived assets:            
|                              
|                              
|                              
|                              
|                               | United States  |   | $                  | 684,185 |      |   | $       | 728,691 |  |   | $       | 709,520 | 
|                              
|                              
|                              
|                              
|                               | United Kingdom |   |                    | 98,543  |      |   |         | 91,866  |  |   |         | 101,862 | 
|                              
|                              
|                              
|                              
|                               | France         |   |                    | 25,254  |      |   |         | 31,594  |  |   |         | 43,061  | 
|                              
|                              
|                              
|                              
|                               | Australia      |   |                    | 78,415  |      |   |         | 117,862 |  |   |         | 113,471 | 
|                               |                |   |                    |         |      |   |         |         |  |   |         |         | 
|Consolidated long-lived assets |                | $ | 886,397            |         |      | $ | 970,013 |         |  | $ | 967,914 |        
|                               |                |   |                    |         |      |   |         |         |  |   |         |         | 



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

Export sales to customers were $2,963,000, $3,408,000 and $4,895,000 for the
years ended September 30, 2000, 1999 and 1998, respectively.

In January 2000, the Company accepted a three-year equipment and service
contract, valued at approximately $40.0 million, for its Imaggiasystem. The
contract value included the sale of document production systems and related
equipment, maintenance, spare parts, supplies and consumable items for the
three-year period. Equipment deliveries under the contract began in the second
quarter of fiscal 2000, with delivery completion expected during the fourth
quarter of fiscal 2001. In fiscal 2000, sales to this customer were
$9,265,000, or 32% of total sales for the year. At September 30, 2000,
accounts receivable from this customer totaled $1,059,000, or 20% of total
trade accounts receivable as of that date. In addition, as of September 30,
2000, the Company recorded deferred revenue of $2,932,000 related to this
customer. In fiscal 1999 and 1998, there were no sales to a single customer in
excess of 10% of total sales.

29



---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 2000

NOTE D  STOCK OPTIONS AND BENEFIT PLAN

During fiscal year 2000, 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 1995, an executive officer exercised stock
options for a $148,966 interest-bearing note, collateralized by the underlying
stock. During fiscal 2000, the Company converted the note to a stock option
grant valued at $225,000 to be earned and recognized as compensation expense
over a twelve-month period. For the fiscal year ended September 30, 2000,
$89,814 was recognized as selling, general and administrative expenses.

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

The 1986 Plan

At September 30, 2000, 1999 and 1998 there were no options outstanding under
the 1986 Plan, with 188,660 shares reserved for future grants.

The 1991 Plan

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

At September 30, 2000, 1999 and 1998, there were 140,709, 176,569 and 164,611
options, respectively, currently exercisable under the 1991 Plan at prices of
$4.38 to $9.63 per share. No options were granted under the 1991 Plan in 2000,
1999 or 1998; total compensation expense for stock-based compensation was
$86,630, $86,625 and $146,987 in each of the three years, respectively.

30



---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 2000

NOTE D  STOCK OPTIONS AND BENEFIT PLANContinued

The 1997 Plan

|                            |                   |  |            |          |             |  |           |         |          |   |          |      | 
|--------------------------- | ----------------- |  | ---------- | -------- | ----------- |  | --------- | ------- | -------- | - | -------- | ---- | 
|                            |                   |  |            |          |             |  |           |         |          |   | Weighted
|                            |                   |  | Shares     |          |             |  |           |         | Average 
|                            |                   |  | Reserved   |          |             |  |           |         | Exercise
|                            |                   |  | for Future |          | Options     |  | Price    
|                            |                   |  | Grants     |          | Outstanding |  | per Share
|                            |                   |  |            |          |             |  |          
|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     |     
|                           
|                           
|                           
|                           
|                            | Options granted   |  |            | (405,000 | )           |  |           | 405,000 |          |   |          | 2.62 | 
|                           
|                           
|                           
|                           
|                            | Options canceled  |  |            | 58,800   |             |  |           | (58,800 | )        |   |          | 3.20 | 
|                            |                   |  |            |          |             |  |           |         |          |   |          |     
|Balance, September 30, 1999 |                   |  | 316,300    |          |             |  | 433,700   |         |          |   | 3.00     |     
|                           
|                           
|                           
|                           
|                            | Options exercised |  |            |         |             |  |           | (20,283 | )        |   |          | 3.15 | 
|                           
|                           
|                           
|                           
|                            | Options granted   |  |            | (108,500 | )           |  |           | 108,500 |          |   |          | 2.77 | 
|                           
|                           
|                           
|                           
|                            | Options canceled  |  |            | 75,167   |             |  |           | (75,167 | )        |   |          | 2.78 | 
|                            |                   |  |            |          |             |  |           |         |          |   |          |     
|Balance, September 30, 2000 |                   |  | 282,967    |          |             |  | 446,750   |         |          | $ | 2.99     |     
|                            |                   |  |            |          |             |  |           |         |          |   |          |     

At September 30, 2000, 1999 and 1998, there were 70,767, 60,625 and 2,500
options, respectively, currently exercisable under the 1997 Plan, at prices of
$2.63 to $6.50 per share.

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

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

The fair value of each option grant is established on the date of grant using
the BlackScholes option pricing model with the following weighted average
assumptions for 2000, 1999 and 1998:

|                                |  |      |         |      |  |      |         |   |  |  |         |  
|------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                                |  | 2000 |         | 1999 |  | 1998
|                                |  |      |         |      |  |     
|Expected dividend yield         |  |      | 0       | %    |  |      | 0       | % |  |  | 0       | %
|                               
|                               
|                               
|                               
|Expected stock price volatility |  |      | 50      |      |  |      | 49      |   |  |  | 51      |  
|                               
|                               
|                               
|                               
|Risk-free interest rate         |  |      | 5.92    |      |  |      | 6.18    |   |  |  | 4.37    |  
|                               
|                               
|                               
|                               
|Expected life of options        |  |      | 7 years |      |  |      | 7 years |   |  |  | 7 years |  

31



---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 2000

NOTE D  STOCK OPTIONS AND BENEFIT PLANContinued

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

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options vesting periods. The Companys pro
forma net loss or income, and net loss or earnings per share, for each of the
three years ended September 30, 2000, 1999 and 1998, respectively, were as
follows:

|                                                               |  |                          |          |      |  |      |            |   |  |   |        | 
|-------------------------------------------------------------- |  | ------------------------ | -------- | ---- |  | ---- | ---------- | - |  | - | ------ | 
|                                                               |  | Year Ended September 30,
|                                                               |  |                         
|                                                               |  | 2000                     |          | 1999 |  | 1998
|                                                               |  |                          |          |      |  |     
|Net (loss) income, pro forma                                   |  | $                        | (400,180 | )    |  | $    | (1,830,483 | ) |  | $ | 83,046 | 
|                                                              
|                                                              
|                                                              
|                                                              
|(Loss) earnings per share, pro forma                           |  |                          | (0.07    | )    |  |      | (0.30      | ) |  |   | 0.01   | 
|                                                              
|                                                              
|                                                              
|                                                              
|Weighted average fair value of options
granted during the year |  |                          | 1.68     |      |  |      | 1.69       |   |  |   | 3.37   | 

The pro forma effect on net loss or income, and net loss or 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.

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

|                |                 |             |                     |               |                     |           |           |             |          |           |  |  |  |         |          |  |  |        |  |  | 
|--------------- | --------------- | ----------- | ------------------- | ------------- | ------------------- | --------- | --------- | ----------- | -------- | --------- |  |  |  | ------- | -------- |  |  | ------ |  |  | 
|                |                 |             | Options Outstanding |               | Options Exercisable
|                |                 |             |                     |               |                    
|                |                 |             |                     |               |                     |           | Weighted  |             | Weighted |           |  |  |  |         | Weighted
|                |                 |             |                     |               |                     |           | Average   |             | Average  |           |  |  |  |         | Average 
|                |                 |             |                     |               |                     |           | Remaining |             | Exercise |           |  |  |  |         | Exercise
|Range of        |                 | Number      |                     | Contractual   |                     | Price     |           | Number      |          | Price    
|Exercise Prices |                 | Outstanding |                     | Life in Years |                     | per Share |           | Outstanding |          | per Share
|                |                 |             |                     |               |                     |           |           |             |          |          
|                | $ 1.750 - 4.750 |             |                     | 444,084       |                     |           | 6.05      |             | $        | 2.92      |  |  |  | 76,601  |          |  |  | $ 3.63 | 
|               
|               
|               
|               
|                | 5.063 - 7.750   |             |                     | 107,000       |                     |           | 4.11      |             |          | 6.11      |  |  |  | 91,375  |          |  |  | 6.02   | 
|               
|               
|               
|               
|                | 8.125
- 9.625   |             |                     | 43,500        |                     |           | 4.22      |             |          | 9.31      |  |  |  | 43,500  |          |  |  | 9.31   | 
|                | $ 1.750 - 9.625 |             |                     | 594,584       |                     |           | 5.57      |             | $        | 3.96      |  |  |  | 211,476 |          |  |  | $ 5.83 | 

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 expense related to the plan was $119,811, $124,455 and
$106,594, for the years ended September 30, 2000, 1999 and 1998, respectively.

32



---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 2000

NOTE E  COMMITMENTS AND CONTINGENCIES

Building, equipment and automobile rentals under operating leases were
$1,235,598, $1,249,909 and $1,234,065 for the years ended September 30, 2000,
1999 and 1998, respectively. As of September 30, 2000, the Company had
committed to purchase certain leased office furniture and equipment from the
lessor for approximately $61,000.

The Company leases its corporate offices under a fifteen-year agreement
expiring on September 15, 2010. Annual rental under the lease is $418,000
increasing to $481,000 in the eleventh year and thereafter. The Company is
obligated to pay operating expenses and real estate taxes incurred by the
landlord. The Company has the right to terminate such lease at the end of the
tenth lease year, subject to a termination fee.

The Companys subsidiary in the United Kingdom leases office space under a
lease expiring in 2013. Annual rental under the lease is $189,000, 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
$9,176,672 and are due as follows: fiscal years ending September 30, 2001 
$991,295; 2002  $918,994; 2003  $875,957; 2004  $860,565; 2005 
$848,425; thereafter  $4,681,436.

In April 1999, the Company completed an agreement with Océ Printing Systems
GmbH for worldwide exclusive rights to private label sell and service the
PS75 MICR product. The Company guarantees to purchase a minimum quantity of
PS75 product. The Company is subject to a minimum commitment fee, contingent
on quantities sold, not to exceed DM 700,000.

NOTE F  LINE OF CREDIT AND NOTES PAYABLE

The Company has a $2,500,000 revolving line of credit with a bank. 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 and expires April 30, 2001.

The line of credit agreement places certain restrictions on the Company,
including, among others, requirements as to maintenance for minimum levels of
tangible net worth. As of September 30, 2000, the entire line was unused, and
the Company was granted a compliance waiver with respect to the total
liabilities to tangible net worth covenant as of that date.

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.

33



---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

September 30, 2000

NOTE G  SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

|                                  |  |               |           |          |  |         |           |              |  |   |            |   |  |   |           |  
|--------------------------------- |  | ------------- | --------- | -------- |  | ------- | --------- | ------------ |  | - | ---------- | - |  | - | --------- | -
|                                  |  | Quarter Ended
|                                  |  |              
|                                  |  | December 31   |           | March 31 |  | June 30 |           | September 30
|                                  |  |               |           |          |  |         |           |             
|2000                             
|                                 
|                                 
|                                 
|                                 
|Net sales                         |  | $             | 6,345,437 |          |  | $       | 6,864,600 |              |  | $ | 7,117,615  |   |  | $ | 8,454,066 |  
|                                 
|                                 
|                                 
|                                 
|Gross profit                      |  |               | 3,491,819 |          |  |         | 3,336,314 |              |  |   | 3,594,138  |   |  |   | 4,252,929 |  
|                                 
|                                 
|                                 
|                                 
|Net (loss) income                 |  |               | (119,855  | )        |  |         | (207,513  | )            |  |   | 131,471    |   |  |   | (94,540   | )
|                                 
|                                 
|                                 
|                                 
|Basic (loss) earnings per share   |  |               | (0.02     | )        |  |         | (0.03     | )            |  |   | 0.02       |   |  |   | (0.02     | )
|                                 
|                                 
|                                 
|                                 
|Diluted (loss) earnings per share |  |               | (0.02     | )        |  |         | (0.03     | )            |  |   | 0.02       |   |  |   | (0.02     | )
|                                 
|                                 
|                                 
|                                 
|1999                             
|                                 
|                                 
|                                 
|                                 
|Net sales                         |  |               | 5,246,543 |          |  |         | 5,320,200 |              |  |   | 4,219,751  |   |  |   | 7,521,506 |  
|                                 
|                                 
|                                 
|                                 
|Gross profit                      |  |               | 2,860,999 |          |  |         | 2,834,716 |              |  |   | 2,182,688  |   |  |   | 3,846,388 |  
|                                 
|                                 
|                                 
|                                 
|Net (loss) income                 |  |               | (319,635  | )        |  |         | (509,882  | )            |  |   | (1,215,085 | ) |  |   | 430,213   |  
|                                 
|                                 
|                                 
|                                 
|Basic (loss) earnings per share   |  |               | (0.05     | )        |  |         | (0.08     | )            |  |   | (0.20      | ) |  |   | 0.07      |  
|                                 
|                                 
|                                 
|                                 
|Diluted (loss) earnings per share |  |               | (0.05     | )        |  |         | (0.08     | )            |  |   | (0.20      | ) |  |   | 0.07      |  

34



---



SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

CHECK TECHNOLOGY CORPORATION AND SUBSIDIARIES

|    |  |                                                |  |            |         |            |  |            |        |              |  |            |  |         |   |   |         | 
|--- |  | ---------------------------------------------- |  | ---------- | ------- | ---------- |  | ---------- | ------ | ------------ |  | ---------- |  | ------- | - | - | ------- | 
|    |  |                                                |  | Balance at |         | Charged to |  | Charged to |        |              |  | Balance at
|    |  |                                                |  | Beginning  |         | Costs and  |  | Other      |        |              |  | End       
|    |  | Description                                    |  | of Period  |         | Expenses   |  | Accounts   |        | (Deductions) |  | of Period 
|    |  |                                                |  |            |         |            |  |            |        |              |  |           
|I.  |  | Allowance for doubtful accounts               
|   
|   
|   
|   
|    |  | Year ended September 30, 2000                  |  | $          | 50,000  |            |  |            | 1,697  |              |  | -          |  | -       |   | $ | 51,697  | 
|   
|   
|   
|   
|    |  | Year ended September 30, 1999                  |  | $          | 50,000  |            |  |            | -      |              |  | -          |  | -       |   | $ | 50,000  | 
|   
|   
|   
|   
|    |  | Year ended September 30, 1998                  |  | $          | 50,000  |            |  |            | -      |              |  | -          |  | -       |   | $ | 50,000  | 
|   
|   
|   
|   
|II. |  | Reserve for obsolete and slow
moving inventory
|   
|   
|   
|   
|    |  | Year ended September 30, 2000                  |  | $          | 480,000 |            |  |            | 62,000 |              |  | -          |  | (47,000 | ) | $ | 495,000 | 
|   
|   
|   
|   
|    |  | Year ended September 30, 1999                  |  | $          | 400,000 |            |  |            | 86,000 |              |  | -          |  | (6,000  | ) | $ | 480,000 | 
|   
|   
|   
|   
|    |  | Year ended September 30, 1998                  |  | $          | 360,000 |            |  |            | 56,000 |              |  | -          |  | (16,000 | ) | $ | 400,000 | 

35