SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

CHECKPOINT SYSTEMS, INC.
(Exact name of Registrant as specified in its Articles of Incorporation)

Yes

No

Yes

No

Yes

No

Large accelerated filer

Accelerated filer

Non-accelerated filer

Yes

No

2

Portions of the Registrant’s definitive proxy statement, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of our fiscal year, for our Annual Meeting of Shareholders, presently scheduled to be held on June 8, 2006, are incorporated by reference into Part III of this Form 10-K.

PART I

This Annual Report includes forward-looking statements that reflect our current expectations and projections about our future results, performance, prospects and opportunities. We have tried to identify these forward-looking statements by using words including “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “plan,” or similar expressions. Any such forward-looking statements may involve risk and uncertainties that could cause actual results to differ materially from historical and anticipated results.

For further information about these and other risks, uncertainties and factors, please review the disclosure included in this Annual Report under the caption “RISK FACTORS RELATED TO OUR BUSINESS.” Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Checkpoint Systems, Inc. is a multinational manufacturer and marketer of integrated system solutions for retail security, labeling and merchandising. We provide technology-driven integrated supply chain solutions to brand, track, and secure goods for retailers and consumer product manufacturers worldwide.

Retailers and manufacturers have become increasingly focused on identifying and protecting assets that are moving through the supply chain. To address this market opportunity, we have built the necessary infrastructure to be a single source for identification and shrink management solutions worldwide.

We are a leading provider of electronic article surveillance (EAS) systems and tags using radio frequency (RF) and electromagnetic (EM) technology, security source tagging, branding tags and labels for apparel, retail display systems (RDS), and hand-held labeling systems (HLS). Our labeling systems and services are designed to consolidate tag and label requirements to improve efficiency, reduce costs, and furnish value-added solutions for customers across many markets and industries. Applications for printed tags and labels include brand identification, automatic identification (auto-ID), retail security, and pricing and promotional labels. We have achieved substantial international growth, primarily through acquisitions, and now operate directly in 33 countries. Products are principally developed and manufactured in-house and sold through direct distribution and reseller channels.

COMPANY HISTORY

Founded in 1969, we were incorporated in Pennsylvania as a wholly-owned subsidiary of Logistics Industries Corporation (Logistics). In 1977, Logistics, pursuant to the terms of its merger into Lydall, Inc., distributed our common stock to Logistics’ shareholders as a dividend.

Historically, we have expanded our business both domestically and internationally through acquisitions, internal growth using wholly-owned subsidiaries, and the utilization of independent distributors. In 1993 and 1995, we completed two key acquisitions which gave us direct access into Western Europe. We acquired ID Systems International BV and ID Systems Europe BV in 1993 and Actron Group Limited in 1995. These companies engaged in the manufacture, distribution, and sale of EAS systems throughout Europe.

In December 1999, we acquired Meto AG, a German multinational corporation and a leading provider of value-added labeling solutions for article identification and security. The acquisition doubled our revenues and provided us with an increased breadth of product offerings and global reach.

In January 2001, we acquired A.W. Printing Inc., a Houston, Texas-based printer of tags, labels, and packaging material for the apparel industry.

In December 2005, Checkpoint announced a definitive agreement to sell its barcode systems business to SATO, a global leader in barcode printing, labeling, and Electronic Product Code (EPC)/Radio Frequency Identification (RFID) solutions. The sale of the businesses was completed in January 2006.

3

Our products and services are organized into three operating segments: security, labeling services, and retail merchandising. Each group offers an assortment of products and services designed to provide a comprehensive, single source solution to help retailers, manufacturers, and distributors identify, track, and protect their assets throughout the entire supply chain. Each segment and their respective products and services are described below.

SECURITY

Our largest business is retail security. Our Company’s diversified security product lines are designed to help retailers prevent inventory losses caused by theft (both by customers and employees) and reduce selling costs through lower staff requirements. Our products facilitate the open display of consumer goods, which allows retailers to maximize sales opportunities through impulse buying. Offering our own proprietary RF-EAS and EM-EAS technologies, we believe that we hold a significant share of worldwide EAS installations. EAS revenues accounted for 58%, 56%, and 59% of our 2005, 2004, and 2003 total revenues, respectively. Systems for closed-circuit television (CCTV), fire and intrusion, and access control also fall within the security business segment. For 2005, 2004, and 2003, the CCTV business represented 17%, 20%, and 16% of our revenues, respectively. No other product group in this segment accounted for as much as 10% of our revenues.

These broad and flexible product lines, marketed and serviced by our extensive sales and service organizations, have helped us emerge as a preferred supplier to premier retailers around the world. Retail security represents approximately 76% of our business.

Electronic Article Surveillance

EAS systems have been designed to act as a deterrent to control the problem of merchandise theft in retail stores and libraries. Our diversified product lines are designed to help reduce both customer and employee theft, reduce inventory shrinkage, and enable retailers to capitalize on consumer impulse buying by openly displaying high-margin and high-cost items.

We offer a wide variety of RF-EAS and EM-EAS solutions to meet the varied requirements of retail store configurations for multiple market segments worldwide. Our EAS systems are primarily comprised of sensors and deactivation units, which respond to or act upon our tags and labels. We also market an extensive line of reusable security tags that protect apparel items, as well as entertainment products. Under our source tagging program, tags can be embedded in products or packaging at the point-of-manufacture. Our EAS products are designed and built to comply with applicable Federal Communications Commission (FCC) and European Community (EC) regulations governing radio frequencies (RF), signal strengths, and other factors.

CCTV, Fire and Intrusion Systems

We offer a broad line of closed-circuit television products providing a high-value systems solution package for retail environments. Our video surveillance solutions, including digital video technology, address shoplifting and internal theft as well as customer and employee safety and security needs. The product line consists of fixed and high-speed pan/tilt/zoom camera systems, programmable switcher controls, time-lapse recording, and remote video surveillance.

Our fire and intrusion systems provide life safety and property protection, completing the line of loss prevention solutions. In addition to the system installations, we offer a US-based 24-hour Central Station Monitoring Service.

Access Control Systems

In 2005 Checkpoint signed an agreement to divest its Access Control business to better position the company for future growth in its core business segments. This business, which represented less than 1% of our revenues, was divested on December 31, 2005.

RETAIL MERCHANDISING

Retail merchandising includes hand-held label applicators and tags, promotional displays, and queuing systems. These traditional products broaden our reach among retailers. Many of the products in this business segment represent high-margin items with a high level of recurring sales of associated consumables such as labels. As a result of retailers introducing scanning, our HLS products are serving a declining market. Retail merchandising, which is focused on European and Asian markets represents approximately 13% of our business with no product group in this segment accounting for as much as 10% of our revenues.

4

Hand-held Labeling Systems

Hand-held labeling systems include a complete line of hand-held price marking and label application solutions, primarily sold to retailers. Sales of labels, consumables, and service generate a significant source of recurring revenues. As retail scanning becomes widespread, in-store retail price marking applications have continued to decline. Currently, our HLS products have a majority market share in Europe.

Retail Display Systems

Retail display systems include a wide range of products for customers in certain retail sectors, such as supermarkets and do-it-yourself (DIY), where high-quality signage and in-store price promotion are important. Product categories include traditional retail promotional systems for in-store communication and electronic graphics systems, and customer queing systems. These systems are no longer sold in the US as a result of the divesture to SATO.

LABELING SERVICES

Labeling services is our third largest business, generating approximately 11% of our revenues in 2005. All participants in the retail supply chain are concerned with maximizing efficiency. Reducing time-to-market requires refined production and logistics systems to ensure just-in-time delivery, as well as shorter development, design, and production cycles. Services range from full-color branding labels to tracking labels and, ultimately, fully-integrated labels that include an EAS or a RFID circuit. This integration is based on the critical objective of supporting the rapid delivery of goods to market while reducing losses, whether through misdirection, tracking failure, theft or counterfeiting, and to reduce labor costs by tagging and labeling products at the source. We support these objectives with our high-quality tag and label production, a global service bureau network (Check-Net®) of e-commerce-enabled capabilities, and EAS and RFID technologies. Increasingly, the market seeks to move toward more sophisticated tag solutions that incorporate RFID components that will automate many aspects of supply chain tracking and facilitate many new merchandising enhancements for suppliers and consumers. No product group in this segment accounted for as much as 10% of our revenues.

Check-Net® (Service Bureau)

We operate a global service bureau network of more than 25 locations worldwide which supplies customers with customized retail apparel tags and labels, typically to the manufacturing location. A service bureau imprints variable pricing and article identification data and barcoding information onto price and apparel branding tags.

Check-Net’s® web-enabled capabilities provide on-time, on-demand printing of custom labels with variable data. Our Check-Net® service bureau network is one of the most extensive in the industry, and its ability to offer integrated branding, barcode, and EAS security tags places it among just a handful of suppliers of this caliber in the world.

In addition to our own label integration and service bureau capabilities, we have strategic working relationships with other label integrators.

Intelligent Library Systems

We have established a product line of sophisticated RFID-based intelligent library solutions that offer strong features and benefits compared to competitive offerings. Our Intelligent Library System®, which was released in 1999, is currently installed in more than 150 libraries, primarily in the US.

RFID Tags and Labels

The company launched an initiative to position itself as a quality producer of RFID tags and labels to serve retail and non-retail markets leveraging its high volume, low cost RF circuit production and manufacturing knowledge.

BUSINESS STRATEGY

Our business strategy focuses on providing comprehensive, single-source solutions that help retailers, manufacturers, and distributors identify, track, and protect their assets. We believe that innovative new products and expanded product offerings will provide significant opportunities to enhance the value of legacy products while expanding the product base in existing customer accounts. We intend to maintain our leadership position in certain key hard goods markets, expand our market share in the soft goods markets, and maximize our position in under-penetrated markets. We also intend to continue to capitalize on our installed base of large global retailers to promote source tagging. Furthermore, we plan to leverage our knowledge of RF and identification technologies to assist retailers and manufacturers in realizing the benefits of RFID.

5

To achieve these objectives, we plan to work to continually enhance and expand our technologies and products, and provide superior service to our customers. We are focused on providing our customers with a wide variety of integrated shrink management, labeling, and retail merchandising solutions characterized by superior quality, ease of use, good value, and enhanced merchandising opportunities for the retailer, manufacturer, and distributor.

To improve profitability, we initiated an evaluation of our business lines and operations globally in order to develop a plan to dramatically improve operating margins, shareholder value, and customer focus. This evaluation resulted in the exiting of underperforming businesses including BCS and Access Control and other actions designed to improve sales productivity, reconfigure our manufacturing and supply chain, and rationalize our overhead structure.

Principal Markets and Marketing Strategy

Through our security business segment, we market EAS and CCTV products primarily to worldwide retailers in the hard goods market (supermarkets, drug stores, mass merchandisers, and music/electronics), soft goods market (apparel), libraries, and consumer product manufacturers through our source tagging program.

We enjoy significant market share, particularly in the supermarket, drug store, hypermarket, and mass merchandiser market segments. Some of our diverse worldwide customers include: Barnes & Noble, Best Buy, Circuit City Stores, CVS/pharmacy, Esprit, GAP/Old Navy, Home Depot, Kohl’s Department Stores, Linens ‘n Things, Sears, Target Corporation, Walgreen Co., and Winn Dixie, Inc. in the USA; Safeway and Shoppers Drug Mart/Pharmaprix in Canada; Gigante in Mexico; Pague Menos in Brazil; B&Q in the United Kingdom; Alcampo, Carrefour, El Corte Inglés, and Mercadona in Spain; Carrefour, Casino, FNAC, and Intermarché in France; Metro Group in Germany; Woolworths in Australia; Don Quixote in Japan; and Ahold throughout Europe.

Shoplifting and employee theft are major causes of shrinkage. Data collection systems have highlighted the shrinkage problem to retailers. As a result, retailers recognize that the implementation of effective electronic security solutions can significantly reduce shrinkage and increase profitability.

In addition to providing retail security solutions, we provide a wide variety of integrated shrink management, labeling services, and retail merchandising solutions to manufacturers and retailers worldwide. This entails a broadened focus within the entire retail supply chain by providing branding, tracking, and shrink management solutions to retail stores, distribution centers, and consumer product and apparel manufacturers worldwide.

We are focused on providing our customers with a wide variety of integrated solutions to help them “Sell More and Lose Less”. These solutions include shrink management, labeling services, and retail merchandising solutions. More specifically, our ongoing marketing strategy includes the following:

We market our products primarily through:

We focus on partnering with retail suppliers worldwide in our source tagging program. Ongoing strategies to increase acceptance of source tagging are as follows:

6

Manufacturing, Raw Materials, and Inventory

Electronic Article Surveillance

We manufacture our EAS products in facilities located in Puerto Rico, Japan, Germany, the Dominican Republic, and the Netherlands. Our manufacturing strategy for EAS products is to rely primarily on in-house capability and to vertically integrate manufacturing operations to the extent economically beneficial. This integration and in-house capability provides significant control over costs, quality, and responsiveness to market demand which we believe results in a distinct competitive advantage.

We practice concurrent engineering techniques in the design and development of our products involving our customers, engineering, manufacturing, and marketing. For RF sensor production, we purchase raw materials from outside suppliers and assemble electronic components at our facilities in Puerto Rico for the majority of our sensor product lines. Certain components of sensors are manufactured at our facilities in the Dominican Republic and shipped to Puerto Rico for final assembly. The manufacture of some RF sensors sold in Europe and all EM hardware is outsourced. For our EAS tag production, we purchase raw materials and components from suppliers and complete the manufacturing process at our facilities in Puerto Rico (disposable tags), Japan (disposable tags), Germany (disposable tags), the Dominican Republic (reusable tags), and the Netherlands (disposable tags). We sold approximately 3.6 billion disposable tags in 2005 and have the capacity to produce more than 7 billion disposable tags per year. The principal raw materials and components used by us in the manufacture of our products are electronic components and circuit boards for our systems; and aluminum foil, resins, paper, and ferric chloride solutions for our disposable tags. While most of these materials are purchased from several suppliers, there are alternative sources for all such materials. The products that are not manufactured by us are sub-contracted to manufacturers selected for their manufacturing and assembly skills, quality, and price.

CCTV, Fire and Intrusion Systems

We are primarily an integrator of CCTV, fire and intrusion components manufactured by others. In the US, we use in-house capabilities to assemble products such as the pan/tilt/zoom dome camera and other products such as the Advanced Public View (APV) CCTV system. The software component of the system is added during product assembly at our operational facilities.

Labeling Services and Retail Merchandising

We manufacture labels, tags, and hand-held tools. Our main production facilities are located in Germany, the Netherlands, the US, and Malaysia. Local production facilities are also situated in Hong Kong, and Spain. Manufacturing in Germany is focused on HLS labels and print heads for HLS tools. Our facilities in the Netherlands and in the US manufacture labels and tags for laser overprinting, thermal labels. HLS labels are also manufactured in the US. The Malaysian facility produces standard bodies for HLS tools for Europe, complete hand-held tools for the rest of the world, and labels for the local market.

DISTRIBUTION

For our major product lines, we principally sell our products to end customers using our direct sales force of more than 450 sales people. To improve our sales efficiency, we also distribute products through an independent network of resellers. This distribution channel supports and services smaller customers. This indirect channel, which has primarily sold EAS solutions, will be broadened and expanded to include more product lines as we focus on improved sales productivity.

Electronic Article Surveillance

We sell our EAS systems principally throughout North America, South America, Europe, and the Asia Pacific region. In North America, we market our EAS products through our own sales personnel and independent representatives. During 2005, 95% of total US EAS revenues were generated by our own sales personnel.

Internationally, we market our EAS products principally through foreign subsidiaries which sell directly to the end-user and through independent distributors. Our international sales operations are currently located in 18 European countries and in Argentina, Australia, Brazil, Canada, Dominican Republic, Hong Kong, India, Japan, Malaysia, Mexico, and New Zealand.

Foreign distributors sell our products to both the retail and library markets. Pursuant to written distribution agreements, we generally appoint an independent distributor as an exclusive distributor for a specified term and for a specified territory.

7

CCTV, Fire and Intrusion Systems

We market CCTV systems and services in selected countries throughout the world using our own sales staff. These products and services are provided to our EAS retail customers, as well as non-EAS retailers. Fire and intrusion systems are marketed exclusively in the US through a direct sales force.

Labeling Services and Retail Merchandising

We have customers worldwide in the labeling services and retail merchandising businesses. These customers are primarily found within the retail sector and retail supply chain. Major customers include companies within industries such as food retailing, DIY (Do-It-Yourself), department stores, and apparel retailers.

Large national and international customers are handled centrally by key account sales specialists supported by appropriate business specialists. Smaller customers are served by either a general sales force capable of representing all products or, if the complexity or size of the business demands, a dedicated business specialist.

Backlog

Our backlog of orders was approximately $57.0 million at December 25, 2005 compared to approximately $63.0 million at December 26, 2004. We anticipate that substantially all of the backlog at the end of 2005 will be delivered during 2006. In the opinion of management, the amount of backlog is not indicative of trends in our business. Our security business generally follows the retail cycle so that revenues are weighted toward the last half of the calendar year as retailers prepare for the holiday season.

Technology

We believe that our patented and proprietary technologies are important to our business and future growth opportunities, and provide us with distinct competitive advantages. We continually evaluate our domestic and international patent portfolio, and where the cost of maintaining the patent exceeds its value, such patent may not be renewed. The majority of our revenues are derived from products or technologies which are patented or licensed. There can be no assurance, however, that a competitor could not develop products comparable to those of the Company. Our competitive position is also supported by our extensive manufacturing experience and know-how.

Electronic Article Surveillance

On October 1, 1995, we acquired certain patents and improvements thereon related to EAS products and manufacturing processes from Arthur D. Little, Inc.

In addition to Arthur D. Little, Inc., we have two principal license agreements covering our EAS products, including Allied Signal, Inc. (now Metglas, Inc.) as licensor for EM tags and Miyake as licensor for RF tags. These licenses expire in 2006 and 2014, respectively. The Allied Signal, Inc. (now Metglas, Inc.) license agreement expires upon expiration of the patent held by Metglas, Inc.

We also license technologies relating to certain sensors, magnetic labels, and fluid tags. These license arrangements have various expiration dates and royalty terms, but are not considered by us to be material.

RFID System Solutions

On February 12, 1997, we entered into a ten-year joint research and development agreement with Mitsubishi Materials for RFID applications. The agreement provides for cross licensing of certain RFID applications during the term and for five years following the termination of the agreement.

Labeling Services and Retail Merchandising

We focus our in-house development efforts on product areas where we believe we can achieve and sustain a competitive cost and positioning advantage, and where delivery service is critical. We also develop and maintain technological expertise in areas that are believed to be important for new product development in our principal business areas. We have a base of technology expertise in the printing, electronics, and software areas and are particularly focused on EAS and labeling capabilities to support the development of higher value-added labels.

Competition

Electronic Article Surveillance

Currently, EAS systems are sold to two principal markets: retail establishments and libraries. Our principal global competitor in the EAS industry is Tyco International Ltd., through its ADT security division. Tyco is a diversified manufacturing and service company with interests in electronics, fire and security, healthcare, plastics and adhesives, and engineered products and services. Tyco’s 2005 revenues were approximately $39.7 billion.

8

Within the US market, additional competitors include Sentry Technology Corporation and Ketec, Inc., principally in the retail market, and 3M Company, principally in the library market. Within our international markets, mainly Europe, NEDAP and Tyco are our most significant competitors.

We believe that our product line offers a more diverse range of products than our competition with a variety of disposable and reusable tags and labels, integrated scan/deactivation capabilities, and RF source tagging embedded into products or packaging. As a result, we compete in marketing our products primarily on the basis of their versatility, reliability, affordability, accuracy, and integration into operations. This combination provides many system solutions and allows for protection against a variety of retail merchandise theft. Furthermore, we believe that our manufacturing know-how and efficiencies relating to disposable and reusable tags give us a cost advantage over our competitors.

CCTV, Fire and Intrusion Systems

Our CCTV, fire and intrusion products, which are sold domestically through our Checkpoint Security Systems Group subsidiary and internationally through our international sales subsidiaries, compete primarily with similar products offered by Pelco and Tyco. We compete based on our superior service and believe that our offerings provide our retail and non-retail customers with distinct system features.

Global Labeling Services

We sell our labeling services, including tags and labels, to the retail market. Major competitors for our label products are Avery Dennison and Paxar. Several competitive labeling service companies are also customers as they purchase EAS circuits from us to integrate into their label offerings.

Retail Merchandising

We face no single competitor across our entire retail merchandising product range or across all international markets. HL Display is our strongest competitor in the retail display systems market, primarily in Europe. In the HLS segment, we compete with Contact, Garvey, Hallo, Paxar, and Prix.

Other Matters

Research and Development

We expended approximately $18.8 million, $28.5 million, and $15.6 million, in research and development activities during 2005, 2004, and 2003, respectively. The emphasis of these activities is the continued broadening of the product lines offered by us, cost reductions of the current product lines, and an expansion of the markets and applications for our products. We believe that our future growth in revenues will be dependent, in part, on the products and technologies resulting from these efforts.

Another important source of new products and technologies has been the acquisition of companies and products. We continue to assess acquisitions of related businesses or products consistent with our overall product and marketing strategies.

We continue to develop and expand our product lines with improvements in disposable tag performance, disposable tag manufacturing processes, and wide-aisle RF-EAS detection sensors with integration of remote and wireless internet connectivity and RFID integration.

Employees

As of December 25, 2005, we had 3,955 employees, including seven executive officers, 108 employees engaged in research and development activities, and 599 employees engaged in sales and marketing activities. In the United States, 11 of our employees are represented by a union. In Europe, we believe that approximately 800 of our employees are represented by various unions or work councils.

Financial Information About Geographic and Business Segments

We operate both domestically and internationally in the three distinct business segments described previously. The financial information regarding our geographic and business segments, which includes net revenues and gross profit for each of the years in the three-year period ended December 25, 2005, and total assets as of December 25, 2005, December 26, 2004, and December 28, 2003, is provided in Note 20 to the Consolidated Financial Statements.

Available Information

Our internet website is at www.checkpointsystems.com. Investors can obtain copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act as soon as reasonably practicable after we have filed such materials with, or furnished them to, the Securities and Exchange Commission. We will also furnish a paper copy of such filings free of charge upon request. Investors can also read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room which is located at 450 Fifth Street, NW, Washington, DC 20549. Information about the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our filings can also be accessed at the SEC’s internet website: www.sec.gov.

9

We have posted the Code of Ethics, the Governance Guidelines, and each of the Committee Charters on our website at www.checkpointsystems.com, and will post on our website any amendments to, or waivers from, the Code of Ethics applicable to any of our directors or executive officers. The foregoing information will also be available in print upon request.

Executive Officers of the Company

The following table sets forth certain current information concerning the executive officers of the Company, including their ages, position, and tenure as of the date hereof:

Mr. Off was appointed Chairman of the Board of Directors, President and Chief Executive Officer on August 15, 2002. Mr. Off had been Interim Chief Executive Officer of the Company since June 2002 and a member of the Board of Directors since May 2002. Mr. Off is a founder and former Chairman and Chief Executive Officer of Catalina Marketing Corporation (NYSE: POS) and a 40-year veteran in the retail marketing industry.

Mr. Burns was appointed Executive Vice President, Chief Financial Officer and Treasurer on March 20, 2001. Mr. Burns was Vice President, Finance, Chief Financial Officer and Treasurer from April 2000 to March 2001. Mr. Burns was Vice President, Corporate Controller and Chief Accounting Officer from December 1997 until April 2000. He was Director of Tax from February 1996 to December 1997. Prior to joining the Company, Mr. Burns was a Senior Tax Manager with Coopers & Lybrand, LLP from June 1989 to February 1996. Mr. Burns is a Certified Public Accountant.

Mr. Davies was appointed President, Asia Pacific and Latin America in June 2004. Mr. Davies was Executive Vice President, General Manager, Americas and Asia Pacific from March 2003 until June 2004, Executive Vice President, Sales and Marketing USA, Americas, Asia Pacific from August 2002 until March 2003, Executive Vice President, Worldwide Operations from March 2002 to August 2002 and Senior Vice President, Worldwide Operations from March 2001 to March 2002. He was Vice President, Research and Development from August 1998 to March 2001 and Senior Director, Worldwide Systems Engineering from October 1996 to August 1998. Since joining the Company in October 1992, Mr. Davies held various engineering positions until October 1996.

Mr. Donnan has been President of North America since July 2004. Prior to joining the Company, Mr. Donnan was a Vice President at the management consulting firm, A.T. Kearney. During his seven-year tenure at A.T. Kearney, he advised senior executives in the areas of consumer products, business and brand strategies, supply chain transformation, and technology applications. His 26 years of business experience also include nine years as a partner with KPMG and senior operating roles in Canada Packers (now Maple Leaf Foods).

Mr. Levin was appointed President of Europe in June 2004. He was Executive Vice President, General Manager, Europe from May 2003 until June 2004, Vice President, General Manager, Europe from February 2001 until May 2003. Mr. Levin was Regional Director, Southern Europe from 1997 to 2001 and joined the Company in January 1995 as Managing Director of Spain.

Mr. Van Zile has been Senior Vice President, General Counsel and Secretary since joining the Company in June 2003. Prior to joining the Company, Mr. Van Zile served as Executive Vice President, General Counsel and Secretary of Exide Corporation from September 2000 until October 2002, and was Vice President and General Counsel from November 1996 until September 2000. Exide Corporation filed for Chapter 11 protection in April 2002. Prior to Exide Corporation, Mr. Van Zile held positions of increasing legal responsibility at GM-Hughes Electronics Corporation and Coltec Industries.

10

Mr. Andrews has been Vice President, Chief Accounting Officer since August 2005. He previously served as Controller of INVISTA S.a'r.l., a subsidiary of Koch Industries, where he oversaw the company's accounting operations in North and South America, Europe and Asia. Prior to the acquisition by Koch Industries, Mr. Andrews was Director of Accounting Operations of INVISTA Inc. From 1998 to 2002, Mr. Andrews served as Controller for DuPont Pharmaceuticals Company and then Bristol-Myers Squibb Pharma Company, a subsidiary of Bristol-Myers Squibb, when that company acquired DuPont Pharmaceuticals in 2001. Prior to being appointed Controller, he held positions of increasing responsibility at DuPont Merck Pharmaceutical Company and the DuPont Company. Mr. Andrews is a Certified Public Accountant.

The following risk factors, among other possible factors, could cause actual results to differ materially from historical or anticipated results:

11

Our principal corporate offices are located at 101 Wolf Drive, Thorofare, New Jersey. As of December 25, 2005, we owned or leased approximately 2.2 million square feet of space worldwide which is used primarily for sales, distribution, manufacturing, and general administration. These facilities include offices located throughout North and South America, Europe, Asia, Australia, and New Zealand. Our principal manufacturing facilities are located in the Dominican Republic, Germany, Japan, Malaysia, the Netherlands, Puerto Rico, and the USA. We believe our current manufacturing capacity will support our needs for the foreseeable future.

We are involved in certain legal and regulatory actions, all of which have arisen in the ordinary course of business, except for the matters described in the following paragraphs. Management believes it is remotely possible that the ultimate resolution of such matters will have a material adverse effect on our consolidated results of operations and/or financial condition, except as described below.

ID Security Systems Canada Inc. versus Checkpoint Systems, Inc.

On August 1, 2004, the Company and ID Security Systems Canada Inc. entered into a settlement agreement effective July 30, 2004, pursuant to which the Company agreed to pay $19.95 million, in full and final settlement of the claims covered by the litigation. This settlement was accrued in the second quarter of 2004. Payment in full was made on August 5, 2004. The settlement did not cause the Company to be in default on any its debt covenants. The Company does not admit or acknowledge any wrongdoing or liability regarding the litigation. In connection with the settlement, the parties have mutually released each other from all other claims, except for any claims relating to existing contracts between the parties. A release in favor of the Company was also provided by various affiliates and associates of ID Security Systems Canada Inc. Management believes that the settlement was in the best interest of the Company to avoid the risks, burden, and expenses of continued litigation.

Matters related to ID Security Systems Canada Inc. versus Checkpoint Systems, Inc.

A certain number of follow-on purported class action suits have arisen in connection with the ID Security Systems Canada Inc. litigation. The purported class action complaints generally allege a claim of monopolization and are substantially based upon the same allegations as contained in the ID Security Systems Canada Inc. case (Civil Action No. 99-CV-577) as discussed below.

On August 1, 2002, a civil action was filed in United States District Court for the Eastern District of Pennsylvania, designated as Civil Action No. 02-6379(ER) by plaintiff Diane Furs, Inc. t/a Diane Furs against Checkpoint Systems, Inc. and served on August 21, 2002. On August 21, 2002, a Notice of Substitution of Plaintiff and Filing of Amended Complaint was filed by the plaintiff, and the named plaintiff was changed to Medi-Care Pharmacy, Inc.

12

On August 2, 2002, a civil action was filed in the United States District Court, District of New Jersey (Camden) designated as Docket No. 02-CV-3730(JEI) by plaintiff Club Sports International, Inc., d/b/a Soccer CSI against Checkpoint Systems, Inc. and served on August 26, 2002.

On October 2, 2002, a civil action was filed in the United States District Court, District of New Jersey (Camden) designated as Docket No. 02-CV-4777(JBS) by plaintiff Baby Mika, Inc. against Checkpoint Systems, Inc. and served on October 7, 2002.

On October 23, 2002, a civil action was filed in the United States District Court, District of New Jersey (Camden) designated as Docket No. 02-CV-5001(JEI) by plaintiff Washington Square Pharmacy, Inc. against Checkpoint Systems, Inc. and served on November 1, 2002.

On October 18, 2002, The United States District Court, District of New Jersey (Camden) entered an Order staying the proceedings in the Club Sports International, Inc. and Baby Mika, Inc. cases referred to above. In accordance with the Order, the Stay will also apply to the Washington Square Pharmacy, Inc. case referred to below. In addition, the Medi-Care Pharmacy, Inc. case, referred to below, will be voluntarily dismissed, and it has been re-filed in New Jersey and is included in the Stay Order. As a result of the settlement of the litigation with ID Security Systems Canada Inc. described above, an application can be made to the Court to dissolve the Stay Order at this time.

On November 13, 2002, a civil action was filed in the United States District Court, District of New Jersey (Camden) designated as Docket No. 02-CV-5319(JEI) by plaintiff 1700 Pharmacy, Inc. against Checkpoint Systems, Inc. and served on November 15, 2002.

On December 30, 2002, a civil action was filed in the United States District Court, District of New Jersey (Camden) designated as Docket No. 02-CV-6131(JEI) by plaintiff Medi-Care Pharmacy, Inc. against Checkpoint Systems, Inc. and served on January 3, 2003.

Both the 1700 Pharmacy, Inc. case and the Medi-Care Pharmacy, Inc. case were consolidated with the previously mentioned cases and are included in the October 18, 2002 Stay Order referred to above.

No liability has been recorded for any of the purported class action suits. Management is of the opinion that, based upon the advice of outside legal counsel, it is not probable that the purported class action suits will be successful. Management believes that the lower end of the reasonably possible range of the contingent liability is zero at this time. The high end of the range cannot be estimated at this time. A status hearing is scheduled for March 26, 2006.

All-Tag Security S.A., et al.

The Company originally filed suit on May 1, 2001, alleging that the disposable, deactivatable radio frequency security tag manufactured by All-Tag Security S.A. and All-Tag Security Americas, Inc.'s (jointly “All-Tag”) and sold by Sensormatic Electronics Corporation (Sensormatic) infringed on a U.S. Patent No. 4,876,555 (Patent) owned by the Company. On April 22, 2004, the United States District Court for the Eastern District of Pennsylvania granted summary judgment to defendants All-Tag and Sensormatic Electronics Corporation on the ground that the Company's Patent is invalid for incorrect inventorship. The Company appealed this decision. On June 20, 2005, the Company won an appeal when the Federal Circuit reversed the grant of summary judgment and remanded the case to the District Court for further proceedings. The case is now in the discovery phase and trial is set for September 2006. The original US application was filed in March 1988 and is scheduled to expire on March 17, 2007. The Company acquired the patent in 1995 when it acquired Actron AG.

13

No matter was submitted during the fourth quarter of 2005 to a vote of stockholders.

PART II

Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol CKP. The following table sets forth, for the periods indicated, the high and low sale prices for our common stock as reported on the NYSE Composite Tape.

Holders of Record

As of February 16, 2005, there were 872 record holders of our common stock.

Dividends

We have never paid a cash dividend on our common stock (except for a nominal cash distribution in April 1997 to redeem the rights outstanding under our 1988 Shareholders’ Rights Plan). We do not anticipate paying any cash dividend in the near future. We have retained, and expect to continue to retain, our earnings for reinvestment back into the business. The declaration and payment of dividends in the future, and their amounts, will be determined by the Board of Directors in light of conditions then existing, including our earnings, our financial condition and business requirements (including working capital needs), and other factors.

Issuer Purchases of Equity Securities

There have been no stock repurchases of our common stock since 1998.

Equity Compensation Plans

The following table sets forth our shares authorized for issuance under our equity compensation plans at December 25, 2005:

On July 1, 2004, we adopted a stand-alone inducement stock option plan, which authorized the issuance of options to purchase up to 200,000 shares of our common stock to the President of North America in connection with his hire. The non-qualified stock options vest over a three-year period with one-third vesting each anniversary date. Options cannot be exercised more than ten years after the grant date. As of December 26, 2005, there are no options available for grant under this plan.

14

The following tables set forth our selected financial data and should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere herein.

15

16

The following section highlights significant factors impacting the consolidated operations and financial condition of the Company and its subsidiaries. The following discussion should be read in conjunction with Item 6. “Selected Financial Data” and Item 8. “Financial Statements and Supplementary Data.”

Overview

Checkpoint Systems, Inc. is a multinational manufacturer and marketer of integrated system solutions for retail security, labeling, and merchandising. We provide technology-driven integrated supply chain solutions to brand, track, and secure goods for retailers and consumer product manufacturers worldwide. We are a leading provider and earn revenues primarily from the sale of electronic article surveillance (EAS), closed-circuit television (CCTV), hand-held labeling systems (HLS), retail merchandising systems (RMS), and radio frequency identification (RFID) systems. Applications include retail security, automatic identification, and pricing and promotional labels and signage. Operating directly in 33 countries, we have a global network of subsidiaries and distributors, and provide customer service and technical support around the world.

Our results are heavily dependent upon sales to the retail market. Our customers are dependent upon retail sales which are susceptible to economic cycles and seasonal fluctuations. Furthermore, as approximately two-thirds of our revenues and operations are located outside the US, fluctuations in foreign currency exchange rates have a significant impact on reported results.

Our business plan is to generate sustained revenue growth through selected investments in product development and marketing. We intend to offset these investments through product cost and operating expense reductions.

On December 22, 2005, the Company entered into an agreement with SATO for the sale of the global barcode businesses included in our Labeling Services Segment, and the U.S. hand-held labeling and Turn-O-Matic ® businesses which are included in our Retail Merchandising Segment (“the disposal group”). In accordance with SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, we are accounting for the disposal group as discontinued operations. On January 30, 2006, we completed the sale transaction for the disposal group and as a result will record, in the first quarter of 2006, a pretax gain on sale of approximately $1 to $2 million.

The businesses included in the disposal group were highly integrated into the operations in many of our countries. In accordance with the guidance of SFAS 144, discontinued operations only includes revenues and expenses that are directly attributable to the businesses included in the disposal group. As a result, discontinued operations do not include any allocations for general and administrative expenses. It also does not include selling and marketing expenses for shared staff that will continue with the Company after the sale of the business. For the year ended 2005, the combined businesses in the disposal group had revenues of $98.1 million with a gross margin of 27.4%. Selling, general and administrative directly attributable to the disposal group were $13.9 million or 14.2 % of revenue. The earnings reported for discontinued operations, net of tax, were $8.1 million.

To respond to the lower revenue base resulting from the sale of the disposal group and improve our operating margins, we have been taking action and are continuing to develop plans to rationalize the selling, general, and administrative structure that is not part of the disposal group. The two major cost savings initiatives are focused on our European region, where the BCS businesses were highly integrated into 17 countries, and on our global supply chain.

European cost reduction initiatives are focused on improving sales productivity by making better use of indirect sales channels and streamlining our field service operations. In certain regions of Europe, we are also using shared service centers to centralize our accounting and customer service operations.

For the global supply chain, we are currently conducting an evaluation to improve manufacturing operations, supply chain operations, and sourcing of materials. As a result, we will be moving our EAS electronics manufacturing from Puerto Rico to the Dominican Republic during the first half of 2006. We have also closed our UK labeling plant and consolidated those operations into our main Service Bureau in Terborg, Netherlands.

We are currently evaluating changes in our supply chain to improve manufacturing utilization, and optimize freight and delivery time. These changes to our supply chain could have an impact on the recoverability of certain fixed assets within our manufacturing facilities, which may result in a future impairment as the evaluation is finalized and plans are approved.

17

Net revenue for year-ended 2005 was $721.0 million, a 7.4% increase over the comparable period in 2004. Foreign currency translation had a positive impact on revenue of approximately 0.7%. The increase in sales for fiscal 2005 was primarily attributable to new large chain-wide EAS roll-outs in the US. Large account rollout activity is a part of the business that can make year over year comparisons difficult. The large chain-wide EAS installations in 2005 will present difficult comparables for 2006, but they will provide for an associated increase in recurring EAS label volumes.

The net earnings for the year-ended 2005 were $39.4 million compared to a loss of $20.2 million in 2004. Our results reflect benefits of large customer installation activity and cost savings initiatives offset, in part, by restructuring and impairment charges totaling $9.9 million, net of tax. The prior year was impacted by an impairment charge of $45.0 million, net of tax and a legal settlement of $13.0 million, net of tax.

Future financial results will be dependent upon our ability to expand the functionality of our existing product lines, develop or acquire new products for sale through our global distribution channels, and reduce the cost of our products and infrastructure to respond to competitive pricing pressures.

On March 4, 2005, we entered into a new $150.0 million five-year senior unsecured multi-currency revolving credit agreement (“Credit Agreement”) with a syndicate of lenders. This agreement will allow us the flexibility for the execution of future business plans.

Our strong base of recurring revenue (revenues from the sale of consumables into the installed base of security systems, and hand-held labeling tools), repeat customer business, and our borrowing capacity should provide us with adequate cash flow and liquidity to execute our business plan.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Note 1 of the Notes to consolidated financial statements describes the significant accounting policies used in the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies. A critical accounting policy is defined as one that is both material to the presentation of our consolidated financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition or results of operations.

Specifically, these policies have the following attributes: (1) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations. Estimates and assumptions about future events and their effects cannot be determined with certainty. On an on-going basis, we evaluate our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. Senior management reviews the development and selection of our Company’s accounting policies and estimates with the Audit Committee. The critical accounting policies have been consistently applied throughout the accompanying financial statements.

We believe the following accounting policy is critical to the preparation of our consolidated financial statements:

Revenue Recognition. We recognize revenue when installation is complete or other post-shipment obligations have been satisfied. Equipment leased to customers under sales-type leases is accounted for as the equivalent of a sale. The present value of such lease revenues is recorded as net revenues, and the related cost of the equipment is charged to cost of revenues. The deferred finance charges applicable to these leases are recognized over the terms of the leases. Rental revenue from equipment under operating leases is recognized over the term of the lease. Installation revenue from EAS equipment is recognized when the systems are installed. Service revenue is recognized, for service contracts, on a straight-line basis over the contractual period, and, for non-contract work, as services are performed. Sales to third party leasing companies are recognized as a sale. For arrangements with multiple elements, we determine the fair value of each element and then allocate the total arrangement consideration among the separate elements as prescribed under Emerging Issues Task Force (EITF)
No. 00-21.

18

We believe the following judgments and estimates have a significant effect on our consolidated financial statements:

Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. These allowances are based on specific facts and circumstances surrounding individual customers as well as our historical experience. The adequacy of the reserves for doubtful accounts is continually assessed. Historically, our reserves have been adequate to cover all losses associated with doubtful accounts. If the financial condition of our customers were to deteriorate, impairing their ability to make payments, additional allowances may be required. If economic or political conditions were to change in the countries where we do business, it could have a significant impact on the results of operations, and our ability to realize the full value of our accounts receivable. Furthermore, we are dependent on customers in the retail markets. Economic difficulties experienced in those markets could have a significant impact on the results of operations and our ability to realize the full value of our accounts receivables. If our historical experiences changed by 10%, it would require an increase or decrease of $0.3 million to our reserve.

Inventory Valuation. We write down our inventory for estimated obsolescence or unmarketable items equal to the difference between the cost of the inventory and the estimated net realizable value based upon assumptions of future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. If our estimates were to change by 10%, it would cause a change in inventory value of $0.6 million.

Valuation of Long-lived Assets. Our long-lived assets include property, plant, and equipment, goodwill, and identified intangible assets. With the exception of goodwill, long-lived assets are depreciated or amortized over their estimated useful lives, and are reviewed for impairment whenever changes in circumstances indicate the carrying value may not be recoverable. Recoverability is determined based upon our estimates of future undiscounted cash flows. If the carrying value is determined to be not recoverable an impairment charge would be necessary to reduce the recorded value of the assets to their fair value. The fair value of the long-lived assets other than goodwill is based upon appraisals, quoted market prices of similar assets, or discounted cash flows. We test goodwill for impairment on an annual basis, relying on a number of factors including operating results, business plans, and anticipated future cash flows. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the present value of projected future cash flows of each reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its present value of the projected future cash flows, then the second step of the process involves a comparison of the fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. The fair value of goodwill is based upon our estimate of future discounted cash flows and other factors. If the use of these assets or the projections of future cash flows change in the future, we may be required to record impairment charges. An erosion of future business results in any of the business units could create impairment in goodwill or other long-lived assets and require a significant write down in future periods. It is possible that future declines in retail merchandising revenues may lead to future impairments of the goodwill associated with this segment. (See Notes 1 and 5 of the Consolidated Financial Statements.)

Income Taxes. In determining income for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of recoverability of certain of the deferred tax assets, which arise from temporary differences between tax and financial statement recognition of revenue and expense. We record a valuation allowance to reduce our deferred tax assets to the amount that it is more likely than not to be realized. In assessing the realizability of deferred tax assets, we consider future taxable income by tax jurisdictions and tax planning strategies. If we were to determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the valuation allowance would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the valuation allowance would decrease income in the period such determination was made. (See Note 13 of the Consolidated Financial Statements.)

Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. We are not aware of any such changes that would have a material effect on our results of operations, cash flows or financial position.

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We record tax liabilities for the anticipated settlement of tax audit issues in the US and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is different from our estimate of tax liabilities. If payment of these amounts ultimately proves to be greater or less than the recorded amounts, the change of the liabilities would result in tax expense or benefit being recognized in that period.

19

Pension Plans. We have various unfunded pension plans outside the US. These plans have significant pension costs and liabilities that are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets, mortality rates, and merit and promotion increases. We are required to consider current market conditions, including changes in interest rates, in selecting these assumptions. Changes in the related pension costs or liabilities may occur in the future due to changes in the assumptions. A change in discount rates of 0.25% would have a $0.3 million effect on pension expense.

Liquidity and Capital Resources

Our liquidity needs have related to, and are expected to continue to relate to, capital investments, product development costs, potential future restructuring related to the rationalization of the business, acquisitions, and working capital requirements. We have met our liquidity needs over the last four years primarily through cash generated from operations. We believe that cash provided from operating activities and funding available under our current credit agreements should be adequate for the foreseeable future to service debt, meet our capital investment requirements, other potential restructuring requirements, and product development requirements.

Our operating activities during fiscal 2005 generated cash of approximately $46.2 million compared to approximately $23.7 million during 2004. In 2005, our cash generated from operating activities was impacted by higher earnings offset, in part, by an increase in other current assets, accounts receivable and inventory. The increase in other current assets is primarily attributable to an increase in our current tax receivable. The 2005 increase in accounts receivable and inventory are due primarily from higher revenue during the second half of 2005 compared to 2004. Our percentage of total debt to stockholders’ equity in 2005 decreased to 9.3% from 19.2%.

We continue to reinvest in the Company through our investment in our technology and process improvement. In 2005, our investment in research and development including discontinued operations amounted to $19.2 million, a decrease of 34% over the $29.0 million in 2004. These amounts are reflected in the cash generated from operations as we expense our research and development as it is incurred. In 2006, we anticipate spending of approximately $18.0 million on research and development.

Our capital expenditures during fiscal 2005 totaled $10.8 million, compared to $11.3 million during fiscal 2004. We anticipate capital expenditures used primarily to upgrade technology and improve our production capabilities to approximate $15.0 million in 2006.

We have various unfunded pension plans outside the USA. These plans have significant pension costs and liabilities that are developed from actuarial valuations. For fiscal 2005, we made payments to employees covered under these plans of $3.6 million. Our funding expectation for 2006 is $3.8 million. We believe our current cash position, cash generated from operations, and availability under our revolving line of credit will be adequate to fund these requirements. The contractual obligation table details our anticipated funding requirements related to pension obligations for the next 10 years.

On March 4, 2005, we entered into a new $150.0 million five-year senior unsecured multi-currency revolving credit agreement (“Credit Agreement”) with a syndicate of lenders. The Credit Agreement replaces the $375.0 million senior collateralized multi-currency credit facility. In connection with the new credit facility, we borrowed $60.0 million to repay the outstanding principal, interest and fees and expenses associated with the previous credit facility. In the first quarter of 2005, we recorded a $1.1 million charge for the unamortized fees from the extinguished credit facility. On December 25, 2005, we had ¥1.6 billion ($13.6 million) and €10 million ($11.9 million) outstanding under this facility. Our available line of credit under this agreement is $123.0 million.

Borrowings under the Credit Agreement bear interest rates of LIBOR plus an applicable margin ranging from 0.75% to 1.75% and/or prime plus 0.00% to 0.50%. The interest rate matrix is based on our leverage ratio of funded debt to EBITDA, as defined by the Credit Agreement. Under the Credit Agreement, we pay an unused line fee ranging from 0.18% to 0.30% per annum on the unused portion of the commitment.

The Credit Agreement contains certain covenants, as defined in the Credit Agreement, that include requirements for a maximum ratio of debt to EBITDA, a maximum ratio of interest to EBITDA, and a maximum threshold for capital expenditures. At December 25, 2005, we were in compliance with all of our debt covenants.

At December 24, 2004, we had a $375.0 million senior collateralized multi-currency credit facility. The credit facility included a $275.0 million equivalent multi-currency term note and a $100.0 million equivalent multi-currency revolving line of credit. Interest on the facility reset monthly and was based on the Eurocurrency base rate plus an applicable margin. This facility was replaced in March 2005 by the $150 million unsecured credit facility described above.

20

We have never paid a cash dividend (except for a nominal cash distribution in April 1997 to redeem the rights outstanding under our 1988 Shareholders’ Rights Plan). We do not anticipate paying any cash dividend in the near future.

Management believes that our anticipated cash needs for the foreseeable future can be funded from cash and cash equivalents on hand, the availability under the $150.0 million revolving credit facility, and cash generated from future operations.

Off-Balance Sheet Arrangements

We do not utilize any material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. Our primary off-balance arrangements are operating leases. We use operating leases as an alternative to purchasing certain property, plant, and equipment. Our future rental commitment under all non-cancelable operating leases was $47.8 million as of December 25, 2005. The scheduled timing of these rental commitments is detailed in our “Contractual Obligations” section.

Contractual Obligations

Our contractual obligations and commercial commitments at December 25, 2005 are summarized below:

Pension Plans

We maintain several defined benefit pension plans, principally in Europe. The majority of these pension plans are unfunded. Our pension expense for 2005, excluding the curtailment gain, increased $0.1 million to $5.4 million from $5.3 million in 2004.

We review our pension assumptions annually. Our assumptions for the year-end December 25, 2005 were a discount rate of 4.25%, an expected return of 3.75% and an expected rate of increase in future compensation of 2.50%. In developing the discount rate assumption, we considered the estimated plan durations of each of our plans and selected a rate of a corresponding length of time. The source of the discount rate was obtained by comparing the yields available on AA rated corporate bonds in the Eurozone, specifically the iboxx AA 10+ index. This resulted in a discount rate of 4.25% for 2005 and 5.00% for 2004. The expected rate of the return was developed using the historical rate of returns of the foreign government bonds currently held. This resulted in the selection of the 3.75% long-term rate of return on asset assumption for both 2005 and 2004.

As of December 25, 2005 and December 26, 2004, the net unrecognized actuarial loss related to pensions was $14.5 million and $8.7 million, respectively. The primary component of the unrecognized loss is attributable to changes in the discount rate as the bond yields have decreased. Unrecognized actuarial losses are amortized over the average remaining service period of the employees expected to receive the benefit in accordance with pension accounting rules. The weighted average remaining service period is approximately 13 years. The impact of recognizing the actuarial losses on 2005, 2004 and 2003 pension expense are $0.2 million, $0.1 million, and $0.1 million, respectively.

21

We manufacture products in the US, the Caribbean, Europe, and the Asia Pacific regions for both the local marketplace, as well as for export to our foreign subsidiaries. The subsidiaries, in turn, sell these products to customers in their respective geographic areas of operation, generally in local currencies. This method of sale and resale gives rise to the risk of gains or losses as a result of currency exchange rate fluctuations on the inter-company receivables and payables. Additionally, the sourcing of product in one currency and the sales of product in a different currency can cause gross margin fluctuations due to changes in currency exchange rates.

We selectively purchase currency forward exchange contracts to reduce the risks of currency fluctuations on short-term receivables and payables. These contracts guarantee a predetermined exchange rate at the time the contract is purchased. This allows us to shift the effect of positive or negative currency fluctuations to a third party.

As of December 25, 2005, we had currency forward exchange contracts totaling approximately $16.4 million. The contracts are in the various local currencies covering primarily our Western European, Canadian, and Australian operations. Historically, we have not purchased currency forward exchange contracts where it is not economically efficient, specifically for our operations in South America and Asia.

We have historically not used financial instruments to minimize our exposure to currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries. We have used third party borrowings in foreign currencies to hedge a portion of our net investments in and cash flows derived from our foreign subsidiaries. As we reduce our third party foreign currency borrowings, the effect of foreign currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries increases.

Provision for Restructuring

2005 Restructuring Plan

In the second quarter of 2005, we initiated actions focused on reducing our overall operating expenses. These actions included the implementation of a cost reduction plan designed to improve our sales productivity and to consolidate certain administrative functions in Europe. During the third and fourth quarters 2005, we continued this program by finalizing an agreement with our labor unions in our French and German subsidiaries. In addition, we have committed to a plan to restructure a portion our supply chain staff as we transition our manufacturing to lower cost areas. The total restructuring charge for the 2005 plan was $13.6 million. This included $16.0 million, net of reversals, for severance and other related charges offset, in part, by a $0.7 million pension curtailment gain resulting from the termination of certain employees in Europe and a gain on sale of a building of $1.7 million. The total employees affected by the restructuring were 335 of which 180 have been terminated as of the end of fiscal 2005. The anticipated total cost of the severance is expected to approximate $17 million to $19 million, of which $16 million has been incurred and $5.4 million has been paid. The remaining terminations are anticipated to be complete by the first half of 2006. Termination benefits are planned to be paid 1 month to 24 months after termination. The total annual savings are anticipated to approximate $17 million to $19 million.

The fiscal 2005 restructuring accrual activity was as follows:

2003 Plan

In the fourth quarter of 2003, we established a shared services initiative in Europe and a manufacturing cost reduction program. The manufacturing cost reduction program included 373 planned employee terminations and was completed as of the end of the third quarter 2004. The shared services initiative in Europe included 139 planned employee terminations. We expect the 15 remaining planned terminations and other actions to be completed by end of 2006. Termination benefits are being paid out over a period of 1 to 24 months after termination. The total cost of the 2003 restructuring is anticipated to be approximately $4.6 million. Upon completion, the annual savings are expected to be approximately $7.5 million.

During the fourth quarter of 2004, we made a reversal of the restructuring accrual of $3.0 million composed of $2.6 million for severance related to the shared services initiative in Europe and $0.4 million resulting from a reduction of the lease reserve due to the Company obtaining a sublease tenant. This reversal was recorded on the “restructuring expense” line on the consolidated statement of operations.

22

The $2.6 million reversal was due primarily to natural employee attrition, adjustments for positions scheduled to be eliminated, employees leaving for less than reserved and Company management retaining certain positions previously scheduled to leave. Employee attrition is composed of two components (1) employees who left the Company prior to notice being given and (2) employees who transferred into different positions which became available during the year, allowing us to eliminate the position without the anticipated severance. The adjustments for positions scheduled to be eliminated was due primarily to substitution of different employees in similar positions which resulted in less required severance accrual and certain employees opting for early retirement.

The 2005 and 2004 restructuring accrual activity for this plan was as follows:

(1) Includes restructuring prior to 2003 of $866, of which $651 relates to lease termination costs.
(2) Includes restructuring prior to 2003 of $1,708, of which $906 relates to lease termination costs.
(3) Includes restructuring prior to 2003 of $2,261, of which $1,295 relates to lease termination costs.

Goodwill and Asset Impairments

In September 2005, we classified our barcode labeling businesses and US Hand-held labeling and Turn-O-Matic ® businesses as held for sale. In accordance with SFAS 142 “Goodwill and Other Intangible Assets”, we allocated goodwill of the reporting units in the Labeling Services and Retail Merchandising Segments to the businesses to be disposed of and the businesses to be retained based on their relative fair market value. We tested the goodwill of the segments effected by the disposal group and determined that there was a $0.7 million impairment in the US barcode labeling disposal group in our Labeling Services Segment. This impairment was recorded in discontinued operations on the consolidated statement of operations in the third quarter 2005.

In 2005, we recorded a $1.4 million impairment related to fixed assets in our supply chain. The charge consisted of $1.0 million related to the write down of our manufacturing facility in Japan and $0.4 million related to assets in our Puerto Rico manufacturing facility. These impairments were recorded in asset impairments on the consolidated statement of operations.

23

In 2004, in accordance with the provisions of SFAS 142, we performed an impairment test which indicated the book value of our US and European labeling services reporting units exceeded their estimated fair values and goodwill impairment had occurred. In addition, as a result of the goodwill analysis we assessed whether there had been an impairment of our long-lived assets in accordance with SFAS 144. We concluded the book values of certain asset groupings within these two reporting units were higher than their expected undiscounted future cash flows and determined the long-lived assets were not fully recoverable. Accordingly, we have recognized a non-cash impairment charge of $51.4 million ($45.0 million, net of tax) in the fourth quarter 2004. The charges included $34.7 million, $12.8 million, and $3.9 million related to goodwill impairment, intangible asset impairments, and fixed asset impairments, respectively. The fair value of the long-lived assets was estimated using the value of similar assets and a discounted cash flow technique. These 2004 charges were recorded to asset impairments ($2.0 million) and discontinued operations ($49.4 million or $43.8 million, net of tax) on the consolidated statement of operations.

Results of Operations

(All comparisons are with the previous year, unless otherwise stated.)

Net Revenues

Our unit volume is driven by product offerings, number of direct sales personnel, recurring sales and, to some extent, pricing. Our base of installed systems provides a source of recurring revenues from the sale of disposable tags and service revenues. For fiscal 2005, 2004, and 2003, approximately 43%, 41%, and 42%, respectively, of our net revenues were attributable to sales of disposable tags, custom and stock labels, and service to our installed base of customers.

Our customers are substantially dependent on retail sales, which are seasonal, subject to significant fluctuations, and difficult to predict. Such seasonality and fluctuations impact our sales. Historically, we have experienced lower sales in the first half of each year.

24

N/A – Comparative percentages are not meaningful.

25

Security revenues increased by $43.5 million or 8.5% in 2005 compared to 2004. The positive impact of foreign currency translation was $3.4 million. The remaining increase was primarily due to growth in the EAS revenues in the US and European markets ($38.3 million and $7.1 million, respectively), partially offset by a decline in the US and International Americas CCTV revenues ($4.8 million and $3.0 million, respectively). The growth in the US and European EAS revenues can be primarily attributed to large account chain-wide installations, whereas the decrease in the CCTV revenues is primarily connected with large one-time installations that took place in fiscal 2004, which did not repeat in fiscal 2005.

Labeling services revenues increased by $11.0 million or 16.8% over last year. The positive impact of foreign currency translation was approximately $0.2 million. The remaining increase was primarily due to increased Check-Net® revenues in Europe and US of $7.3 million and $1.0 million, respectively, coupled with an increase in the Intelligent Library Systems (ILS) revenues in the US and Asia Pacific of $2.2 million and $0.5 million, respectively. The increase in Check-Net® revenues resulted from the increased focus on expanding our customer base and it is mainly attributable to the growth of our integrated apparel source tag labels revenues.

Retail merchandising revenues decreased by $5.1 million or 5.3% in 2005 compared to 2004. The positive impact of foreign currency translation was approximately $1.2 million. The net decrease was due primarily to a decline of the HLS revenues in Europe of approximately $3.7 million. This decline was due to difficult retail trading environment and the continued transition by retailers from hand-held price labeling to automated barcoding and scanning.

Gross Profit

The principal elements comprising cost of revenues are product cost, field service and installation cost, and royalties paid to third parties. In 2005, as a percentage of net revenues, these three elements represent 44.4%, 11.6%, and 0.6%, respectively.

During 2005, gross profit increased by $3.5 million or 1.1% from $309.9 million to $313.4 million. The benefit of foreign currency translation on gross profit was approximately $1.8 million. The gross profit, as a percentage of net revenues, decreased from 46.1% to 43.5%.

Security gross profit, as a percentage of net revenues, decreased from 46.3% in 2004 to 43.5% in 2005 and was negatively impacted by increased field service costs resulting from large account chain-wide installations of our EAS products.

Gross profit, as a percentage of net revenues, for labeling services decreased from 34.3% in 2004 to 31.8% in 2005. The decrease in gross profit, as a percentage of labeling revenues, resulted primarily from lower gross margins on the labels used in our ILS product line in the US.

The retail merchandising gross profit, as a percentage of revenues, decreased to 53.1% in 2005 from 53.6% in 2004. This decrease, as a percentage of retail merchandising revenues, was mainly due to a shift in sales mix.

For fiscal years 2005 and 2004, field service and installation costs were 11.6% and 10.2% of net revenues, respectively. The increase was due primarily to an increase in fees from subcontractors, as a result of installation activities related to large chain-wide installations of our EAS products.

Selling, General, and Administrative Expenses

During 2005, selling, general, and administrative expenses increased $1.2 million or 0.5% over 2004. Foreign currency translation increased selling, general, and administrative expenses by approximately $2.0 million. As a percentage of revenues, selling, general, and administrative expenses decreased to 33.0% in fiscal 2005 from 35.2% in 2004. This decrease resulted primarily from reduction in sales and marketing expenses as a percentage of revenue.

26