10-K

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

For the fiscal year ended December 31, 2006

Commission File No. 1-11257

CHECKPOINT SYSTEMS, INC.

(Exact name of Registrant as specified in its Articles of Incorporation)

Pennsylvania	22-1895850
(State of Incorporation)	(IRS Employer Identification No.)
101 Wolf Drive, PO Box 188, Thorofare, New Jersey	08086
(Address of principal executive offices)	(Zip Code)

856-848-1800

(Registrant’s telephone number, including area code)

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

	Name of each exchange on which
Title of each class to be so registered	each class is to be registered
Common Stock Purchase Rights	New York Stock Exchange

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

Common Stock, Par Value $.10 Per Share
(Title of class)

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o            No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes o            No þ

     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 past 90 days.

Yes o            No þ

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. þ

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ            Accelerated filer o            Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o            No þ

     As of June 25, 2006, the aggregate market value of the Common Stock held by non-affiliates of the Registrant was approximately $819,895,000.

     As of March 26, 2007, there were 39,374,189 shares of the Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement for its 2007 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

RESTATEMENT

Overview

Checkpoint Systems, Inc. (the “Company”) is restating herein its historical financial data for the quarters ended March 26, 2006, June 25, 2006 and September 24, 2006, the year ended December 25, 2005 including the quarters ended March 27, 2005, June 26, 2005, September 25, 2005 and December 25, 2005, the year ended December 26, 2004 and other selected financial data for the year ended December 28, 2003 and December 29, 2002. The restatement is the result of the combined effect of financial statement errors attributable to (i) the overstatement of revenue due to the improper activities of certain former employees of the Company’s Japanese sales subsidiary; (ii) errors in the timing of recognition of revenue for certain transactions in the Company’s CheckNet® business; and (iii) income tax adjustments recorded in the fourth quarter of 2005 relating to prior years. The Company has not amended its Annual Reports on Form 10-K or its Quarterly Reports on Form 10-Q for periods affected by the restatement adjustments, and accordingly the financial statements and related financial information contained in such reports should not be relied upon. For a discussion of the significant restatement adjustments and the background leading to the adjustments, see Notes 1 and 22 to the consolidated financial statements. All amounts in this Annual Report on Form 10-K affected by the restatement adjustments reflect such amounts as restated.

The restatement has the following impact on Net Income and Diluted Earnings Per Common Share (EPS) by period:

Increase (Decrease) by Periods

	Net Income			Diluted EPS
(dollar amounts in thousands, except per share information)	Adjustment			Adjustment
Cumulative adjustment as of December 31, 2001		42			N/A
2002		(318	)		(0.01	)
2003		(308	)		(0.01	)
2004		1,567			0.04
2005
1Q05		(249	)		(0.01	)
2Q05		(281	)		(0.01	)
3Q05		173			0.00
4Q05		(2,527	)		(0.06	)
Year		(2,884	)		(0.07	)
2006
1Q06		(882	)		(0.02	)
2Q06		(571	)		(0.01	)
3Q06		(419	)		(0.01	)
Nine months ending September 24, 2006		(1,872	)		(0.05	)
Total		(3,773	)		(0.10	)

For additional information relating to the effect of the restatement, see the following items:

PART II.
	Item 6.	Selected Financial Data	19
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
	Item 8.	Financial Statements and Supplementary Data	39
	Item 9A.	Controls and Procedures	100

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CHECKPOINT SYSTEMS, INC.

FORM 10-K

Table of Contents

			Page
PART I.
	Item 1.	Business		4
	Item 1A.	Risk Factors Related to Our Business		13
	Item 1B.	Unresolved Staff Comments		15
	Item 2.	Properties		15
	Item 3.	Legal Proceedings		15
	Item 4.	Submission of Matters to Vote of Stockholders		15
PART II.
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		16
	Item 6.	Selected Financial Data		19
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		37
	Item 8.	Financial Statements and Supplementary Data		39
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		100
	Item 9A.	Controls and Procedures		100
	Item 9B.	Other Information		102
PART III.
	Item 10.	Directors and Executive Officers and Corporate Governance		102
	Item 11.	Executive Compensation		102
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder		102
	Item 13.	Certain Relationships and Related Transactions, and Director Independence		102
	Item 14.	Principal Accounting Fees and Services		102
PART IV.
	Item 15.	Exhibits and Financial Statement Schedules		102
	SIGNATURES			104
	INDEX TO EXHIBITS			105
	SCHEDULE II – Valuation and Qualifying Accounts			107
Ratio of Earnings to Fixed Charges
Subsidiaries of Registrant
Consent of Independent Registered Public Accounting Firm
Certification of the Chief Executive Officer
Certification of the Chief Financial Officer
Certification of the CEO and the CFO

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PART I

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties and reflect the Company’s judgment as of the date of this report. Specific forward-looking statements are identified by words such as “believe,” “expect,” “will,” “intend,” “anticipate,” “estimate,” “project,” “plan” or similar expressions. Forward-looking statements may involve risks and uncertainties that could cause actual results to differ materially from our historical and anticipated results. Such risks and uncertainties include the detection by our Audit Committee’s investigation of all principal improper activities of personnel of Checkpoint Systems Japan Co. Ltd., our Japanese sales subsidiary, or other employees of the Company; the effectiveness of our disclosure controls and procedures, our internal control over financial reporting and their conformity to applicable requirements; the risk that we could, in the future, identify one or more additional material weakness in our internal control over financial reporting; the impact of the investigation on the Company’s business operations, its relationships with business partners, employee relations and its pipeline; and anticipated costs and expenses of the investigation and related activities. Actual results of the Company may differ materially from those indicated by these forward-looking statements as a result of various risks and uncertainties, including additional unanticipated accounting issues or audit issues; inability of the Company or our independent registered public accounting firm to confirm financial information or data; unanticipated accounting or financial reporting issues that require additional efforts, procedures, review or investigation; our ability to address fully any remaining issues with respect to our internal control over financial reporting; the detection of wrongdoing or improper activities not detected and covered by the investigation; the impact upon operations of investigations, legal compliance matters or internal controls review, improvement and remediation; difficulties in controlling expenses, including costs of investigations, legal compliance matters or internal controls review, improvement and remediation; impact of changes in management or staff levels; and other risks and uncertainties discussed more fully in this report under Item 1A. “Risk Factors Related to Our Business” and Item 7. “Management’s Discussion and Analysis.” We disclaim any obligation to update or revise any forward-looking statements made herein.

Item 1. BUSINESS

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 31 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.

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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 January 2006, we completed the sale of our barcode systems business to SATO, a global leader in barcode printing, labeling, and Electronic Product Code (EPC)/Radio Frequency Identification (RFID) solutions.

In November 2006, we acquired ADS Worldwide (ADS). Based in Hull, England, ADS is an established supplier of tags, labels and trim to apparel manufacturers, retailers and brands around the world. ADS provides us with new technological and production capabilities and is in line with our strategy to grow our CheckNet^® service bureau business to create increased value for our customers and stockholders.

Products and Offerings

Our products and services are organized into three operating segments: security, labeling services, and retail merchandising. Each segment offers an assortment of products and services that in combination are 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 56%, 58%, and 55% of our 2006, 2005, and 2004 total revenues, respectively. Systems for closed-circuit television (CCTV), fire and intrusion, and access control also fall within the security business segment. For 2006, 2005, and 2004, the CCTV business represented 17%, 17%, and 20% 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 represented approximately 73% of total revenues in 2006.

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.

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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 U.S.-based 24-hour Central Station Monitoring Service.

Access Control Systems

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

LABELING SERVICES

Labeling services is our second largest business, generating approximately 15% of our revenues in 2006. 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 of e-commerce-enabled capabilities (Check-Net®), and EAS and RFID technologies. Increasingly, the market is moving toward more sophisticated tag solutions that incorporate RFID components and that will automate many aspects of supply chain tracking and facilitate many new merchandising enhancements for suppliers and consumers. Check-Net® revenues represented 13%, 9%, and 9% of our total revenues for 2006, 2005, and 2004, respectively. No other product in this segment represented more than 10% of revenues.

Check-Net® (Service Bureau)

We operate a global service bureau network of more than 30 locations worldwide which supplies customers with customized retail apparel tags and labels, typically to the location where the retail goods are manufactured. 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. CheckNet’s® printing capacity and service bureau network expanded in November 2006 with the acquisition of ADS.

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 125 libraries in the U.S..

RFID Tags and Labels

The company has a RFID initiative aimed at positioning Checkpoint as a quality producer of RFID tags and labels, leveraging its high volume, low cost RF circuit production and manufacturing knowledge. In October 2006, we announced our intention to focus our RFID initiative on our core retail customers and our existing library business.

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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 the increasing use of scanning technology in retail, our HLS products are serving a declining market. Retail merchandising, which is focused on European and Asian markets, represents approximately 12% of our business, with no product group in this segment accounting for as much as 10% of our revenues.

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. Our HLS products currently 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 queuing systems. These systems are no longer sold in the U.S. as a result of the divesture to SATO in January 2006.

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.

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 U.S.; 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.

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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.” Our ongoing marketing strategy includes the following:

• open new, and expand, existing retail accounts with new products that will increase penetration through integrated value-added solutions for labeling, security, and merchandising;

• establish business-to-business web-based capabilities to enable retailers and manufacturers to initiate and track their orders through the supply chain on a global basis;

• expand market opportunities to manufacturers and distributors, including source tagging and value-added labeling;

• continue to promote source tagging around the world with extensive integration and automation capabilities using new EAS, RFID, and auto-ID technologies; and

• assist retailers in understanding the benefits and implementation of the new Electronic Product Code (EPC) using RFID technology.

We market our products primarily:

• by providing total loss prevention solutions to the retailer;

• by helping retailers sell more merchandise by avoiding stock-outs and making merchandise available to consumers;

• by serving as a single point of contact for auto-ID and EAS labeling and ticketing needs;

• through direct sales efforts and targeted trade show participation;

• through superior service and support capabilities; and

• by emphasizing source tagging benefits.

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

• increase installation of EAS equipment on a chain-wide basis with leading retailers around the world;

• offer integrated tag solutions, including custom tag conversion that addresses the needs of branding, tracking, and loss prevention;

• assist retailers in promoting source tagging with vendors;

• broaden penetration of existing accounts by promoting our in-house printing, global service bureau network (Check-Net®), and labeling solution capabilities;

• support manufacturers and suppliers to speed implementation;

• expand RF tag technologies and products to accommodate the needs of the packaging industry; and

• develop compatibility with EPC/RFID technologies.

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Manufacturing, Raw Materials, and Inventory

Electronic Article Surveillance

We manufacture our EAS products in facilities located in Puerto Rico, Japan, Germany, the Dominican Republic, Malaysia, 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 involve customers, engineering, manufacturing, and marketing in the design and development of our products. For RF sensor production, we purchase raw materials from outside suppliers and assemble electronic components at our facilities in the Dominican Republic for the majority of our sensor product lines. The manufacture of some RF sensors sold in Europe and all EM hardware is outsourced. For our EAS disposable tag production, we purchase raw materials and components from suppliers and complete the manufacturing process at our facilities in Puerto Rico, Japan, Germany, and the Netherlands. We sold approximately 3.5 billion disposable tags in 2006 and have the capacity to produce more than 5 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 U.S., 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 U.S., and Malaysia. Local production facilities are also situated in Hong Kong. Manufacturing in Germany is focused on HLS labels and print heads for HLS tools. Our facilities in the Netherlands and in the U.S. manufacture labels and tags for laser overprinting, thermal labels. 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. With the acquisition of ADS in November 2006, we acquired label manufacturing facilities in the UK, Hong Kong, China, and Turkey.

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 2006, 93% of total U.S. 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 16 European countries and in Argentina, Australia, Brazil, Canada, Dominican Republic, Hong Kong, India, Japan, Malaysia, China, Mexico, Turkey and New Zealand.

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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.

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 U.S. 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 $54.9 million at December 31, 2006 compared to approximately $52.2 million at December 25, 2005. We anticipate that substantially all of the backlog at the end of 2006 will be delivered during 2007. 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.

Patents & Licensing

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

We also license technologies relating to RFID applications, EAS Products, 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.

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.

SEASONALITY

Our business is subject to seasonal influences, which generally causes us to realize higher levels of sales and income in the second half of the year. Our business’ seasonality substantially follows the retail cycle of our customers, which generally has revenues weighted towards the last half of the calendar year in preparation for the holiday season.

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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 2006 revenues were approximately $41.0 billion.

Within the U.S. 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 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 distinctive 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 largest 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 spent approximately $19.4 million, $19.1 million, and $28.5 million, in research and development activities during 2006, 2005, and 2004, 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.

11

Employees

As of December 31, 2006, we had 3,213 employees, including six executive officers, 90 employees engaged in research and development activities, and 535 employees engaged in sales and marketing activities. In the United States, 10 of our employees are represented by a union. In Europe, we believe that approximately 500 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 31, 2006, and long-lived assets as of December 31, 2006, December 25, 2005, and December 26, 2004, 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 100 F Street, NE, 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.

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:

			Tenure
			with	Position with the Company and
Name	Age		Company	Date of Election to Position on
George W. Off		60	4 years	Chairman of the Board Directors, President and Chief Executive Officer since June 2002
W. Craig Burns		47	11 years	Executive Vice President, Chief Financial Officer and Treasurer since March 2001
John E. Davies, Jr.		49	15 years	President, Intelligent Labeling Solutions since March 2006
Per H. Levin		49	12 years	Worldwide President, SMMS since March 2006
John R. Van Zile		54	3 years	Senior Vice President, General Counsel and Secretary since June 2003
Raymond Andrews		54	1 year	Vice President, Chief Accounting Officer since August 2005

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.

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Mr. Davies was appointed President, Intelligent Label Solutions in March 2006. Mr. Davies was President, Asia Pacific and Latin America from June 2004 until March 2006, 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. Levin was appointed President, Shrink Management and Merchandising Solutions in March 2006. He was President of Europe from June 2004 until March 2006, 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.

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.

Item 1A. RISK FACTORS RELATED TO OUR BUSINESS

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

(1)	changes in international business conditions;
	We are a multinational manufacturer and marketer of integrated system solutions for retail security, labeling, and merchandising. Our international operations account for approximately 63% of our revenues. Our results of operations could be affected by material adverse changes in foreign economic conditions generally or in markets served.
(2)	foreign currency exchange rate and interest rate fluctuations;
	Economic factors, including inflation and fluctuations in foreign currency exchange rates and interest rates, and competitive factors in the countries in which we operate, could affect our revenues, expenses and results of operations.
(3)	lower than anticipated demand by retailers and other customers for our products, particularly in the current economic environment;
	Our business is heavily dependent on the retail marketplace. Changes to the economic environment or reductions in retailer spending could adversely affect our revenues and results of operations.
(4)	slower commitments of retail customers to chain-wide installations and/or source tagging adoption or expansion;
	Our revenues are dependent on our ability to maintain and increase our system installation base. The system installation base leads to additional revenues, which we term as “recurring revenues,” through the sale of tags and maintenance services. In addition, we partner with manufacturers to include our sensor tags into the product during manufacturing.

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	If the commitment for chain-wide installation declines or the adoption or expansion of our source tag program does not occur, it could have an adverse affect on our revenues and results of operations.
(5)	possible increases in per unit product manufacturing costs due to less than full utilization of manufacturing capacity as a result of slowing economic conditions or other factors;
	Our manufacturing capacity is designed to meet our current and future anticipated demands. If our product demand decreases as a result of economic conditions and other factors, it could increase our cost per unit and affect our cost of sales and results of operations.
(6)	our ability to provide and market innovative and cost-effective products;
	We operate in competitive markets which are sensitive to price. Our ability to provide cost-effective products could affect our customer demand.
(7)	the development of new competitive technologies;
	Our long term success will depend on transitioning from existing technologies into the next generation of technology. While we are investigating and investing in potential replacement technologies such as radio frequency identification, there is no guarantee that we will be successful in maintaining our current market position in the future.
(8)	our ability to maintain our intellectual property;
	We have a number of patents that will be expiring in the next several years. The expiration of these patents will reduce the barriers to entry into our existing lines of business and may result in loss of market share.
(9)	competitive pricing pressures causing profit erosion;
	We operate in highly competitive business segments. If pricing in any of these segments were to decrease due to competitive pressures, it could have an adverse affect on our results of operations.
(10)	the availability and pricing of component parts and raw materials;
	Our ability to grow earnings will be affected by increases in the cost of component parts and raw materials, including electronic components, circuit boards, aluminum foil, resins, paper, and ferric chloride solutions. We may not be able to offset fully the effects of higher component parts and raw material costs through price increases, productivity improvements or cost reduction programs.
(11)	possible increases in the payment time for receivables as a result of economic conditions or other market factors;
	The majority of our customer base is in the retail marketplace. A material change in the economic condition of this sector or other sectors served by us could have a material effect on our results from operations and anticipated cash from operations.
(12)	changes in regulations or standards applicable to our products;
	Our EAS products are subject to FCC regulation and equivalent regulatory oversight in Europe. While we continually monitor potential changes, any change could affect our ability to compete in that market.
(13)	the ability to implement cost reduction in field service, sales, and general and administrative expense, and our manufacturing and supply chain operations without significantly impacting revenue and profits; and
	We are in the process of taking actions to rationalize our field service, improve our sales productivity, reduce our general and administrative expenses, and reconfigure our manufacturing and supply chain operations. While we will monitor the progress, our ability to execute the changes to these areas could have an impact on future revenues and profits.
(14)	material weaknesses or deficiencies in our internal control over financial reporting could harm stockholder and business confidence in our financial reporting, and other aspects of our business.

14

The maintenance of an effective system of internal control over financial reporting is necessary for us to provide reliable financial reports. In March 2007, we restated our consolidated financial statements for the years ended 2004 and 2005, and the four quarterly periods in 2005 and the first three quarters in 2006. We identified a material weakness in our internal control over financial reporting that is described in Item 9A of this report. As a result of this material weakness, management’s assessment concluded that our internal control over financial reporting was ineffective. The material weakness has not been fully addressed. It is also possible that additional material weaknesses will be identified in the future. Until we complete the remediation of the material weakness, we risk material misstatements to the annual or interim financial statements that are not prevented or detected on a timely basis. The current material weakness or any future weaknesses or internal control deficiencies could hurt confidence in our business and consolidated financial statements, impacting our ability to do business with customers, investors, securities analysts, investors and others.

Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 2. PROPERTIES

Our principal corporate offices are located at 101 Wolf Drive, Thorofare, New Jersey. As of December 31, 2006, we owned or leased approximately 2.1 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, the UK and the USA. We believe our current manufacturing capacity will support our needs for the foreseeable future.

Item 3. LEGAL PROCEEDINGS

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.

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

On June 22, 2006, the Company settled the follow-on purported class action suits that were filed in connection with the ID Security Systems Canada Inc. litigation. The purported class action complaints generally alleged a claim of monopolization. The settlement was for $1.45 million in cash and credits for the purchase of 90 million radio frequency label tags. As a result, we recorded a pre-tax charge to earnings of $2.3 million. As a portion of the settlement is in the form of vouchers for the future purchases of tags, the settlement is anticipated to impact revenue and margin over the term of the redemption period for the vouchers.

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. On January 29, 2007 the case went to trial. On February 13, 2007 a jury found in favor of the defendants. This decision is not expected to significantly impact revenue or margins since the original patent was scheduled to expire in March 2008.

Item 4. SUBMISSION OF MATTERS TO VOTE OF STOCKHOLDERS

No matter was submitted during the fourth quarter of 2006 to a vote of stockholders.

15

PART II

Item 5. MARKET FOR THE REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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.

	Market Price Per Share
	High		Low
Fiscal year ended December 31, 2006
First Quarter	$	29.91	$	24.13
Second Quarter	$	27.55	$	19.63
Third Quarter	$	22.28	$	15.37
Fourth Quarter	$	20.60	$	16.41
Fiscal year ended December 25, 2005
First Quarter	$	19.35	$	15.14
Second Quarter	$	18.11	$	15.49
Third Quarter	$	23.83	$	16.91
Fourth Quarter	$	25.43	$	21.40

Holders of Record

As of March 26, 2007, there were 817 holders of record 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 dividends 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 repurchases of our common stock since 1998.

Recent Sales of Unregistered Securities

There has been no sale of unregistered securities in fiscal 2006, 2005 or 2004.

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Equity Compensation Plans

The following table sets forth our shares authorized for issuance under our equity compensation plans at December 31, 2006:

				Equity
	Equity			compensation
	compensation			plans not
	plans approved			approved by
	by shareholders			shareholders			Total
Number of securities to be issued upon exercise of outstanding options		3,021,183	(1)		133,334	(2)		3,154,517
Weighted average exercise price of outstanding options	$	16.22		$	17.74		$	16.28
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected above)		2,266,442			—			2,266,442

(1)	Includes Stock Options and performance based restricted stock units.
(2)	Inducement options granted to the former President of North America in connection with his hire in fiscal 2004.

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 former President of North America in connection with his hire. Prior to the President of North America leaving only two-thirds of this grant had vested. As of December 31, 2006, there are no options available for grant under this plan.

17

STOCK PERFORMANCE GRAPH

The following graph compares the cumulative total shareholder return on the Common Stock of the Company for the period beginning December 31, 2001 and ending on December 29, 2006, with the cumulative total return on the Center for Research in Security Prices Index (“CRSP Index”) for NYSE/AMEX/NASDAQ Stock market, and the CRSP Index for NASDAQ Electronic Components and Accessories, assuming the investment of $100 in the Company’s Stock, the CRSP Index for NYSE/AMEX/NASDAQ Stock market, and the CRSP Index for NASDAQ Electronic Components and Accessories and the reinvestment of all dividends.

			NASDAQ
			Electronic
	Checkpoint	NYSE/AMEX/NASDAQ	Components And
Year	Systems, Inc.	Stock Market Index	Accessories Index
2001	100	100	100
2002	77.2	79.4	53.5
2003	141.1	104.6	103.0
2004	134.7	117.5	81.5
2005	184.0	124.7	80.7
2006	150.7	144.6	88.8

The foregoing Stock Performance Graph shall not be deemed incorporated by reference by any general statement incorporating by reference the Registrant’s Definitive Proxy Statement for its 2007 Annual Meeting of Shareholders into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts.

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Item 6. SELECTED FINANCIAL DATA

The consolidated financial information below has been restated, which is more fully described in Note 1 to Consolidated Financial Statements of this Annual Report. The data from our Consolidated Statement of Operations and Consolidated Balance Sheets for the fiscal year ended December 28, 2003 and December 29, 2002 and the Consolidated Balance Sheets for the fiscal year ended December 26, 2004 have been restated as set forth in this Annual Report, but such restated data have not been audited and are derived from the Company’s books and records. The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, “Management’s Discussion and Analysis — Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included in Item 8 of this Annual Report to fully understand factors that may affect the comparability of the information presented below. We have not amended any other previously-filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by this restatement. The financial information that has been previously filed or otherwise reported for these periods is superseded by the information in this Annual Report on Form 10-K, and the financial statements and related financial information contained in previously-filed reports should no longer be relied upon.

(dollar amounts are in thousands except per share amounts)

	Dec. 31,			Dec. 25,			Dec. 26,			Dec. 28,			Dec. 29,
Year ended	2006			2005			2004			2003			2002
				(As Restated)			(As Restated )			(As Restated)			(As Restated)
STATEMENT OF OPERATIONS DATA
Net revenues	$	687,775		$	717,992		$	670,453		$	615,998		$	535,804
Earnings from continuing operations before income taxes	$	41,975		$	40,127		$	21,031		$	29,443		$	22,801
Income taxes	$	6,987		$	11,661		$	2,064		$	10,069		$	10,533
Earnings from continuing operations	$	35,019		$	28,413		$	18,823		$	19,186		$	12,123
Discontinued operations, net of tax	$	903		$	8,108		$	(37,448	)	$	9,659		$	9,596
Cumulative effect of change in accounting principle, net of tax	$	—		$	—		$	—		$	—		$	(72,861	)
Net earnings (loss)	$	35,922	(1)	$	36,521	(2)	$	(18,625	)(3)	$	28,845	(4)	$	(51,142	)(5)
Earnings (loss) per share from continuing operations before cumulative effect of change in accounting principle:
Basic	$	.89		$	.75		$	.51		$	.58		$	.37
Diluted	$	.87		$	.72		$	.50		$	.57		$	.37
Net earnings (loss) per share:
Basic	$	.91		$	.96		$	(.51	)	$	.87		$	(1.58	)
Diluted	$	.89		$	.93		$	(.50	)	$	.85		$	(1.56	)
Depreciation and amortization	$	19,504		$	22,539		$	26,316		$	31,281		$	30,932

(1)	Includes a $7.0 million ($4.8 million, net of tax) restructuring charge, a $2.3 million ($1.5 million, net of tax) litigation settlement charge, and a $1.8 million ($1.1 million, net of tax) gain from the settlement of a capital lease. Also included in discontinued operations is a $2.8 million ($1.4 million, net of tax) gain on the divestment of our bar-code business.
(2)	Includes a $12.6 million ($8.5 million, net of tax) restructuring charge, a $1.4 million ($1.4 million, net of tax) asset impairment charge, $2.0 million of additional tax expense related to our tax restructuring and dividend repatriation under the American Jobs Creation Act, and a $0.7 million ($0.7 million, net of tax) goodwill impairment charge.
(3)	Includes a $34.7 million ($34.7 million, net of tax) goodwill impairment, a $20.0 million ($13.0 million, net of tax) litigation settlement, $16.7 million ($10.3 million, net of tax) asset impairment, and a $3.0 million ($2.0 million, net of tax) restructuring charge reversal.
(4)	Includes a $7.5 million ($5.0 million, net of tax) restructuring charge, a $1.5 million ($1.0 million, net of tax) asset impairment, and a $0.3 million ($0.2 million, net of tax) restructuring charge reversal related to fourth quarter 2001 and 2002 restructuring programs.
(5)	Includes a non-cash reduction in net earnings of $72.9 million resulting from the adoption of Statement of Financial Accounting Standards No. 142, (SFAS 142) “Goodwill and Other Intangible Assets,” a $1.5 million restructuring charge (net of tax), a $0.3 million asset impairment (net of tax), and a $1.7 million restructuring charge reversal (net of tax), as a result of changes in estimates.

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SELECTED FINANCIAL DATA (continued)

(dollar amounts are in thousands)

	Dec. 31,				Dec. 25,				Dec. 26,				Dec. 28,				Dec. 29,
	2006				2005				2004				2003				2002
						(As Restated)				(As Restated)				(As Restated)				(As Restated)
AT YEAR END
Working capital		$	254,024			$	208,255			$	168,382			$	77,172			$	108,855
Total debt		$	16,534			$	39,745			$	73,998			$	146,507			$	209,974
Stockholders’ equity		$	473,581			$	396,420			$	379,645			$	322,660			$	221,447
Total assets		$	781,191			$	739,245			$	769,685			$	773,087			$	680,479
FOR THE YEAR ENDED
Capital expenditures		$	11,520			$	10,846			$	11,342			$	12,714			$	7,449
Cash provided by operating activities		$	22,386			$	44,618			$	23,280			$	101,796			$	110,059
Cash provided by (used in) investing activities		$	7,963			$	(8,521	)		$	(10,338	)		$	(11,698	)		$	(7,018	)
Cash used in financing activities		$	(6,945	)		$	(18,283	)		$	(24,503	)		$	(39,197	)		$	(95,524	)
RATIOS
Return on net sales (a)			5.22	%			5.09	%			(2.78	%)			4.68	%			(9.54	%)
Return on average equity (b)			8.26	%			9.41	%			(5.30	%)			10.60	%			(22.15	%)
Return on average assets (c)			4.73	%			4.84	%			(2.41	%)			3.97	%			(7.14	%)
Current ratio (d)			2.31				1.99				1.72				1.26				1.57
Percent of total debt to capital (e)			3.37	%			9.11	%			16.31	%			31.23	%			48.67	%

(a)	“Return on net sales” is calculated by dividing net earnings (loss) after the cumulative effect of change in accounting principle by net sales.
(b)	“Return on average equity” is calculated by dividing net earnings (loss) after the cumulative effect of change in accounting principle by average equity.
(c)	“Return on average assets” is calculated by dividing net earnings (loss) after the cumulative effect of change in accounting principle by average assets.
(d)	“Current ratio” is calculated by dividing current assets by current liabilities.
(e)	“Percent of total debt to capital” is calculated by dividing total debt by total debt and equity.

(amounts are in thousands, except employee data)

	Dec. 31,		Dec. 25,		Dec. 26,			Dec. 28,			Dec. 29,
	2006		2005		2004			2003			2002
Other Information
Weighted average number of shares
Outstanding – diluted		40,233		39,075		37,604	(1)		33,747	(2)		32,785	(3)
Number of employees		3,213		3,955		4,260			4,042			3,930
Backlog	$	54,899	$	52,234	$	63,026		$	52,703		$	38,955

(1)	Excludes 2,187 common shares from the assumed conversion of the subordinated debentures as it is anti-dilutive.
(2)	Excludes 6,189 common shares from the assumed conversion of the subordinated debentures as it is anti-dilutive.
(3)	Excludes 6,528 common shares from the assumed conversion of the subordinated debentures as it is anti-dilutive.

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.”

Restatement of Financial Statements

In this Annual Report on Form 10-K, we are restating herein our historical financial data for the quarters ended March 26, 2006, June 25, 2006 and September 24, 2006, the year ended December 25, 2005 including the quarters ended March 27, 2005, June 26, 2005, September 25, 2005 and December 25, 2005, the year ended December 26, 2004. The restatement is the result of the combined effect of financial statement errors attributable to (i) the overstatement of revenue due to the improper activities of certain former employees of the Company’s Japanese sales subsidiary; (ii) errors in the timing of recognition of revenue for certain transactions in the Company’s CheckNet® business; and (iii) income tax adjustments recorded in the fourth quarter of 2005 relating to prior years. The Company has not amended its Annual Reports on Form 10-K or its Quarterly Reports on Form 10-Q for periods affected by the restatement adjustments, and accordingly the financial statements and related financial information contained in such reports should not be relied upon.

During the fourth quarter of 2006, the Company’s Audit Committee initiated an independent investigation with respect to the Company’s Japanese sales subsidiary. Based on this investigation, it was determined that improper activities by certain employees of the subsidiary affected the financial reporting of the subsidiary and that the improper activities were contained within the Japanese sales subsidiary. As a result of the investigation, the employment of both the Chairman and the President of the Japanese sales subsidiary have been terminated. During the fourth quarter of 2006, the subsidiary dismissed its Controller and the General Manager of its RFID Business.

For a discussion of the significant restatement adjustments and the background leading to the adjustments, see Notes 1 and 22 to the consolidated financial statements. All amounts in this Annual Report on Form 10-K affected by the restatement adjustments reflect such amounts as restated.

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 of and earn revenues primarily from the sale of electronic article surveillance (EAS), closed-circuit television (CCTV), custom tags and labels (CheckNet®), hand-held labeling systems (HLS), retail merchandising systems (RMS), and radio frequency identification (RFID) systems. Applications of these products include retail security, automatic identification, and pricing and promotional labels and signage. Operating directly in 31 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 U.S., 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 the cost of these investments through product cost and operating expense reductions. We also intend to pursue acquisitions to extend our product offerings to our customers.

On January 30, 2006, we completed the sale transaction for our barcode systems (BCS) businesses and U.S. hand-held labeling and Turn-O-Matic® businesses (“disposal group”) and as a result recorded, in the first quarter of 2006, a pre-tax gain on sale of $2.8 million. The businesses included in the disposal group were highly integrated into our operations in many of the countries in which we operate.

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To respond to the lower revenue base resulting from the sale of the disposal group and improve our operating margins, we initiated actions in 2005 to rationalize the selling, general, and administrative structure that is not part of the disposal group. This major cost savings initiative, which continued into 2006, was focused on our European region where the BCS businesses were highly integrated into 14 countries. The European cost reduction initiatives focused on improving sales productivity by making better use of indirect sales channels and streamlining our field service operations. We also centralized accounting, customer service, and distribution operations in certain regions of Europe.

A second cost savings initiative focused on the global supply chain, where we have been evaluating improvements to manufacturing operations, supply chain operations, and sourcing of materials. As a result, we closed our UK labeling plant and consolidated those operations into our main Service Bureau in Terborg, Netherlands in 2005, and we moved our EAS electronics manufacturing from Puerto Rico to the Dominican Republic at the end of 2006. We continue to evaluate additional changes in our supply chain to improve manufacturing utilization, and optimize freight and delivery time. These changes to our supply chain could affect our ability to recover the value of certain fixed assets within our manufacturing facilities, which may result in a future impairment as the evaluation is finalized and plans are approved.

In the fourth quarter of 2006, we implemented changes to streamline our management structure, as well as focus our RFID strategy on our core retail customers and our existing library business. We continue to evaluate actions focused on improving our cost structure and the operating performance of the Company.

As a direct result of these detailed plans first initiated in the second quarter of 2005, employee headcount, excluding the acquisition of ADS, was reduced by 1,222 or 29% compared to the end of the first quarter 2005. This was accomplished through restructuring and attrition. Included in the employee headcount reduction are 374 employees who left the company as part of the sale of the disposal group. We realized approximately $15 million in cost savings in 2006 from these restructuring efforts. We expect to realize an additional $7 million of savings in product cost, field service costs, and selling, general and administrative expenses in 2007, and have plans to redeploy a portion of the savings to select market and sourcing opportunities. While some of the actions had a negative impact on sales and profits in the short term, we believe they will yield a positive, long-term impact on operating margins.

Net revenue for fiscal year 2006 was $687.8 million, a 4.2% decrease from fiscal year 2005. Foreign currency translation had a positive impact on revenue of approximately 0.1%. The decrease in revenues can be primarily attributed to large account chain-wide installations in the U.S. and Europe during 2005 that did not continue in 2006, the disruptive effect of the restructuring of European sales operations, and the planned move to indirect sales channels in certain markets. The decline was partially offset by growth in our CheckNet^® service bureau business.

During the second quarter 2006, we settled the class action lawsuit that arose in connection with the antitrust litigation with ID Security Systems Canada, Inc. The settlement was for $1.45 million in cash and credits for the purchase of 90 million radio frequency label tags. As a result, we recorded a pre-tax charge to earnings of $2.3 million. As a portion of the settlement is in the form of vouchers for the future purchases of tags, the settlement is anticipated to impact revenue and margin over the term of the redemption period for the vouchers.

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, convert new large chain retailers to RF-EAS, and reduce the cost of our products and infrastructure to respond to competitive pricing pressures.

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 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.

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Note 1 of the notes to the 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. For arrangements with multiple elements, we determine the fair value of each element and then allocate the total arrangement consideration among the separate elements.

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 our 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.

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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 the 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 charge 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 U.S. 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.

Pension Plans. We have various unfunded pension plans outside the U.S.. 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 $0.2 million effect on pension expense.

Stock Compensation. Effective December 26, 2005, we adopted the fair value recognition provision of Statement of Financial Accounting Standards (SFAS) 123R “Share-based Payment”, using the modified prospective transition method, and therefore have not restated prior period results. Under this method we recognize compensation expense for all share-based payments granted either after December 25, 2005 or prior to December 26, 2005 but not vested as of that date. Under the fair value recognition provisions of SFAS 123R, we recognize share-based compensation, net of an estimated forfeiture rate, and only recognize compensation cost for those shares expected to vest. For awards granted after the adoption date we recognize the expense on a straight-line basis over the requisite service period of the award. For non-vested awards granted prior to the adoption date, we continue to use the ratable expense allocation method. Prior to SFAS 123R adoption, we accounted for share-based payments under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and accordingly, generally recognized compensation expense only when we granted options with a discounted exercise price. Pro forma net earnings and earnings per share stated as if we applied the fair value method, are included in note 1 of our consolidated financial statement footnotes.

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Determining the fair value of share-based payment awards requires the input of highly subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the share-based compensation expense could be significantly different from what we have recorded in the current period. A change in the estimated forfeiture rate of 10% would have a $0.1 million effect on stock compensation expense. See Note 8 to the Consolidated Condensed Financial Statements for a further discussion on share-based compensation.

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, fund potential acquisitions, and product development requirements.

Our operating activities during fiscal 2006 generated cash of approximately $22.4 million compared to approximately $44.6 million during 2005. In 2006, the cash from operating activities was negatively impacted compared to 2005 by decreases in accounts payable, other current liabilities and restructuring payments. The decrease in accounts payable was due primarily to the timing of payments as our current fiscal year ended on December 31, 2006 compared to December 25, 2005 in the prior year. The other current liabilities decrease compared to prior year was due to lower bonus accruals in 2006 coupled with the payment of the 2005 bonus. The negative impact on cash resulting from the decrease in liabilities was partially offset by a decrease in other current assets, that was due primarily to the receipt of a $13.1 million tax refund in 2006. Our percentage of total debt to stockholders’ equity in 2006 decreased to 3.5% from 10.0%.

We continue to reinvest in the Company through our investment in our technology and process improvement. In 2006, our investment in research and development amounted to $19.4 million as compared to $19.1 million in 2005. These amounts are reflected in the cash generated from operations as we expense our research and development as it is incurred. In 2007, we anticipate spending of approximately $18.0 million on research and development.

Our capital expenditures during fiscal 2006 totaled $11.5 million, compared to $10.8 million during fiscal 2005. We anticipate capital expenditures to be used primarily to upgrade technology and improve our production capabilities to approximate $15.0 million in 2007.

We have various unfunded pension plans outside the U.S. These plans have significant pension costs and liabilities that are developed from actuarial valuations. For fiscal 2006, we made payments to employees covered under these plans of $3.6 million. Our funding expectation for 2007 is $3.9 million. We believe our current cash position, cash generated from operations, and the availability of cash 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.

The Company has a full-recourse factoring arrangement with Mitsubishi UFJ Factoring Co., Ltd. The arrangements were secured by trade receivables. The Company received 99.7% of the face amount of receivables that it desired to sell and Mitsubishi UFJ Factoring Co., Ltd. agreed, at its discretion, to buy. As of December 31, 2006 and December 25, 2005, the face amount of receivables sold and not yet collected was $0.8 million and $2.6 million, respectively. These receivables were recorded in accounts receivable on our consolidated balance sheets.

In November 2006, we cancelled a capital lease for one of our buildings with an outstanding amount owed of $10.3 million. This building was sublet to a third party tenant. The Company and the tenant reached a cancellation settlement which resulted in sublease income of $10.2 million. We recorded a $8.0 million impairment on this building as a result of the transaction. Additionally, we incurred a loss on the retirement of the capital lease of $0.2 million and an additional interest expense charge of $0.2 million. The sublease income, loss on the settlement of the capital lease, and the impairment were recorded in other operating income on our consolidated statement of operations.

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 31, 2006, we had ¥1.1 billion ($9.1 million) outstanding under this facility. Our available line of credit under this agreement is $139.3 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.

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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 31, 2006, we were in compliance with all of our debt covenants.

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 dividends 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 of cash under the $150.0 million revolving credit facility, and cash generated from future operations.

Quarterly Liquidity Analysis

The restatement of our financial statements did not materially impact our cash position for either the full fiscal years 2006 and 2005 or the interim periods. Restatement adjustments increased our outstanding short-term debt by $1.4 million, $1.3 million and $0.6 million for the fiscal year 2006 quarters ended March 26, 2006, June 25, 2006 and September 24, 2006, respectively, and by $0.3 million, $0.7 million, and $2.1 million for the fiscal year 2005 quarters ended March 27, 2005, June 26, 2005 and September 25, 2005, respectively. These increases were primarily the result of the factoring adjustments for our Japan subsidiary.

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 $36.8 million as of December 31, 2006. The scheduled timing of these rental commitments is detailed in our “Contractual Obligations” section.

Contractual Obligations

Our contractual obligations and commercial commitments at December 31, 2006 are summarized below:

			Due in less		Due in		Due in		Due after
Contractual Obligation	Total		than 1 year		1-3 years		3-5 years		5 years
	(dollar amounts in thousands)
Long-term debt(1)	$	9,433	$	115	$	231	$	9,087	$	—
Capital leases(2)		1,779		1,059		706		14		—
Operating leases		36,800		12,917		15,440		7,186		1,257
Pension obligations(3)		48,503		3,865		8,093		8,916		27,629
Inventory purchase commitments(4)		7,366		7,366		—		—		—
Total contractual cash obligations	$	103,881	$	25,322	$	24,470	$	25,203	$	28,886

			Due in less		Due in		Due in		Due after
Commercial Commitments	Total		than 1 year		1-3 years		3-5 years		5 years
	(dollar amounts in thousands)
Standby letters of credit	$	1,620	$	1,620	$	—	$	—	$	—
Surety bonds		1,522		766		756		—		—
Total commercial commitments	$	3,142	$	2,386	$	756	$	—	$	—

(1)	Includes interest payments through maturity of $366.
(2)	Includes interest payments through maturity of $124.
(3)	Amounts represent undiscounted projected benefit payments to our unfunded plans over the next 10 years. The expected benefit payments are estimated based on the same assumptions used to measure our accumulated benefit obligation at the end of 2006 and include benefits attributable to estimated future employee service of current employees.
(4)	Inventory purchase commitments represent the Company’s legally binding agreements to purchase fixed or minimum quantities of goods at determinable prices.

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Pension Plans

We maintain several defined benefit pension plans, principally in Europe. The majority of these pension plans are unfunded. Our pension expense for 2006 was $5.4 million, excluding a curtailment gain of $0.3 million, a settlement loss of $0.7 million and a special termination benefit charge of $0.2 million. Our pension expense for 2005 was $5.4 million, excluding a curtailment gain of $0.7 million.

We review our pension assumptions annually. Our assumptions for the year-end December 31, 2006 were a discount rate of 4.50%, an expected return of 3.80% 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 4.50% for 2006 and 4.25% for 2005. 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 a long-term rate of return on plan assets of 3.80% for 2006 and 3.75% for 2005.

As of December 31, 2006, we have adopted the recognition provisions of SFAS 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statement No. 87, 88, 106 and 132(R)” and as a result, we recognized the previously unrecognized actuarial losses into the accrued pension liability with an offsetting charge to accumulated other comprehensive income. The total amount recognized for actuarial losses in accumulated other comprehensive income as of December 31, 2006 was $14.7 million. As of December 25, 2005, these amounts were unrecognized and amounted to $14.5 million. The primary component of the actuarial 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 14 years. The impact of recognizing the actuarial losses on 2006, 2005 and 2004 pension expense are $0.7 million, $0.2 million, and $0.1 million, respectively. The total projected amortization for these losses in 2007 is approximately $0.6 million.

Exposure to Foreign Currency

We manufacture products in the U.S., 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 31, 2006, we had currency forward exchange contracts totaling approximately $15.9 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.

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Provision for Restructuring

2005 Restructuring Plan

In the second quarter of 2005, we initiated actions focused on reducing our overall operating expenses. This plan included the implementation of a cost reduction plan designed to consolidate certain administrative functions in Europe and a commitment to a plan to restructure a portion of our supply chain manufacturing to lower cost areas. During fourth quarter 2006, we continued to review the results of the overall initiatives and added an additional reduction focused on the reorganization of senior management to focus on key markets and customers. This additional restructuring reduced our management by 25%.

A net charge of $7.8 million was recorded in 2006 in connection with the 2005 Restructuring Plan. Included in the net charge was $7.2 million related to severance and a $0.7 million litigation settlement accrual related to employees previously terminated according to the restructuring plan in certain countries. Also included in the net charge was a $0.3 million pension curtailment gain related to employees previously terminated according to the restructuring plan in certain countries and an expense of $0.2 million for a special termination benefit provided to one employee according to the employee’s termination agreement.

The total restructuring charge for fiscal 2005 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 763, of which 671 have been terminated. Of the remaining 92 employees who have not yet been terminated, 73 employees were related to 2006 additions to the restructuring plan and 19 employees were notified in 2005. These terminations are expected to be completed by the end of the second quarter of 2007. The anticipated total cost is expected to approximate $24 million to $26 million of which $24.0 million has been incurred and $17.0 million has been paid. Termination benefits are planned to be paid 1 month to 24 months after termination. Upon completion, the annual savings are anticipated to be approximately $22 million to $24 million.

Restructuring accrual activity was as follows:

Fiscal 2006

(dollar amounts are in thousands)

	Accrual at				Charge
	Beginning		Charged to		Reversed to			Cash			Exchange		Accrual at
	of Year		Earnings		Earnings			Payments			Rate Changes		12/31/06
Severance and other employee-related charges	$	10,121	$	9,140	$	(1,225	)	$	(11,989	)	$	739	$	6,786

Included in the 2006 restructuring liability is a $0.7 million litigation settlement accrual related to employees previously terminated according to the restructuring plan in certain countries.

Fiscal 2005

(dollar amounts are in thousands)

	Accrual at				Charge
	Beginning		Charged to		Reversed to			Cash			Exchange			Accrual at
	of Year		Earnings		Earnings			Payments			Rate Changes			12/25/05
Severance and other employee-related charges	$	—	$	16,911	$	(957	)	$	(5,357	)	$	(476	)	$	10,121

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2003 Restructuring Plan

During 2006, we reversed $0.8 million related to the 2003 plan. This was composed of $0.4 million related to the release of our lease reserve to income as we have obtained a sublease for the property previously reserved and a $0.4 million severance reversal.

During 2005, we reversed $1.0 million of previously accrued severance related to the 2003 plan.

Goodwill and Asset Impairments

In September 2005, we classified our barcode labeling businesses and U.S. 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 U.S. 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.

In 2004, in accordance with the provisions of SFAS 142, we performed an impairment test which indicated the book value of our U.S. 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 2006, 2005, and 2004, approximately 45%, 43%, and 41%, 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.

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Analysis of Statement of Operations

The following table presents for the periods indicated certain items in the consolidated statement of operations as a percentage of total revenues and the percentage change in dollar amounts of such items compared to the indicated prior period:

										Percentage Change
	Percentage of Total Revenues									In Dollar Amount
	December 31,			December 25,			December 26,			Fiscal 2006			Fiscal 2005
	2006			2005			2004			vs.			vs.
Year ended	(Fiscal 2006)			(Fiscal 2005)			(Fiscal 2004)			Fiscal 2005			Fiscal 2004
				(As Restated)			(As Restated)
Net revenues
Security		72.7	%		76.7	%		75.8	%		(9.2	)%		8.3	%
Labeling services		14.9			10.6			9.8			34.5			15.8
Retail merchandising		12.4			12.7			14.4			(6.4	)		(5.3	)
Net revenues		100.0			100.0			100.0			(4.2	)		7.1
Cost of revenues		57.6			56.6			53.8			(2.6	)		12.6
Total gross profit		42.4			43.4			46.2			(6.4	)		0.7
Selling, general, and administrative expenses		33.0			33.1			35.2			(4.5	)		0.8
Research and development		2.8			2.7			4.2			1.6			(33.0	)
Asset impairments		—			0.2			0.3			N/A			(29.1	)
Restructuring expenses		1.0			1.7			(0.4	)		(44.3	)		N/A
Litigation settlement		0.3			—			3.0			N/A			N/A
Other operating income		0.2			—			—			N/A			N/A
Operating income		5.5			5.7			3.9			6.7			55.5
Interest income		0.7			0.3			0.2			N/A			49.2
Interest expense		0.3			0.4			1.0			(24.7	)		(59.1	)
Other gain (loss), net		0.2			—			—			N/A			N/A
Earnings from continuing operations before income taxes and minority interest		6.1			5.6			3.1			4.6			90.8
Income taxes		1.0			1.6			0.3			(40.1	)		N/A
Minority interest		—			—			—			N/A			63.2
Earnings from continuing operations		5.1			4.0			2.8			23.2			50.9
Earnings (loss) from discontinued operations, net of tax		0.1			1.1			(5.6	)		(88.9	)		N/A
Net earnings (loss)		5.2	%		5.1	%		(2.8	)%		(1.6	)%		N/A	%

N/A – Comparative percentages are not meaningful.

30

Fiscal 2006 compared to Fiscal 2005

Net Revenues

During 2006, revenues decreased by $30.2 million or 4.2% from $718.0 million to $687.8 million. Foreign currency translation had a positive impact on revenues of $1.0 million for the full year of 2006.

(dollar amounts in millions)

					Dollar Amount			Percentage
	December 31,		December 25,		Change Fiscal			Change
	2006		2005		2006			Fiscal 2006
Year ended	(Fiscal 2006)		(Fiscal 2005)		vs. Fiscal 2005			vs. Fiscal 2005
			(As Restated)
Net revenues:
Security	$	499.8	$	550.4	$	(50.6	)		(9.2	)%
Labeling Services		102.6		76.3		26.3			34.5
Retail Merchandising		85.4		91.3		(5.9	)		(6.4	)
Net revenues	$	687.8	$	718.0	$	(30.2	)		(4.2	)%

Security revenues decreased by $50.6 million or 9.2% in 2006 compared to 2005. The positive impact of foreign currency translation was approximately $0.1 million. The decline in security revenue was attributable to decreases in EAS revenues of $36.8 million and CCTV revenues of $8.7 million. The decrease of EAS revenue was primarily due to decreases in the U.S. and Europe of $32.2 million and $11.6 million, respectively, which was partially offset by an increase in Asia Pacific EAS revenues of $6.8 million. The decrease in U.S. revenues can be primarily attributed to large account chain-wide installations during 2005 that did not continue in 2006. The decrease in Europe revenues was due primarily to large chain-wide installations during 2005 without such comparables in 2006, the effects of the restructuring of European sales operations, and the planned move to indirect sales channels in certain markets. The Asia Pacific increase is a result of new chain-wide installations in 2006 and the growth of source tagging. The CCTV decline was due primarily to decreases in the U.S. and Europe of $5.6 million and $4.5 million, respectively. The decrease in U.S. CCTV was due to fewer large account chain-wide roll-outs this year compared to the prior year. The decrease of CCTV in Europe was due primarily to the planned exit from this business in the United Kingdom.

Labeling services revenues increased by $26.3 million or 34.5% over last year. The positive impact of foreign currency translation was approximately $0.4 million. The increase in revenues was primarily due to an increase in Check-Net® and Intelligent Library System revenues of $22.9 million and $3.0 million, respectively. The increase in Check-Net® revenues resulted from the expansion of our customer base using our integrated apparel source tag labels. The increase in Intelligent Library Systems revenue was attributable to an increase in installation activity in the U.S.

Retail merchandising revenues decreased by $5.9 million or 6.4% in 2006 compared to 2005. The positive impact of foreign currency translation was approximately $0.5 million. The remaining decrease resulted primarily from the decline of HLS revenues in Europe of $7.4 million, partially offset by an increase in RMS of $1.4 million. The decline in HLS was due primarily to the transition to an indirect sales model in parts of Europe. In addition, the ongoing transition from hand-held price labeling to automated bar-coding and scanning by retailers contributed to the decline in HLS. The increase in RMS was primarily attributable to new large customer orders during the fourth quarter in Europe.

Gross Profit

During 2006, gross profit decreased by $19.8 million or 6.4% from $311.5 million to $291.7 million. The benefit of foreign currency translation on gross profit was approximately $0.3 million. The gross profit, as a percentage of net revenues, decreased from 43.4% to 42.4%.

Security gross profit decreased from 43.5% in 2005 to 43.1% in 2006. Security gross profit percentage was negatively impacted by unfavorable manufacturing variances due to higher raw material costs, the cost associated with a new manufacturing process for our RF labels, and costs to move our systems assembly operations from Puerto Rico to the Dominican Republic, coupled with an increase in our inventory reserves. The increase in our inventory reserves were due to aging customer specific inventory and production issues with new label manufacturing processes.

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Labeling services gross profit increased from 31.5% in 2005 to 33.6% in 2006. The improved margin was due primarily to higher margins in our library business.

Retail merchandising gross profit decreased to 48.8% in 2006 from 52.9% in 2005. This decrease, as a percentage of Retail Merchandise revenues, was due primarily to the transition to an indirect sales model in parts of Europe. The reduction in gross profit was substantially offset by the a reduction in selling, general and administrative expenses.

For fiscal years 2006 and 2005, field service and installation costs were 10.6% and 11.6% of net revenues, respectively. The decrease was due primarily to cost reductions and fewer large account chain-wide installations of our EAS products in 2006 than in 2005.

Selling, General, and Administrative Expenses

During 2006, selling, general, and administrative expenses decreased $10.7 million or 4.5% over 2005. Foreign currency translation increased selling, general, and administrative expenses by approximately $0.4 million. The remaining decrease was due primarily to the impact of our restructuring initiatives, coupled with 2005 expenses which did not repeat in 2006. These 2005 expenses included consulting costs and the write-off of unamortized bank fees associated with the term loan and secured revolving credit facility, resulting from the repayment of the term loan and refinancing of the revolving credit facility. The decreases were offset by stock compensation expense of $5.7 million in 2006 with no such comparable charge in 2005. As a percentage of revenues, selling, general, and administrative expenses decreased to 33.0% in fiscal 2006 from 33.1% in 2005.

Asset Impairments

In 2005, we recorded a $1.4 million impairment of fixed assets associated with our supply chain in Puerto Rico and Japan. For details refer to the “Goodwill and Asset Impairments” section.

Restructuring Expenses

Restructuring expenses were $7.0 million in 2006 compared to $12.6 million in 2005. The current and the prior year expense are detailed in the “Provisions for Restructuring” section.

Litigation Settlement

Litigation expense was $2.3 million for 2006. This was a result of the settlement of a class action suit arising from the anti-trust litigation with ID Security Systems Canada, Inc.

Other Operating Income

Other operating income increased due to the settlement of a sublease with our tenant in a building under a capital lease and the subsequent cancellation of that lease. The net impact of the sublease income and impairment of the asset was $2.0 million.

Interest Income and Interest Expense

Interest expense for 2006 decreased by $0.7 million compared to 2005 due primarily to lower debt levels. Interest income in 2006 increased by $2.6 million compared to 2005 due primarily to an increase in cash associated with the sale of our bar-coding business to SATO.

Other Gain (Loss), net

Other gain (loss), net increased due primarily to transition services from the sale of our BCS business to SATO.

Income Taxes

The tax rate on 2006 continuing operations was 16.6%. The 2006 effective tax rate is positively impacted by a reduction of valuation allowances and tax reserves of $2.0 million. In addition, the Company recorded a $1.7

32

million reduction in foreign tax, primarily associated with a change of tax law in Germany. The tax rate on 2005 continuing operations was 29.1%. Included in the 2005 year provision was $2.0 million additional tax cost associated with the repatriation of earnings under the American Jobs Creation Act and a change in tax rates on deferred taxes created by a tax restructuring.

Our net earnings generated by the operations of our Puerto Rico subsidiary were partially exempt from Federal income taxes under Section 936 of the Internal Revenue Code until December 31, 2005, and are substantially exempt from Puerto Rico’s income taxes.

Earning from Discontinued Operations, Net of Tax

Earnings from discontinued operations, net of tax, for 2006 decreased to $0.9 million from $8.1 million in 2005. The 2005 earnings from discontinued operations were primarily due to our operation of the bar-code business in 2005. The 2006 earnings were due primarily to the $1.4 million gain on the sale of the bar-code business.

Net Earnings

Net earnings were $35.9 million, or $0.89 per diluted share, in 2006 compared to net earnings of $36.5 million, or $0.93 per diluted share, in 2005. The weighted average number of shares used in the diluted earnings per share computation was 40.2 million and 39.1 million for fiscal years 2006 and 2005, respectively.

Quarterly Analysis

The comparison of fiscal year 2006 results of operations to fiscal year 2005 results herein is indicative of the quarter over quarter trends for the interim periods. For each of the first three quarters of 2006, revenues decreased when compared to the same quarter in 2005, primarily due to large-account chain wide installations in the U.S. during 2005 that did not continue in 2006. These decreases were partially offset by offset by growth in our CheckNet^® service bureau business.

Gross profit in the first and second quarters of 2006 was impacted by manufacturing variances resulting from higher raw material costs, the implementation of a new manufacturing process for our RF-EAS labels, and the cost of moving our system assembly operations from Puerto Rico to the Dominican Republic. Gross profit in the second quarter of 2006 benefited from improved labeling services margins in our CheckNet^® service bureau and library businesses. Gross profit in the third quarter of 2006 included the effect of an increase in our inventory reserves due to aging of specific customer inventory and production issues with the new manufacturing process for RF-EAS labels, partially offset by improved margins in our security segment.

For each of the first three quarters of 2006, selling, general and administrative expenses decreased when compared to the same quarter in 2005 due to the improvement in our cost structure resulting from restructuring initiatives, coupled with 2005 expenses associated with consulting activities and the restructuring of our revolving credit facility, that did not recur in 2006. This was partially offset by share-based compensation expense in 2006 with no comparable expense in 2005.

Fiscal 2005 compared to Fiscal 2004

Net Revenues

During 2005, revenues increased by $47.5 million or 7.1% from $670.5 million to $718.0 million. Foreign currency translation had a positive impact on revenues of $4.8 million for the full year of 2005.

(dollar amounts in millions)

					Dollar Amount			Percentage
	December 25,		December 26,		Change Fiscal			Change
	2005		2004		2005			Fiscal 2005
Year ended	(Fiscal 2005)		(Fiscal 2004)		vs. Fiscal 2004			vs. Fiscal 2004
	(As Restated)		(As Restated)
Net revenues:
Security	$	550.4	$	508.2	$	42.2			8.3	%
Labeling Services		76.3		65.8		10.4			15.8
Retail Merchandising		91.3		96.4		(5.1	)		(5.3	)
Net revenues	$	718.0	$	670.5	$	47.5			7.1	%

Security revenues increased by $42.2 million or 8.3% 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 U.S. and European markets ($38.3 million and $7.1 million, respectively), partially offset by a decline in the U.S. and International Americas CCTV revenues ($4.8 million and $3.0 million, respectively). The growth in the U.S. 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 $10.4 million or 15.8% in 2005 compared to 2004. 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 U.S. of $6.7 million and $1.0 million, respectively, coupled with an increase in the Intelligent Library Systems (ILS) revenues in the U.S. and Asia Pacific of $2.2 million and $0.4 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 HLS revenues in Europe of approximately $3.7 million. This decline was due to a difficult retail trading environment and the continued transition by retailers from hand-held price labeling to automated barcoding and scanning.

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Gross Profit

During 2005, gross profit increased by $2.1 million or 0.7% from $309.4 million to $311.5 million. The benefit of foreign currency translation on gross profit was approximately $1.7 million. The gross profit, as a percentage of net revenues, decreased from 46.2% to 43.4%.

Security gross profit 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.

Labeling services gross profit decreased from 34.3% in 2004 to 31.5% 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 U.S..

Retail merchandising gross profit decreased to 52.9% 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 $1.9 million or 0.8% over 2004. Foreign currency translation increased selling, general, and administrative expenses by approximately $1.5 million. As a percentage of revenues, selling, general, and administrative expenses decreased to 33.1% in fiscal 2005 from 35.2% in 2004. This decrease resulted primarily from a reduction in sales and marketing expenses as a percentage of revenue.

Research and Development Expenses

Research and development (R&D) costs represented 2.7% of revenues in 2005 and 4.2% in 2004. The decrease in R&D costs primarily resulted from a focused and selective development effort on manufacturing process improvements and application of new technologies.

Asset Impairments

In 2005 we recorded a $1.4 million impairment of fixed assets associated with our supply chain in Puerto Rico and Japan. For details refer to the “Goodwill and Asset Impairments” section.

In 2004 we recorded a $2.0 million impairment of intangible assets and fixed assets associated with our U.S. and European reporting units in our labeling segment, detailed in the “Goodwill and Asset Impairments” section.

Restructuring Expenses

Restructuring expenses were $12.6 million in 2005 compared to a $3.0 million reversal in 2004. The 2005 expense is detailed in the “Provisions for Restructuring” section.

The 2004 reversal was composed of $2.6 million reversal of severance from a shared service initiative and $0.4 million reduction of a lease reserve resulting from obtaining a sublease on a previously reserved property.

Litigation Settlement

In 2004, we reached a settlement agreement in the antitrust, tortious interference and unfair competition lawsuit brought by ID Security Systems Canada Inc. (ID Systems). Under the terms of the settlement agreement, Checkpoint paid $19.95 million.

We believe that the settlement was attained in our best interest and it mitigated further risks, burden, and expenses of continued litigation.

34

Interest Income and Interest Expense

Interest expense for 2005 decreased by $4.1 million compared to 2004, due primarily to lower debt levels. Interest income in 2005 increased by $0.8 million compared to 2004.

Other (Loss) Gain, net

Other (loss) gain, net resulted from net foreign currency transaction losses of $0.2 million and gains of $0.2 million for 2005 and 2004, respectively.

Income Taxes

The tax rate on continuing operations was 29.1%. Included in the 2005 provision was $2.0 million of additional tax costs associated with the repatriation of earnings under the Homeland Investment Act and a change in tax rates on deferred taxes created by a tax restructuring. The 2004 tax rate on continuing operations was 9.8%.

Our net earnings generated by the operations of our Puerto Rico subsidiary are partially exempt from Federal income taxes under Section 936 of the Internal Revenue Code until December 31, 2005 and are substantially exempt from Puerto Rico’s income taxes.

Earning from Discontinued Operations, Net of Tax

Earnings from discontinued operations, net of tax, for 2005 increased to $8.1 million from a loss of $37.4 million in 2004. The 2005 earnings from discontinued operations, net of tax, include a $0.7 million goodwill impairment in the U.S. barcode labeling segment, whereas the loss from discontinued operations in 2004, net of tax, include impairment of goodwill, intangible assets, and fixed assets of approximately $43.8 million, connected with our U.S. and European barcode systems businesses.

Net Earnings

Net earnings were $36.5 million, or $0.93 per diluted share, in 2005 compared to net losses of $18.6 million, or $0.50 per diluted share, in 2004. The weighted average number of shares used in the diluted earnings per share computation was 39.1 million and 37.6 million for fiscal years 2005 and 2004, respectively.

Quarterly Analysis

The comparison of fiscal year 2005 results of operations to fiscal year 2004 results herein is also indicative of the quarter over quarter trends for the interim periods. For each of the first three quarters of 2005, revenues increased when compared to the same quarter in 2004, primarily due to the increase in large-account chain wide installations in the U.S. in our security segment. This activity resulted in an increase in installation costs that reduced gross profit as a percentage of revenues when compared to the same periods in the prior year.

For the first quarter of 2005, selling, general and administrative expenses increased when compared to the same quarter in 2004 due to the impact of the restructuring of our revolving credit facility and consulting expenses associated with the evaluation of our business. For the second quarter of 2005, selling, general and administrative expenses increased over the same quarter in 2004 due to additional consulting costs, partially offset by a decrease in selling and marketing expenses. For the third quarter of 2005, selling, general and administrative expenses declined when compared to the same quarter in the prior year, due to a reduction in selling and marketing expenses.

Other Matters

Recently Adopted Accounting Standards

In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, “Inventory Costs”, an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4. The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The Company adopted the provisions of SFAS No. 151 in the first quarter of fiscal 2006 with no material impact on our consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” This statement is a revision to SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. Entities are required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost is recognized over the period during which an employee is required to provide service, the requisite service period (usually the vesting period), in exchange for the award. The Company adopted SFAS No. 123R in the first quarter 2006 using the modified-prospective transition method for awards granted subsequent to adoption and those that were granted and not yet vested. The impact on the adoption on the consolidated statement of operations was $5.7 million ($4.2 million, net of tax) or $.10 per diluted share of stock compensation expense in 2006.

35

In March 2005, the FASB issued Interpretation No. (FIN) 47, “Accounting for Conditional Asset Retirement Obligations,” that requires an entity to recognize a liability for a conditional asset retirement obligation when incurred if the liability can be reasonably estimated. FIN 47 clarifies that the term Conditional Asset Retirement Obligation refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company adopted this guidance in the first quarter of fiscal 2006 with no material impact on our consolidated financial statements.

In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which requires entities that voluntarily make a change in accounting principle to apply that change retrospectively to prior periods’ financial statements, unless this would be impracticable. SFAS No. 154 supersedes APB Opinion No. 20, “Accounting Changes”, which previously required that most voluntary changes in accounting principle be recognized by including in the current period’s net income the cumulative effect of changing to the new accounting principle. SFAS No. 154 also makes a distinction between “retrospective application of an accounting principle” and the “restatement” of financial statements to reflect the correction of an error. Another significant change in practice under SFAS No. 154 is that if an entity changes its method of depreciation, amortization, or depletion for long-lived, non-financial assets, the change must be accounted for as a change in accounting estimate. Under APB Opinion No. 20, such a change would have been reported as a change in accounting principle. SFAS No. 154 applies to accounting changes and error corrections that are made in fiscal years beginning after December 15, 2005. The Company adopted the provisions of SFAS No. 154 in the first quarter of fiscal 2006.

In June 2006, the FASB ratified Emerging Issues Task Force (EITF) issued Issue 06-3, “How Sales Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement.” EITF 06-3 requires a company to disclose its accounting policy (i.e., gross or net presentation) regarding the presentation of taxes within the scope of EITF 06-3. If taxes are significant, a company should disclose the amount of such taxes for each period for which an income statement is presented. The guidance is effective for periods beginning after December 15, 2006. Amounts collected from customer, which under common trade practices are referred to as sales taxes, are and have been recorded on a net basis. The Company has no intention of modifying this accounting policy. Therefore, the adoption of EITF 06-03 has not had an effect on the Company’s financial position or results of operations.

The FASB issued in September 2006 SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statement No. 87, 88, 106 and 132(R)”. This Standard requires recognition of the funded status of a benefit plan in the statement of financial position. The Standard also requires recognition in other comprehensive income certain gains and losses that arise during the period but are deferred under pension accounting rules, as well as modifies the timing of reporting and adds certain disclosures. SFAS 158 provides recognition and disclosure elements to be effective as of the end of the fiscal year after December 15, 2006 and measurement elements to be effective for fiscal years ending after December 15, 2008. The Company adopted the recognition and disclosure elements of SFAS No. 158 as of December 31, 2006. The adoption of the measurement elements of SFAS 158 will not have an impact on our financial position and results of operations.

36

The Company adopted the recognition and disclosure provisions of Statement 158 effective December 31, 2006. The adoption of Statement 158 had the following effect on the Company’s statement of financial position as of December 31, 2006:

(dollar amounts in thousands)

	As of December 31, 2006
			Effect of
	Prior to adoption		adopting
	of Statement 158		Statement 158			After Adoption
Non-current Deferred income tax assets	$	29,818	$	1,598		$	31,416
Total assets		779,593		1,598			781,191
Accrued pensions — current		—		3,730			3,730
Accrued pensions		81,991		611			82,602
Accumulated other comprehensive income		950		(2,743	)		(1,793	)
Total stockholder’s equity	$	476,555	$	(2,743	)	$	473,812

The adoption of Statement 158 did not affect the Company’s statement of operations for the year ended December 31, 2006, or any prior periods. Application of the Statement will not change the calculation of net income in future periods, but will affect the calculation of other comprehensive income.

New Accounting Pronouncements and Other Standards

In July 2006, the FASB issued Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” which prescribes a recognition threshold and measurement attribute, as well as criteria for subsequently recognizing, derecognizing and measuring uncertain tax positions for financial statement purposes. FIN 48 also requires expanded disclosure with respect to the uncertainty in income tax assets and liabilities. FIN 48 is effective for fiscal years beginning after December 15, 2006 and is required to be recognized as a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. We are currently evaluating the effect that the adoption of FIN 48 will have on our financial position and results of operations. We do not expect adoption to have a material impact on the consolidated financial statements.

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The adoption of SFAS 157 is not expected to have a material impact on our financial position, results of operations or cash flows.

In February 2007, FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. FAS 159 is effective for fiscal years after November 15, 2007. We are currently evaluating the impact of adopting FAS 159 on our financial statements.

Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Factors

Fluctuations in interest and foreign currency exchange rates affect our financial position and results of operations. We enter into forward exchange contracts denominated in foreign currency to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. 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 of December 31, 2006, all third party borrowings were in the functional currency of the subsidiary borrower.

37

We are subject to foreign currency exchange risk on our foreign currency forward exchange contracts which represent a $0.1 million liability position as of December 31, 2006 and an offsetting (liability) asset position as of December 25, 2005. The sensitivity analysis assumes an instantaneous 10% change in foreign currency exchange rates from year-end levels, with all other variables held constant. At December 31, 2006, a 10% strengthening of the U.S. dollar versus other currencies would result in an increase of $1.9 million in the net asset position, while a 10% weakening of the dollar versus all other currencies would result in a decrease of $1.9 million.

Foreign exchange forward contracts are used to hedge certain of our firm foreign currency cash flows. Thus, there is either an asset or cash flow exposure related to all the financial instruments in the above sensitivity analysis for which the impact of a movement in exchange rates would be in the opposite direction and substantially equal to the impact on the instruments in the analysis. There are presently no significant restrictions on the remittance of funds generated by our operations outside the U.S..

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm		40
Consolidated Balance Sheets as of December 31, 2006 and December 25, 2005		42
Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2006		43
Consolidated Statements of Stockholders’ Equity for each of the years in the three-year period ended December 31, 2006		44
Consolidated Statements of Comprehensive Income (Loss) for each of the years in the three-year period ended December 31, 2006		45
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2006		46
Notes to Consolidated Financial Statements	47-98
Financial Statement Schedules, Schedule II – Valuation and Qualifying Accounts		107

39

Report of Independent Registered Public Accounting Firm

To The Board of Directors and Stockholders of
     Checkpoint Systems, Inc.

We have completed integrated audits of Checkpoint Systems, Inc.’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Checkpoint Systems Inc. and its subsidiaries at December 31, 2006 and December 25, 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 of the consolidated financial statements, the Company has restated its 2005 and 2004 consolidated financial statements.

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in 2006, and the manner in which it accounts for defined benefit pension and other postretirement plans effective December 31, 2006.

Internal control over financial reporting

Also, we have audited management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that Checkpoint Systems Inc. did not maintain effective internal control over financial reporting as of December 31, 2006, because the Company did not maintain effective controls over the financial reporting and close process, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

40

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management’s assessment as of December 31, 2006.

The Company did not maintain effective controls over the financial reporting and close process. Specifically, the Company’s controls to monitor the financial position and results of operations of subsidiaries and controls to accurately record non-routine and non-systematic transactions in accordance with accounting principles generally accepted in the United States of America were not effective. This control deficiency contributed to errors resulting in the restatement of the Company’s consolidated financial statements for 2005 and 2004, each of the interim periods in 2005 and the first three quarters of 2006 affecting revenues and cost of revenues. Additionally, this control deficiency could result in a material misstatement in any account and disclosures that would not be prevented or detected.

As a result of the material weakness, management has concluded that the internal control over financial reporting was ineffective as of December 31, 2006 based on the criteria established in Internal Control — Integrated Framework issued by the COSO. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2006 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

As described in Management’s Report on Internal Controls Over Financial Reporting, management has excluded ADS Worldwide from its assessment of internal control over financial reporting as of December 31, 2006 because it was acquired by the Company in a purchase business combination in November 2006. We have also excluded ADS Worldwide from our audit of internal control over financial reporting. ADS Worldwide is a wholly-owned subsidiary whose total assets and total revenues represent 2.4% and 0.3%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2006.

In our opinion, management’s assessment that Checkpoint Systems Inc. did not maintain effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the COSO. Also, in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Checkpoint Systems Inc. has not maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the COSO.

/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 30, 2007

41

CHECKPOINT SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(dollar amounts in thousands)

	December 31,			December 25,
	2006			2005
				(As Restated)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	143,394		$	113,223
Restricted cash		2,121			—
Accounts receivable, net of allowance of $12,417 and $11,174		160,463			139,480
Inventories		94,562			80,740
Other current assets		36,199			38,746
Deferred income taxes		10,858			12,950
Assets of discontinued operations held for sale		—			34,254
Total Current Assets		447,597			419,393
REVENUE EQUIPMENT ON OPERATING LEASE, net		4,325			4,169
PROPERTY, PLANT, AND EQUIPMENT, net		67,717			72,377
GOODWILL		187,288			165,313
OTHER INTANGIBLES, net		33,143			33,263
DEFERRED INCOME TAXES		31,416			31,509
OTHER ASSETS		9,705			13,221
TOTAL ASSETS	$	781,191		$	739,245
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt	$	6,810		$	4,391
Accounts payable		49,521			61,485
Accrued compensation and related taxes		27,712			34,547
Other accrued expenses		33,557			27,294
Income taxes		27,811			25,567
Unearned revenues		21,634			23,650
Restructuring reserve		6,786			11,715
Accrued pensions — current		3,730			—
Other current liabilities		16,012			16,031
Liabilities of discontinued operations held for sale		—			6,458
Total Current Liabilities		193,573			211,138
LONG-TERM DEBT, LESS CURRENT MATURITIES		9,724			35,354
ACCRUED PENSIONS		82,602			71,194
OTHER LONG-TERM LIABILITIES		4,125			4,349
DEFERRED INCOME TAXES		16,630			19,588
MINORITY INTEREST		956			1,202
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, no par value, authorized 500,000 shares, none issued		—			—
Common stock, par value $.10 per share, authorized 100,000,000 shares, issued 41,315,581 and 40,737,110		4,131			4,073
Additional capital		345,206			326,950
Retained earnings		146,658			110,736
Common stock in treasury, at cost, 2,035,912 shares		(20,621	)		(20,621	)
Accumulated other comprehensive loss		(1,793	)		(24,718	)
TOTAL STOCKHOLDERS’ EQUITY		473,581			396,420
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	781,191		$	739,245

See notes to consolidated financial statements.

42

CHECKPOINT SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollar amounts in thousands, except per share data)

	December 31,			December 25,			December 26,
Year ended	2006			2005			2004
				(As Restated)			(As Restated)
Net revenues	$	687,775		$	717,992		$	670,453
Cost of revenues		396,084			406,462			360,981
Gross profit		291,691			311,530			309,472
Selling, general, and administrative expenses		226,958			237,654			235,798
Research and development		19,417			19,108			28,525
Asset impairments		—			1,396			1,968
Restructuring expenses		7,007			12,570			(3,016	)
Litigation settlement		2,251			—			19,950
Other operating income		2,025			—			—
Operating income		38,083			40,802			26,247
Interest income		4,906			2,338			1,567
Interest expense		2,155			2,862			7,002
Other gain (loss), net		1,141			(151	)		219
Earnings from continuing operations before income taxes and minority interest		41,975			40,127			21,031
Income taxes		6,987			11,661			2,064
Minority interest		(31	)		53			144
Earnings from continuing operations		35,019			28,413			18,823
Earnings (loss) from discontinued operations, net of tax of $1,059, $3,820, and ($1,692)		903			8,108			(37,448	)
Net earnings (loss)	$	35,922		$	36,521		$	(18,625	)
Basic Earnings (Loss) Per Share:
Earnings from continuing operations	$	.89		$	.75		$	.51
Earnings (loss) from discontinued operations, net of tax		.02			.21			(1.02	)
Basic Earnings (Loss) Per Share	$	.91		$	.96		$	(.51	)
Diluted Earnings (Loss) Per Share:
Earnings from continuing operations	$	.87		$	.72		$	.50
Earnings (loss) from discontinued operations, net of tax		.02			.21			(1.00	)
Diluted Earnings (Loss) Per Share	$	.89		$	.93		$	(.50	)

See notes to consolidated financial statements.

43

CHECKPOINT SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(dollar amounts in thousands)

																Accumulated
																Other			Total
	Common Stock				Additional		Retained			Treasury Stock						Comprehensive			Stockholders’
	Shares		Amount		Capital		Earnings			Shares			Amount			Income (Loss)			Equity
Balance, Dec. 28, 2003 (As Restated)		39,479	$	3,948	$	282,529	$	92,840			4,641		$	(47,003	)	$	(9,654	)	$	322,660
Net loss (As Restated)								(18,625	)											(18,625	)
Exercise of stock options and related tax benefit		362		36		4,663														4,699
Net gain on interest rate swap																	826			826
Treasury stock issued upon conversion of subordinated debentures						22,311					(2,599	)		26,325						48,636
Minimum pension liability adjustment, net of tax																	(2,521	)		(2,521	)
Foreign currency translation adjustment (As Restated)																	23,970			23,970
Balance, Dec. 26, 2004 (As Restated)		39,841		3,984		309,503		74,215			2,042			(20,678	)		12,621			379,645
Net earnings (As Restated)								36,521												36,521
Exercise of stock options and related tax benefit		871		86		13,448														13,534
Stock compensation expense						788														788
Deferred compensation plan		25		3		3,211					(6	)		57						3,271
Minimum pension liability adjustment, net of tax																	(3,840	)		(3,840	)
Foreign currency translation adjustment (As Restated)																	(33,499	)		(33,499	)
Balance, Dec. 25, 2005 (As Restated)		40,737		4,073		326,950		110,736			2,036			(20,621	)		(24,718	)		396,420
Net earnings (As Restated)								35,922												35,922
Exercise of stock-based compensation		578		58		8,633														8,691
Tax benefit on stock-based compensation						1,836														1,836
Stock-based compensation expense						5,710														5,710
Deferred compensation plan						2,077														2,077
Adoption of SFAS 158, net of tax																	(2,743	)		(2,743	)
Minimum pension liability adjustment, net of tax																	(121	)		(121	)
Foreign currency translation adjustment (As Restated)																	25,789			25,789
Balance, Dec. 31, 2006		41,315	$	4,131	$	345,206	$	146,658			2,036		$	(20,621	)	$	(1,793	)	$	473,581

See notes to consolidated financial statements.

44

CHECKPOINT SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollar amounts in thousands)

	December 31,			December 25,			December 26,
Year ended	2006			2005			2004
				(As Restated)			(As Restated)
Net earnings (loss)	$	35,922		$	36,521		$	(18,625	)
Net gain on interest rate swap, net of tax		—			—			826
Minimum pension liability, net of tax		(121	)		(3,840	)		(2,521	)
Foreign currency translation adjustment		25,789			(33,499	)		23,970
Comprehensive income (loss)	$	61,590		$	(818	)	$	3,650

See notes to consolidated financial statements.

45

CHECKPOINT SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars amounts in thousands)

	December 31,			December 25,			December 26,
Year ended	2006			2005			2004
				(As Restated)			(As Restated)
Cash flows from operating activities:
Net earnings (loss)	$	35,922		$	36,521		$	(18,625	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation and amortization		19,504			22,539			26,316
Deferred taxes		281			(4,226	)		(7,287	)
Stock-based compensation		5,710			788			—
Excess tax benefit on stock compensation		(1,685	)		—			—
Provision for losses on accounts receivable		2,442			2,574			1,673
Gain on sublease settlement		(1,777	)		—			—
Gain on sale of discontinued operations		(1,299	)		—			—
Loss (gain) on disposal of fixed assets		262			(1,627	)		139
Impairments of goodwill and long-lived assets		—			2,060			51,444
(Increase) decrease in current assets, net of the effects of acquired companies:
Accounts receivable		(3,977	)		(8,228	)		(9,682	)
Inventories		(8,299	)		(5,526	)		(6,295	)
Other current assets		6,207			(10,929	)		3,896
Increase (decrease) in current liabilities, net of the effects of acquired companies:
Accounts payable		(18,358	)		(1,062	)		951
Income taxes		4,904			2,454			(11,227	)
Unearned revenues		(3,930	)		(1,797	)		(1,088	)
Restructuring reserve		(5,668	)		7,932			(6,138	)
Other current and accrued liabilities		(7,853	)		3,145			(797	)
Net cash provided by operating activities		22,386			44,618			23,280
Cash flows from investing activities:
Acquisition of property, plant, and equipment		(11,520	)		(10,846	)		(11,342	)
Proceeds from the sale of discontinued operations		26,904			—			—
Acquisitions of businesses, net of cash acquired		(7,353	)		(2,026	)		(155	)
Other investing activities		(68	)		4,351			1,159
Net cash provided by (used in) investing activities		7,963			(8,521	)		(10,338	)
Cash flows from financing activities:
Proceeds from stock issuances		8,691			11,356			3,950
Excess tax benefit on stock compensation		1,685			—			—
Proceeds of short-term debt		14,200			—			—
Payment of short-term debt		(9,873	)		—			—
Net change in factoring and bank overdrafts		(3,293	)		1,612			376
Proceeds of long-term debt		—			51,776			25,000
Payment of long-term debt		(18,355	)		(83,027	)		(53,829	)
Net cash used in financing activities		(6,945	)		(18,283	)		(24,503	)
Effect of foreign currency rate fluctuations on cash and cash equivalents		6,767			(7,285	)		3,879
Net increase (decrease) in cash and cash equivalents		30,171			10,529			(7,682	)
Cash and cash equivalents:
Beginning of year		113,223			102,694			110,376
End of year	$	143,394		$	113,223		$	102,694

See notes to consolidated financial statements.

46

CHECKPOINT SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. RESTATEMENT AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Restatement

Checkpoint Systems, Inc. (the “Company”) is restating herein its historical financial statements for the year ended December 25, 2005 and the year ended December 26, 2004. The restatement is the result of the combined effect of financial statement errors attributable to (i) the overstatement of revenue due to the improper activities of certain former employees of the Company’s Japanese sales subsidiary; (ii) errors in the timing of recognition of revenue for certain transactions in the Company’s CheckNet® business; and (iii) income tax adjustments recorded in the fourth quarter of 2005 relating to prior periods. The Company has not amended its Annual Reports on Form 10-K for December 25, 2005 and December 26, 2004 and accordingly the financial statements and related financial information contained in such reports should not be relied upon. All amounts in this Annual Report on Form 10-K affected by the restatement adjustments reflect such amounts as restated.

Description of Restatement Adjustments

Set forth below is a description of the restatement adjustments reflected in the restatement of previously issued financial statements.

Overstatement of revenue and other financial statement errors due to the improper activities of certain former employees of the Company’s Japanese sales subsidiary - During the fourth quarter of 2006, the Company’s Audit Committee initiated an independent investigation with respect to the Company’s Japanese sales subsidiary. Based on this investigation, it was determined that improper activities by certain employees of the subsidiary affected the financial reporting of the subsidiary and that the improper activities were contained within the Japanese sales subsidiary.

The improper activities by certain former employees of the subsidiary included (i) the recognition of revenue upon receipt of orders, prior to shipment of goods or installation of equipment; (ii) the recognition of revenue where orders never existed and goods were never shipped or installed; (iii) the premature recognition of revenue from long-term maintenance contracts; (iv) entering into arrangements with third parties to factor accounts receivable and improperly reporting the transactions as reductions in accounts receivable when the transaction should have been reported as financing. As of December 25, 2005, there was $2.6 million outstanding for these factored receivables; (v) entering into an arrangement to sell, and then repurchase, inventory immediately before and after the year-end of 2002, 2003, and 2005, and improperly reporting the transaction as a reduction of inventory rather than as the incurrence and extinguishment of short-term debt; and (v) recording arbitrary balance sheet adjustments to increase cash and reduce accounts receivable in certain accounting periods in 2004 and 2005 other than year-end.

The Japanese sales subsidiary also failed to correctly account for the costs associated with an agreement with a third party supplier for the development of new products that were subsequently purchased and resold by the sales subsidiary. The sales subsidiary incorrectly recorded product development costs totaling $0.5 million incurred from August 2005 through April 2006 as inventory when the costs should have been recorded as research and development expense, in each of the periods that development costs were incurred. The Japanese sales subsidiary also incorrectly recorded as inventory two transactions involving cash advances totaling $0.4 million that were paid to the supplier the third and fourth quarters of 2005. The funds advanced to the supplier were subsequently recovered through discounts on the purchase of products in the second and third quarters of 2006.

Income tax adjustments recorded in 2004 and the fourth quarter of 2005 that related to prior years – In 2004 and 2005, the Company recorded several adjustments to income tax expense that were determined, at the time, to be corrections of prior period errors that were not material to the financial statements issued for 2005 and prior years. As a result of the restatement of these amounts, income tax expense will increase by $1.6 million in fiscal year 2005 and was reduced by $1.5 million in fiscal year 2004.

Overstatement of revenue due to errors in the timing of recognition of revenue for certain transactions in the Company’s CheckNet® business – In the fourth quarter of 2006, the Company’s CheckNet® business identified errors in revenue recognition in prior periods related to the shipment of certain goods where title to the goods did not pass to the buyer until the goods reached customers in Asia.

47

The CheckNet® business had incorrectly recorded revenue associated with these transactions at the time of shipment, when recognition should have been deferred until receipt of the goods by the customer. An adjustment has also been recorded to defer a portion of the revenue from certain customers associated with the provision of internet services beyond the time that the customer is billed for the service. As a result of these errors, the Company’s consolidated revenue was overstated by $0.6 million in fiscal year 2005 and $0.3 million in fiscal year 2004.

Other - In conjunction with the restatement, the Company also made other adjustments and changes in classifications to its accounting in various periods for various other errors that were immaterial.

The following table summarized the effects of the adjustments on basic earnings per share, diluted earnings per share, net revenues, gross margin, operating income, income taxes, earnings from continuing operations, and net earnings for the years ended December 25, 2005 and December 26, 2004, respectively, and on retained earnings as of December 29, 2003 (the first day of fiscal 2004).

										December 25, 2005						December 26, 2004
										Basic			Diluted			Basic			Diluted
										EPS			EPS			EPS			EPS
As Previously Reported										$	1.03		$	1.01		$	(.55	)	$	(.54	)
Restatement Adjustments:
CheckNet® Revenue Adjustments											(.01	)		(.01	)		—			—
Japan Revenue Adjustments											(.01	)		(.01	)		—			—
Other Japan Adjustments											(.01	)		(.01	)		—			—
Income Tax Adjustments											(.04	)		(.04	)		.04			.04
Other Adjustments											(.01	)		(.01	)		.01			.01
As Restated										$	.96		$	.93		$	(.51	)	$	(.50	)
	Retained			Net Earnings						Earnings from Continuing Operations						Income Taxes
	Earnings as of			Dec. 25,			Dec. 26,			Dec. 25,			Dec. 26,			Dec. 25,			Dec. 26,
	Dec. 29, 2003			2005			2004			2005			2004			2005			2004
As Previously Reported	$	93,422		$	39,405		$	(20,192	)	$	31,297		$	17,256		$	10,970		$	3,515
Restatement Adjustments:
CheckNet® Revenue Adjustments		(189	)		(276	)		(174	)		(276	)		(174	)		(127	)		(73	)
Japan Revenue Adjustments		—			(408	)		(77	)		(408	)		(77	)		(370	)		(70	)
Other Japan Adjustments		—			(215	)		(26	)		(215	)		(26	)		(183	)		(19	)
Income Tax Adjustments		43			(1,561	)		1,518			(1,561	)		1,518			1,561			(1,518	)
Other Adjustments		(436	)		(424	)		326			(424	)		326			(190	)		229
As Restated	$	92,840		$	36,521		$	(18,625	)	$	28,413		$	18,823		$	11,661		$	2,064
				Operating Income						Gross Profit						Net Revenues
				Dec. 25,			Dec. 26,			Dec. 25,			Dec. 26,			Dec. 25,			Dec. 26,
				2005			2004			2005			2004			2005			2004
As Previously Reported				$	43,027		$	26,055		$	313,437		$	309,918		$	721,018		$	671,558
Restatement Adjustments:
CheckNet® Revenue Adjustments					(403	)		(247	)		(403	)		(247	)		(597	)		(293	)
Japan Revenue Adjustments					(880	)		(166	)		(880	)		(166	)		(1,722	)		(433	)
Other Japan Adjustments					(418	)		(23	)		(100	)		(23	)		—			—
Other Adjustments					(524	)		628			(524	)		(10	)		(707	)		(379	)
As Restated				$	40,802		$	26,247		$	311,530		$	309,472		$	717,992		$	670,453

Comparison of restated financial statements to financial statements as originally reported

The following tables compare our previously reported consolidated statements of operations, stockholders’ equity, comprehensive income (loss), and cash flows for the fiscal years ended December 25, 2005 and December 26, 2004 and the previously reported consolidated balance sheet as of December 25, 2005 to the corresponding financial statements for those years as restated.

48

Consolidated Balance Sheets

(dollar amounts in thousands)

	December 25, 2005
	As Previously			As
	Reported			Restated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	113,223		$	113,223
Accounts receivable, net of allowance of $11,174		138,871			139,480
Inventories		79,528			80,740
Other current assets		38,344			38,746
Deferred income taxes		11,747			12,950
Assets of discontinued operations held for sale		34,254			34,254
Total Current Assets		415,967			419,393
REVENUE EQUIPMENT ON OPERATING LEASE, net		4,699			4,169
PROPERTY, PLANT, AND EQUIPMENT, net		72,377			72,377
GOODWILL		165,313			165,313
OTHER INTANGIBLES, net		33,263			33,263
DEFERRED INCOME TAXES		31,509			31,509
OTHER ASSETS		13,240			13,221
TOTAL ASSETS	$	736,368		$	739,245
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt	$	1,776		$	4,391
Accounts payable		61,006			61,485
Accrued compensation and related taxes		34,547			34,547
Other accrued expenses		27,294			27,294
Income taxes		25,567			25,567
Unearned revenues		22,047			23,650
Restructuring reserve		11,715			11,715
Other current liabilities		16,031			16,031
Liabilities of discontinued operations held for sale		6,458			6,458
Total Current Liabilities		206,441			211,138
LONG-TERM DEBT, LESS CURRENT MATURITIES		35,354			35,354
ACCRUED PENSIONS		71,194			71,194
OTHER LONG-TERM LIABILITIES		4,349			4,349
DEFERRED INCOME TAXES		19,588			19,588
MINORITY INTEREST		1,120			1,202
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, no par value, authorized 500,000 shares, none issued		—			—
Common stock, par value $.10 per share, authorized 100,000,000 shares, issued 40,737,110		4,073			4,073
Additional capital		326,950			326,950
Retained earnings		112,635			110,736
Common stock in treasury, at cost, 2,035,912 shares		(20,621	)		(20,621	)
Accumulated other comprehensive (loss) income		(24,715	)		(24,718	)
TOTAL STOCKHOLDERS’ EQUITY		398,322			396,420
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	736,368		$	739,245

49

Consolidated Statements of Operations
For the Years Ended
(dollar amounts in thousands, except per share data)

	December 25, 2005						December 26, 2004
	As Previously			As			As Previously			As
	Reported			Restated			Reported			Restated
Net revenues	$	721,018		$	717,992		$	671,558		$	670,453
Cost of revenues		407,581			406,462			361,640			360,981
Gross profit		313,437			311,530			309,918			309,472
Selling, general, and administrative expenses		237,654			237,654			236,436			235,798
Research and development		18,790			19,108			28,525			28,525
Asset impairment		1,396			1,396			1,968			1,968
Restructuring expense		12,570			12,570			(3,016	)		(3,016	)
Litigation settlement		—			—			19,950			19,950
Operating income		43,027			40,802			26,055			26,247
Interest income		2,338			2,338			1,567			1,567
Interest expense		2,844			2,862			6,980			7,002
Other (loss) gain, net		(151	)		(151	)		219			219
Earnings from continuing operations before income taxes and minority interest		42,370			40,127			20,861			21,031
Income taxes		10,970			11,661			3,515			2,064
Minority interest		103			53			90			144
Earnings from continuing operations		31,297			28,413			17,256			18,823
Earnings (loss) from discontinued operations, net of tax		8,108			8,108			(37,448	)		(37,448	)
Net earnings (loss)	$	39,405		$	36,521		$	(20,192	)	$	(18,625	)
Basic Earnings per Share:
Earnings from continuing operations	$	.82		$	.75		$	.47		$	.51
Earnings (loss) from discontinued operations, net of tax		.21			.21			(1.02	)		(1.02	)
Basic Earnings (Loss) per Share	$	1.03		$	.96		$	(.55	)	$	(.51	)
Diluted Earnings per Share:
Earnings from continuing operations	$	.80		$	.72		$	.46		$	.50
Earnings (loss) from discontinued operations, net of tax		.21			.21			(1.00	)		(1.00	)
Diluted Earnings (Loss) per Share	$	1.01		$	.93		$	(.54	)	$	(.50	)

50

Consolidated Statements Of Stockholders’ Equity

(dollar amounts in thousands)

							Accumulated Other Comprehensive
	Retained Earnings						Income (Loss)						Total Stockholders’ Equity
	As						As						As
	Previously			As			Previously			As			Previously			As
	Reported			Restated			Reported			Restated			Reported			Restated
Balance, Dec. 28, 2003	$	93,422		$	92,840		$	(9,606	)	$	(9,654	)	$	323,290		$	322,660
Net loss		(20,192	)		(18,625	)								(20,192	)		(18,625	)
Exercise of stock options and related tax benefit														4,699			4,699
Net gain on interest rate swap								826			826			826			826
Treasury stock issued upon conversion of subordinated debentures														48,636			48,636
Minimum pension liability adjustment, net of tax								(2,521	)		(2,521	)		(2,521	)		(2,521	)
Foreign currency translation adjustment								24,025			23,970			24,025			23,970
Balance, Dec. 26, 2004	$	73,230		$	74,215		$	12,724		$	12,621		$	378,763		$	379,645
Net earnings		39,405			36,521									39,405			36,521
Exercise of stock options and related tax benefit														13,534			13,534
Stock compensation expense														788			788
Deferred compensation plan														3,271			3,271
Minimum pension liability adjustment, net of tax								(3,840	)		(3,840	)		(3,840	)		(3,840	)
Foreign currency translation adjustment								(33,599	)		(33,499	)		(33,599	)		(33,499	)
Balance, Dec. 25, 2005	$	112,635		$	110,736		$	(24,715	)	$	(24,718	)	$	398,322		$	396,420

51

Consolidated Statements of Comprehensive Income (Loss)

(dollar amounts in thousands)

	December 25, 2005						December 26, 2004
	As Previously			As			As Previously			As
	Reported			Restated			Reported			Restated
Net earnings (loss)	$	39,405		$	36,521		$	(20,192	)	$	(18,625	)
Net gain on interest rate swap, net of tax		—			—			826			826
Minimum pension liability, net of tax		(3,840	)		(3,840	)		(2,521	)		(2,521	)
Foreign currency translation adjustment		(33,599	)		(33,499	)		24,025			23,970
Comprehensive income (loss)	$	1,966		$	(818	)	$	2,138		$	3,650

52

Consolidated Statements of Cash Flows

(dollar amounts in thousands)

	Year Ended						Year Ended
	December 25, 2005						December 26, 2004
	As						As
	Previously						Previously
	Reported			Restated			Reported			Restated
Cash flows from operating activities:
Net earnings (loss)	$	39,405		$	36,521		$	(20,192	)	$	(18,625	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation and amortization		22,730			22,539			26,538			26,316
Deferred taxes		(4,917	)		(4,226	)		(5,836	)		(7,287	)
Stock-based compensation		788			788			—			—
Provision for losses on accounts receivable		2,574			2,574			1,673			1,673
(Gain) loss on disposal of fixed assets		(1,627	)		(1,627	)		139			139
Impairments of goodwill and long-lived assets		2,060			2,060			51,444			51,444
(Increase) decrease in current assets, net of the effects of acquired companies:
Accounts receivable		(8,316	)		(8,228	)		(8,938	)		(9,682	)
Inventories		(4,860	)		(5,526	)		(7,090	)		(6,295	)
Other current assets		(10,553	)		(10,929	)		4,210			3,896
Increase (decrease) in current liabilities, net of the effects of acquired companies:
Accounts payable		(1,844	)		(1,062	)		870			951
Income taxes		2,454			2,454			(11,227	)		(11,227	)
Unearned revenues		(2,791	)		(1,797	)		(1,381	)		(1,088	)
Restructuring reserve		7,932			7,932			(6,138	)		(6,138	)
Other current and accrued liabilities		3,195			3,145			(324	)		(797	)
Net cash provided by operating activities		46,230			44,618			23,748			23,280
Cash flows from investing activities:
Acquisition of property, plant, and equipment		(10,846	)		(10,846	)		(11,342	)		(11,342	)
Acquisitions of businesses, net of cash acquired		(2,026	)		(2,026	)		(155	)		(155	)
Other investing activities		4,351			4,351			1,159			1,159
Net cash used in investing activities		(8,521	)		(8,521	)		(10,338	)		(10,338	)
Cash flows from financing activities:
Proceeds from stock issuances		11,356			11,356			3,950			3,950
Net change in short-term debt		—			1,612			(92	)		376
Proceeds of long-term debt		51,776			51,776			25,000			25,000
Payment of long-term debt		(83,027	)		(83,027	)		(53,829	)		(53,829	)
Net cash used in financing activities		(19,895	)		(18,283	)		(24,971	)		(24,503	)
Effect of foreign currency rate fluctuations on cash and cash equivalents		(7,285	)		(7,285	)		3,879			3,879
Net increase (decrease) in cash and cash equivalents		10,529			10,529			(7,682	)		(7,682	)
Cash and cash equivalents:
Beginning of year		102,694			102,694			110,376			110,376
End of year	$	113,223		$	113,223		$	102,694		$	102,694

53

Nature of Operations

We are a multinational manufacturer and marketer of integrated system solutions for loss prevention, labeling, and merchandising. 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 labeling requirements to improve efficiency, reduce costs, and furnish value-added solutions for customers across many markets and industries. Applications for labeling systems include brand identification, automatic identification (auto-ID), retail security, and pricing and promotional labels. We also market closed-circuit television (CCTV) systems primarily to help retailers prevent losses caused by theft of merchandise. We have achieved substantial international growth, primarily through acquisitions, and now operate directly in 31 countries. Products are principally developed and manufactured in-house and sold through direct distribution and reseller channels.

Principles of Consolidation

The consolidated financial statements include the accounts of Checkpoint Systems, Inc. and its majority-owned subsidiaries (Company). All inter-company transactions are eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fiscal Year

Our fiscal year is the 52 or 53 week period ending the last Sunday of December. References to 2006, 2005, and 2004, are for the 53 weeks ended December 31, 2006 and for the 52 weeks ended December 25, 2005, and December 26, 2004, respectively.

Cash and Cash Equivalents

Cash in excess of operating requirements is invested in short-term, income-producing instruments or used to pay down debt. Cash equivalents include commercial paper and other securities with original maturities of 90 days or less at the time of purchase. Book value approximates fair value because of the short maturity of those instruments.

Restricted Cash

At December 31, 2006, the Company has $2.1 million in restricted cash related to cash received from the divestiture of our barcode businesses and the U.S. hand-held labeling and Turn-O-Matic^® businesses. This cash is restricted until potential working capital adjustments related to the divestiture are resolved. These adjustments should be finalized in the first quarter 2007.

Accounts Receivable

Accounts receivables are recorded at net realizable values. We maintain an allowance 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. Provisions for the losses on receivables are charged to income to maintain the allowance at a level considered adequate to cover losses. Receivables are charged off against the reserve when they are deemed uncollectible.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market. A provision is made to reduce excess or obsolete inventory to its net realizable value.

Revenue Equipment on Operating Lease

The cost of the equipment leased to customers under operating leases is depreciated on a straight-line basis over the length of the contract, which is usually between three and five years.

54

Property, Plant, and Equipment

Property, plant, and equipment is carried at cost less accumulated depreciation. Maintenance, repairs, and minor renewals are expensed as incurred. Additions, improvements, and major renewals are capitalized. Depreciation generally is provided on a straight-line basis over the estimated useful lives of the assets. Buildings, equipment rented to customers, and leased equipment on capitalized leases use the following estimated useful lives of 15 to 30 years, three to five years, and five years, respectively. Machinery and equipment estimated useful lives range from three to ten years. Leasehold improvement useful lives are the lesser of the minimum lease term or the useful life of the item. The cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss on disposition is included in income.

We review our property, plant, and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If it is determined that an impairment, based on expected future undiscounted cash flows, exists, then the loss is recognized on the consolidated statements of operations. The amount of the impairment is the excess of the carrying amount of the impaired asset over its fair value.

Goodwill

Goodwill is carried at cost and is not amortized. We test goodwill for impairment on an annual basis, relying on a number of factors including operating results, business plans and future cash flows. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its fair value, 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. We perform our annual assessment as of fiscal month end October each fiscal year. Refer to Note 5.

Other Intangibles

Other intangibles are amortized on a straight-line basis over their useful lives (or legal lives if shorter). We review our other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If it is determined that an impairment, based on expected future undiscounted cash flows, exists, then the loss is recognized on the consolidated statements of operations. The amount of the impairment is the excess of the carrying amount of the impaired asset over the fair value of the asset. The fair value represents expected future cash flows from the use of the assets, discounted at the rate used to evaluate potential investments. Refer to Note 5.

Other Assets

Included in other assets are $1.0 million and $3.3 million of net long-term customer-based receivables at December 31, 2006 and December 25, 2005, respectively.

Deferred Financing Costs

Financing costs are capitalized and amortized to interest expense over the life of the debt. The net deferred financing costs at December 31, 2006 and December 25, 2005 were $0.6 million and $0.7 million, respectively. The financing cost amortization expense was $0.2 million, $1.3 million, and $1.5 million, for 2006, 2005, and 2004, respectively.

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 using the straight-line method, which approximates the effective interest method. Rental revenue from equipment under operating lease 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. For arrangements with multiple elements, we determine the fair value of each element and then allocate the total arrangement consideration among the separate elements. We record revenues net of an allowance for estimated return activities. Return activity was immaterial to revenue and results of operations for all periods presented.

55

Shipping and Handling Fees and Costs

Shipping and handling fees are accounted for in net revenues and shipping and handling costs in cost of revenues.

Cost of Revenues

The principal elements of cost of revenues are product cost, field service and installation cost, freight, and product royalties paid to third parties.

Warranty Reserves

We provide product warranties for our various products. These warranties vary in length depending on product and geographical region. We establish our warranty reserves based on historical data of warranty transactions. The following table sets forth the movement in the warranty reserve:

	December 31,			December 25,
	2006			2005
	(dollar amounts in thousands)
Balance at beginning of year	$	5,211		$	5,171
Accruals for warranties issued		3,909			3,784
Accruals related to pre-existing warranties, including changes in estimate		865			—
Total accruals		4,774			3,784
Settlement made		(4,580	)		(3,404	)
Divestiture		(236	)		—
Foreign currency translation adjustment		330			(340	)
Balance at end of year	$	5,499		$	5,211

Royalty Expense

Royalty expenses related to security products approximated $3.7 million, $4.1 million, and $4.2 million, in 2006, 2005, and 2004, respectively. These expenses are included as part of cost of revenues.

Research and Development Costs

Research and development costs are expensed as incurred.

Stock Options

Effective December 26, 2005, we adopted the fair value recognition provision of Statement of Financial Accounting Standards (SFAS) 123R “Share-based Payment”, using the modified prospective transition method, and therefore have not restated prior period results. Under this method we recognize compensation expense for all share-based payments granted either after December 25, 2005 or prior to December 26, 2005 but not vested as of that date. Under the fair value recognition provisions of SFAS 123R, we recognize share-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest. For awards granted after the adoption date we recognize the expense on a straight-line basis over the requisite service period of the award. For non-vested awards granted prior to the adoption date, we continue to use the ratable expense allocation method. Prior to SFAS 123R adoption, we accounted for share-based payments under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and accordingly, generally recognized compensation expense only when we granted options with a discounted exercise price. The impact on the adoption on the consolidated statement of operations was $5.7 million ($4.2 million, net of tax) or $.10 per diluted share of stock compensation expense in 2006.

In light of new accounting guidance under SFAS 123R, the Company reevaluated its assumptions used in estimating the fair value of employee options granted. As part of its SFAS 123R adoption, the Company also examined its historical pattern of option exercises in an effort to determine if there were any discernable activity patterns based on certain employee populations. From this analysis, the Company identified that there were no discernable populations. The Company used the Black-Scholes option pricing model to value the options. The table below presents the weighted average expected life in years. The expected life computation is based on historical exercise patterns and post-vesting termination behavior. Volatility is determined using changes in historical stock prices. The interest rate for periods within the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.

56

The fair value of share-based payment units was estimated using the Black-Scholes option pricing model with the following assumptions and weighted average fair values as follows:

	Year ended,			Year ended,			Year ended,
	December 31,			December 25,			December 26,
	2006			2005			2004
Weighted average fair value of grants	$	11.47		$	4.99		$	5.34
Valuation assumptions:
Expected dividend yield		0.00	%		0.00	%		0.00	%
Expected volatility		.4135			.3209			.261
Expected life (in years)		4.54			3.4			3.2
Risk-free interest rate		4.55 – 5.07	%		2.8 – 4.6	%		2.9	%

The pro forma table below reflects net earnings and basic and diluted net earnings per share for the years ended December 25, 2005, and December 26, 2004, had the Company applied the fair value recognition provisions of SFAS 123, as follows:

(dollar amounts in thousands, except per share amounts)

	Year ended,			Year ended,
	December 25,			December 26,
	2005			2004
	(As Restated)			(As Restated)
Net earnings (loss), as reported	$	36,521		$	(18,625	)
Add: Stock-based compensation recorded under the instrinsic method, net of tax		271			—
Less: Stock-based compensation expenses determined under the fair-value method, net of tax		(2,124	)		(2,564	)
Pro forma net earnings (loss)	$	34,668		$	(21,189	)
Basic net earnings (loss) per share:
As reported	$	.96		$	(.51	)
Pro forma	$	.91		$	(.58	)
Diluted net earnings (loss) per share:
As reported	$	.93		$	(.50	)
Pro forma	$	.88		$	(.56	)

See Note 8 to the Consolidated Condensed Financial Statements for a further discussion on stock-based compensation.

Income Taxes

Deferred tax liabilities and assets are determined based on the difference between the financial statement basis and the tax basis of assets and liabilities, using enacted statutory tax rates in effect at the balance sheet date. Changes in enacted tax rates are reflected in the tax provision as they occur. A valuation allowance is recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

Taxes Collected from Customers

Sales taxes collected from customers are excluded from revenues. The obligation is included in other current liabilities until the taxes are remitted to the appropriate taxing authorities.

Foreign Currency Translation and Transactions

Our balance sheet accounts of foreign subsidiaries are translated into U.S. dollars at the rate of exchange in effect at the balance sheet dates. Revenues, costs, and expenses of our foreign subsidiaries are translated into U.S. dollars at the year-to-date average rate of exchange. The resulting translation adjustments are recorded as a separate component of shareholders’ equity. Gains or losses on certain long-term inter-company transactions are excluded from the net earnings (loss) and accumulated in the cumulative translation adjustment as a separate component of consolidated stockholders’ equity. All other foreign currency transaction gains and losses are included in net earnings (loss).

57

Accounting for Hedging Activities

We enter into certain foreign exchange forward contracts in order to hedge anticipated rate fluctuations in Western Europe, Canada, and Australia. Transaction gains or losses resulting from these contracts are recognized at the end of each reporting period. We use the fair value method of accounting, recording realized and unrealized gains and losses on these contracts. These gains and losses are included in other gain (loss), net on our consolidated statements of operations.

We enter, on occasion, into interest rate swaps to reduce the risk of significant interest rate increases in connection with floating rate debt. This cash flow hedging instrument is marked to market and the changes are recorded in other comprehensive income. Any hedge ineffectiveness is charged to interest expense. We had no interest rate swaps in fiscal years 2006 and 2005. No ineffectiveness occurred during fiscal year 2004.

Recently Adopted Accounting Standards

In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, “Inventory Costs”, an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4. The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The Company adopted the provisions of SFAS No. 151 in the first quarter of fiscal 2006 with no material impact on our consolidated financial statements.

In March 2005, the FASB issued Interpretation No. (FIN) 47, “Accounting for Conditional Asset Retirement Obligations,” that requires an entity to recognize a liability for a conditional asset retirement obligation when incurred if the liability can be reasonably estimated. FIN 47 clarifies that the term Conditional Asset Retirement Obligation refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company adopted this guidance in the first quarter of fiscal 2006 with no material impact on our consolidated financial statements.

In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which requires entities that voluntarily make a change in accounting principle to apply that change retrospectively to prior periods’ financial statements, unless this would be impracticable. SFAS No. 154 supersedes APB Opinion No. 20, “Accounting Changes”, which previously required that most voluntary changes in accounting principle be recognized by including in the current period’s net income the cumulative effect of changing to the new accounting principle. SFAS No. 154 also makes a distinction between “retrospective application of an accounting principle” and the “restatement” of financial statements to reflect the correction of an error. Another significant change in practice under SFAS No. 154 is that if an entity changes its method of depreciation, amortization, or depletion for long-lived, non-financial assets, the change must be accounted for as a change in accounting estimate. Under APB Opinion No. 20, such a change would have been reported as a change in accounting principle. SFAS No. 154 applies to accounting changes and error corrections that are made in fiscal years beginning after December 15, 2005. The Company adopted the provisions of SFAS No. 154 in the first quarter of fiscal 2006.

In June 2006, the FASB ratified Emerging Issues Task Force (EITF) issued Issue 06-3, “How Sales Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement”. EITF 06-3 requires a company to disclose its accounting policy (i.e., gross or net presentation) regarding the presentation of taxes within the scope of EITF 06-3. If taxes are significant, a company should disclose the amount of such taxes for each period for which an income statement is presented. The guidance is effective for periods beginning after December 15, 2006. Amounts collected from customer, which under common trade practices are referred to as sales taxes, are and have been recorded on a net basis. The Company has no intention of modifying this accounting policy. Therefore, the adoption of EITF 06-03 has not had an effect on the Company’s financial position or results of operations.

The FASB issued in September 2006 SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statement No. 87, 88, 106 and 132(R)”. This standard requires recognition of the funded status of a benefit plan in the statement of financial position. The standard also requires recognition in other comprehensive income certain gains and losses that arise during the period but are deferred under pension accounting rules, as well as modifies the timing of reporting and adds certain disclosures. SFAS 158 provides recognition and disclosure elements to be effective as of the end of the fiscal year after December 15, 2006 and measurement elements to be effective for fiscal years ending after December 15, 2008. The Company adopted the recognition and disclosure elements of SFAS No. 158 in the fourth quarter of fiscal 2006. The adoption of the measurement elements of SFAS 158 will not have an impact on our financial position and results of operations.

58

The Company adopted the recognition and disclosure provisions of Statement 158 effective December 31, 2006. The adoption of Statement 158 had the following effect on the Company’s statement of financial position as of December 31, 2006:

(dollar amounts in thousands)

	As of December 31, 2006
			Effect of
	Prior to adoption		adopting
	of Statement 158		Statement 158			After adoption
Non-current deferred income tax assets	$	29,818	$	1,598		$	31,416
Total assets		779,593		1,598			781,191
Accrued pensions — current		—		3,730			3,730
Accrued pensions		81,991		611			82,602
Accumulated other comprehensive income		950		(2,743	)		(1,793	)
Total stockholder’s equity	$	476,555	$	(2,743	)	$	473,812

The adoption of Statement 158 did not affect the Company’s statement of operations for the year ended December 31, 2006, or any prior periods. Application of the Statement will not change the calculation of net income in future periods, but will affect the calculation of other comprehensive income.

New Accounting Pronouncements and Other Standards

In July 2006, the FASB issued Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” which prescribes a recognition threshold and measurement attribute, as well as criteria for subsequently recognizing, derecognizing and measuring uncertain tax positions for financial statement purposes. FIN 48 also requires expanded disclosure with respect to the uncertainty in income tax assets and liabilities. FIN 48 is effective for fiscal years beginning after December 15, 2006 and is required to be recognized as a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. We are currently evaluating the effect that the adoption of FIN 48 will have on our financial position and results of operations. We do not expect adoption to have a material impact on the consolidated financial statements.

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements”. This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The adoption of SFAS 157 is not expected to have a material impact on our financial position, results of operations or cash flows.

In February 2007, FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. FAS 159 is effective for fiscal years after November 15, 2007. We are currently evaluating the impact of adopting FAS 159 on our financial statements.

Note 2. VARIABLE INTEREST ENTITY

On February 3, 2004, we made a $2.5 million minority investment in Goliath Solutions, which is considered a variable interest entity (VIE). On October 6, 2004, Goliath Solutions received an additional investment from a party unrelated to us. As a result of this investment, we reevaluated our status and determined we were no longer the primary beneficiary. Accordingly, we deconsolidated Goliath Solutions on a prospective basis and applied the equity method to the investment in Goliath Solutions and notes receivable. In applying the equity method, our investment in Goliath Solutions was reduced to zero and the notes receivable was reduced to $0.4 million, due to the losses incurred during the year. We do not expect to collect the balance of the receivable investment and therefore an allowance for the entire amount has been made in 2004.

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Note 3. INVENTORIES

Inventories consist of the following:

(dollar amounts in thousands)

	December 31,		December 25,
	2006		2005
			(As Restated)
Raw materials	$	14,420	$	10,643
Work-in-process		4,467		4,351
Finished goods		75,675		65,746
Total	$	94,562	$	80,740

Note 4. REVENUE EQUIPMENT ON OPERATING LEASE AND PROPERTY, PLANT, AND EQUIPMENT

The major classes are:

(dollar amounts in thousands)

	December 31,			December 25,
	2006			2005
				(As Restated)
Revenue equipment on operating lease
Equipment rented to customers	$	29,331		$	47,693
Accumulated depreciation		(25,006	)		(43,524	)
Total revenue equipment on operating lease	$	4,325		$	4,169
Property, plant, and equipment
Land	$	8,011		$	8,045
Buildings		46,538			56,441
Machinery and equipment		126,084			108,558
Leasehold improvements		10,684			10,546
Construction in progress		5,389			4,846
		196,706			188,436
Accumulated depreciation		(128,989	)		(116,059	)
Total property, plant, and equipment	$	67,717		$	72,377

Property, plant, and equipment under capital lease had gross values of $5.3 million and $15.9 million and accumulated depreciation of $3.5 million and $6.7 million, as of December 31, 2006 and December 25, 2005, respectively.

Depreciation expense on our revenue equipment on operating lease and property, plant, and equipment was $16.2 million, $17.8 million, and $20.7 million, for 2006, 2005, and 2004, respectively.

In November 2006, we cancelled a capital lease for one of our buildings with an outstanding amount owed of $10.3 million. This building was sublet to a third party tenant. The Company and the tenant reached a cancellation settlement which resulted in sublease income of $10.2 million. We recorded a $8.0 million impairment on this building as a result of the transaction. Additionally, we incurred a loss on the retirement of the capital lease of $0.2 million and an additional interest expense charge of $0.2 million. The sublease income, loss on the settlement of the capital lease, and the impairment were recorded in other operating income on our consolidated statement of operations.

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.

In 2004, we recorded a $3.9 million fixed asset impairment (discussed in Note 5).

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Note 5. GOODWILL AND OTHER INTANGIBLE ASSETS

We had intangible assets with a net book value of $33.1 million, and $33.3 million as of December 31, 2006 and December 25, 2005, respectively.

The following table reflects the components of intangible assets as of December 31, 2006 and December 25, 2005:

			December 31, 2006				December 25, 2005
	Amortizable				Gross				Gross
	Life		Carrying		Accumulated		Carrying		Accumulated
	(years)		Amount		Amortization		Amount		Amortization
	(dollar amounts in thousands)
Customer lists		20	$	32,583	$	22,116	$	29,093	$	18,822
Trade name		30		28,625		13,587		26,106		11,936
Patents, license agreements		5 to 14		40,060		32,761		36,978		28,561
Other		3 to 6		921		582		902		497
Total			$	102,189	$	69,046	$	93,079	$	59,816

We recorded $3.2 million, $3.4 million, and $3.9 million of amortization expense for 2006, 2005, and 2004, respectively.

Estimated amortization expense for each of the five succeeding years is anticipated to be:

	(dollar amounts
	in thousands)
2007	$	3,277
2008	$	3,182
2009	$	2,832
2010	$	2,394
2011	$	2,247

The changes in the carrying amount of goodwill are as follows:

				Labeling			Retail
	Security			Services			Merchandising			Total
	(dollar amounts in thousands)
Balance as of December 26, 2004	$	114,237		$	3,944		$	73,124		$	191,305
Acquired during the year		760			—			—			760
Impairment		—			(664	)		—			(664	)
Translation adjustment and other		(13,699	)		(1,555	)		(9,358	)		(24,612	)
Discontinued operations		—			(1,335	)		(141	)		(1,476	)
Balance as of December 25, 2005		101,298			390			63,625			165,313
Acquired during the year		—			5,714			—			5,714
Translation adjustment and other		9,433			274			6,554			16,261
Balance as of December 31, 2006	$	110,731		$	6,378		$	70,179		$	187,288

In November 2006, the Company purchased ADS Worldwide (ADS), a privately held company, for $7.4 million, net of cash acquired. The transaction was paid in cash. The financial statements reflect the preliminary allocations of the purchase price based on estimated fair values at the date of acquisition. This allocation has resulted in acquired goodwill of $5.7 million, which is non-deductible for tax purposes. The allocation of the purchase price is expected to be completed during the year 2007. The results from the acquisition date through December 31, 2006 are included in the labeling segment and were not material to the consolidated financial statements.

In September 2005, we classified our barcode labeling businesses and U.S. Hand-held labeling and Turn-O-Matic^® businesses as held for sale. 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 U.S. barcode labeling disposal group in our Labeling Services segment. This impairment was recorded in discontinued operations on the consolidated statement of operations.

In April 2005, we acquired Security Source, Inc. The total cost of this acquisition was $2.0 million, which was paid in cash. Goodwill recognized in this transaction amounted to $0.8 million and is fully deductible for tax purposes. This goodwill was assigned to our Security segment. We also acquired intangibles totaling $1.7 million, composed of patents ($1.6 million) and customer lists ($0.1 million). The patents and customer lists have weighted average useful lives of 8 years and 2 years, respectively.

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In the fourth quarter of 2004, we performed an assessment of the carrying value of goodwill utilizing a discounted cash flow analysis. This assessment indicated the book value of our U.S. and European labeling services reporting units exceeded their estimated fair value and a 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 estimated fair values resulting in an impairment charge. The estimated fair value was determined from prices of similar assets and discounted cash flows. Accordingly, we have recognized non-cash impairment charges of $51.4 million ($45.0 million, net of tax) in 2004. The charges included $34.7 million, $12.8 million, and $3.9 million related to goodwill impairments, intangible asset impairments, and fixed asset impairments, respectively. In developing the discounted cash flow analysis for these segments, we incorporated the 2004 decline, excluding the benefits of foreign exchange, related to the increased economic pressures and difficult market conditions. These factors resulted in lower growth expectations for the reporting units and triggered the impairment. 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.

We perform our annual assessment as of fiscal month end October each fiscal year. The 2006 and 2005 annual assessments did not result in an additional impairment charge. Future annual assessments could result in additional impairment charges, which would be accounted for as an operating expense. It is possible that future declines in retail merchandising revenues and profitability may lead to future impairments of the goodwill associated with this segment.

Note 6. SHORT-TERM BORROWINGS AND CURRENT PORTION OF LONG-TERM DEBT

Short-term borrowings and current portion of long-term debt at December 31, 2006 and at December 25, 2005 consisted of the following:

(dollar amounts in thousands)

	December 31,		December 25,
	2006		2005
			(As Restated)
Overdraft facilities and lines of credit with interest rates raging from 1.50% to 1.75%(1)	$	5,038	$	858
Full recourse factoring liabilities		774		2,615
Current portion of long-term debt		998		918
Total short-term borrowings and current portion of long-term debt	$	6,810	$	4,391

(1) The weighted average interest rates for 2006 and 2005 were 1.69% and 1.44%, respectively.

As of December 31, 2006, the ¥1.0 billion ($8.4 million) short-term revolving loan facility had an outstanding balance of ¥600 million ($5.0 million) and availability of ¥400 million ($3.4 million).

The Company has a full-recourse factoring arrangement with Mitsubishi UFJ Factoring Co., Ltd. The arrangements were secured by trade receivables. The Company received 99.7% of the face amount of receivables that it desired to sell and Mitsubishi UFJ Factoring Co., Ltd. agreed, at its discretion, to buy. As of December 31, 2006 and December 25, 2005, the face amount of receivables sold and not yet collected was $0.8 million and $2.6 million, respectively. These receivables were recorded in accounts receivable on our consolidated balance sheets.

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Note 7. LONG-TERM DEBT

Long-term debt at December 31, 2006 and December 25, 2005 consisted of the following:

	December 31,		December 25,
	2006		2005
	(dollar amounts in thousands)
Senior unsecured credit facility:
$150 million variable interest rate revolving credit facility maturing in 2010	$	9,067	$	25,421
€9.5 million capital lease maturing in 2021		—		9,590
€2.7 million capital lease maturing in 2007		469		831
Other capital leases with maturities through 2010		1,186		430
Total(1)		10,722		36,272
Less current portion		998		918
Total long-term portion	$	9,724	$	35,354

(1) The weighted average interest rates for 2006 and 2005 were 1.8% and 3.16%, respectively.

In November 2006, we cancelled a capital lease for one of our buildings with an outstanding amount owed of $10.3 million. This building was sublet to a third party tenant. The Company and the tenant reached a cancellation settlement which resulted in sublease income of $10.2 million. We recorded a $8.0 million impairment on this building as a result of the transaction. Additionally, we incurred a loss on the retirement of the capital lease of $0.2 million and an additional interest expense charge of $0.2 million. The sublease income, loss on the settlement of the capital lease, and the impairment were recorded in other operating income on our consolidated statement of operations.

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 arranged in December 1999. In connection with the refinancing, we borrowed $60.0 million to repay the outstanding principal, interest and fees and expenses associated with the extinguishment of 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 31, 2006, we had ¥1.1 billion ($9.1 million) outstanding under this facility. Our available line of credit under this agreement is $139.3 million. Our availability under this facility was reduced by letters of credit totaling $1.6 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. In connection with the 2005 refinancing, our aggregate fees and expenses were $0.7 million, which are being amortized over the term of the Credit Agreement.

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. As of December 31, 2006, we were in compliance with all covenants.

The aggregate maturities on all long-term debt (including current portion) are:

			Capital		Total
	Debt		Leases		Debt
	(dollar amounts in thousands)
2007	$	—	$	998	$	998
2008		—		434		434
2009		—		209		209
2010		9,067		14		9,081
2011		—		—		—
Thereafter		—		—		—
Total	$	9,067	$	1,655	$	10,722

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Note 8. STOCK-BASED COMPENSATION

At December 31, 2006, the Company had stock-based employee compensation plans as described below. For the year ended December 31, 2006, the total compensation expense related to these plans was $5.7 million ($4.2 million, net of tax) or $.10 per diluted share. Prior to December 26, 2005, the Company accounted for those plans under the recognition and measurement provisions of APB 25. Accordingly, the Company generally recognized compensation expense only when it granted options with a discounted exercise price.

In 2006, we changed the method in which we issue share-based awards to our key employees. In prior years, share-based compensation for key employees consisted primarily of stock options. Upon consideration of several factors, we began in 2006 to award key employees a combination of stock options and restricted stock units. Therefore, this change resulted in an increase in stock-based compensation from restricted stock units.

Stock Plans

On April 29, 2004, the shareholders approved the Checkpoint Systems, Inc. 2004 Omnibus Incentive Compensation Plan (2004 Plan). The initial shares available under the 2004 Plan were approximately 3,500,000, which represent the shares that were available at that time under the 1992 Stock Option Plan (1992 Plan). All cancellations and forfeitures related to share units outstanding under the 1992 Plan will be added back to the shares available for grant under the 2004 Plan. No further awards will be issued under the 1992 plan. The 2004 Plan is designed to provide incentives to employees, non-employee directors, and independent contractors through the award of stock options, stock appreciation rights, stock units, phantom shares, dividend equivalent rights and cash awards. The Compensation Committee (Committee) of our Board of Directors administers the 2004 Plan and determines the terms and conditions of each award. Stock options issued under the 2004 Plan primarily vest over a three year period and expire not more than 10 years from date of grant. Restricted stock units vest over three to five year periods from date of grant. As of December 31, 2006, there were 2,266,442 shares available for grant under the 2004 plan.

Our 1992 Stock Option Plan (1992 Plan) allowed us to grant either Incentive Stock Options (ISOs) or Non-Incentive Stock Options (NSOs) to purchase up to 16,000,000 shares of common stock. Only employees were eligible to receive ISOs and both employees and non-employee directors of the Company were eligible to receive NSOs. On February 17, 2004, the Plan was amended to allow an independent consultant to receive NSOs. All ISOs under the 1992 Plan expire not more than ten years (plus six months in the case of NSOs) from the date of grant. Both ISOs and NSOs require a purchase price of not less than 100% of the fair market value of the stock at the date of grant. As of December 31, 2006, there were no shares available for grant under the 1992 Plan.

On July 1, 2004, we adopted a stand alone inducement stock option plan authorizing the issuance of options to purchase up to 200,000 shares of our common stock, which were granted to an officer 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 31, 2006, there are no shares available for grant under this plan.

During fiscal 2005, we initiated a Long-Term Incentive Plan (LTIP). Under this plan, restricted stock units (RSUs) were awarded to eligible executives. The number of shares for these units varies based on the Company’s operating income and operating margin. These units cliff vest at the end of fiscal 2007. The final value of these units will be determined by the number of shares earned. The value of these units is charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated number of shares to be awarded. The weighted average price for these RSUs was $17.87 per share. For the year ended December 31, 2006, $0.1 million was charged to compensation expense. As of December 31, 2006, total unamortized compensation expense for the initial grant was $0.2 million. As of December 31, 2006, the maximum achievable RSUs outstanding under this plan are 136,000 units. These RSUs reduce the shares available to grant under the 2004 Plan.

During fiscal 2006, we expanded the scope of the LTIP. Under the expanded plan, RSUs were awarded to eligible key employees. The number of shares for these units varies based on the Company’s cash flow. These units cliff vest at the end of fiscal 2008. The final value of these units will be determined by the number of shares earned. The value of these units is charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated award amounts and estimated forfeitures rates. The weighted average price for these RSUs was $28.89 per share. For fiscal year 2006, $1.1 million was charged to compensation expense. As of December 31, 2006, total unamortized compensation expense for this grant was $2.6 million. As of December 31, 2006, the maximum achievable RSUs outstanding under this plan are 281,969 units. These RSUs reduce the shares available to grant under the 2004 Plan.

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Stock Options

Option activity under the principal option plans as of December 31, 2006 and changes during the year then ended were as follows:

						Weighted
						Average
				Weighted-		Remaining		Aggregate
				Average		Contractual		Intrinsic
				Exercise		Term		Value
	Shares			Price		(in years)		(in thousands)
Outstanding at December 25, 2005		3,693,361		$	15.68
Granted		320,262			28.33
Exercised		(532,731	)		15.08
Forfeited or expired		(326,375	)		23.22
Outstanding at December 31, 2006		3,154,517		$	16.28		6.03	$	15,274
Vested and expected to vest at December 31, 2006		3,059,222		$	16.06		5.96	$	15,144
Exercisable at December 31, 2006		2,466,100		$	14.74		5.38	$	14,175

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of fiscal 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2006. This amount changes based on the fair market value of the Company’s stock. Total intrinsic value of options exercised for the year ended December 31, 2006 was $5.8 million.

As of December 31, 2006, $2.5 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 1.9 years.

Prior to the adoption of SFAS 123R, the Company presented the tax benefit of stock option exercises as operating cash flows. Upon the adoption of SFAS 123R, tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options are classified as financing cash flows. Cash received from option exercises and purchases under the ESPP for the year ended December 31, 2006 was $8.7 million. The actual tax benefit realized for the tax deduction from option exercises of the share-based payment units totaled $1.9 million for the year ended December 31, 2006. In adopting SFAS 123R, we have applied the “Short-cut” method in calculating the historical windfall tax benefits. All tax short falls will be applied against this windfall before being charged to earnings.

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Restricted Stock Units

In 2006, we issued service-based restricted stock units with vesting periods of three to five years. These awards are valued using their intrinsic value on the date of grant. The compensation expense is recognized straight-line over the vesting term.

Nonvested service-based restricted stock units as of December 31, 2006 and changes during the year ended December 31, 2006 were as follows:

				Weighted-
	Number of			Average Vest		Weighted-
	Shares			Date		Average Grant
	(in thousands)			(in years)		Date Fair Value
Nonvested at December 25, 2005		—				$	—
Granted		203,486				$	26.32
Vested		—				$	—
Forfeited		(5,814	)			$	28.89
Nonvested at December 31, 2006		197,672			1.37	$	26.24
Vested and expected to vest at December 31, 2006		157,881			1.19
Vested at December 31, 2006		—			—

As of December 31, 2006, there was $2.8 million unrecognized stock-based compensation expense related to nonvested restricted stock units. That cost is expected to be recognized over a weighted-average period of 3.1 years.

Note 9. SUPPLEMENTAL CASH FLOW INFORMATION

Cash payments in 2006, 2005, and 2004, included payments for interest of $2.0 million, $3.7 million, and $6.1 million, and income taxes of $13.6 million, $29.8 million, and $14.6 million, respectively.

Non-cash investing and financing activities are excluded from the consolidated statement of cash flows. For 2006, non-cash transfer of a sublease receivable of $10.3 million was transferred to settle our capital lease obligation and excluded from our consolidated cash flow. The net of the transaction was shown as an adjustment to reconcile net earnings to cash provided by operating activities. Additionally, we entered into new capital leases in 2006 of $0.4 million which were excluded from the cash flow as they were non-cash transactions. For 2004, non-cash investing and financing activities included a $47.7 million conversion of subordinated debentures into 2.599 million shares of our common stock and an addition for capital leases of $0.5 million.

Note 10. STOCKHOLDERS’ EQUITY

In March 1997, our Board of Directors adopted a new Shareholder’s Rights Plan (1997 Plan). The Rights under the 1997 Plan attached to the common shares of the Company as of March 24, 1997. The Rights are designed to ensure all Company shareholders fair and equal treatment in the event of a proposed takeover of the Company, and to guard against partial tender offers and other abusive tactics to gain control of the Company without paying all shareholders a fair price.

The Rights are exercisable only as a result of certain actions of an acquiring person. Initially, upon payment of the exercise price (currently $100.00), each Right will be exercisable for one share of common stock. Upon the occurrence of certain events each Right will entitle its holder (other than the acquiring person) to purchase a number of our or an acquiring person’s common shares having a market value of twice the Right’s exercise price. The Rights expire on March 10, 2017.

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The components of accumulated other comprehensive income (loss) at December 31, 2006 and at December 25, 2005 are as follows:

(dollar amounts in thousands)

	2006			2005
				(As Restated)
Actuarial losses on pension plans	$	(9,225	)	$	—
Minimum pension liability adjustment, net of tax		—			(6,361	)
Foreign currency translation adjustment		7,432			(18,357	)
Total	$	(1,793	)	$	(24,718	)

Note 11. EARNINGS PER SHARE

For fiscal years 2006, 2005, and 2004, basic earnings (loss) per share are based on net earnings divided by the weighted average number of shares outstanding during the period. The following data shows the amounts used in computing earnings per share and the effect on net earnings from continuing operations and the weighted average number of shares of dilutive potential common stock:

(amounts in thousands, except per share data)

	December 31,		December 25,		December 26,
	2006		2005		2004
			(As Restated)		(As Restated)
Basic earnings available to common stockholders:
Net earnings available to common stockholders from continuing operations	$	35,019	$	28,413	$	18,823
Diluted earnings available to common stockholders from continuing operations	$	35,019	$	28,413	$	18,823
Shares:
Weighted average number of common shares outstanding		39,136		38,072		36,823
Shares issuable under deferred compensation agreements		240		157		—
Basic weighted average number of common shares outstanding		39,376		38,229		36,823
Common shares assumed upon exercise of stock options and awards		839		832		781
Shares issuable under deferred compensation arrangements		18		14		—
Dilutive weighted average number of common shares outstanding		40,233		39,075		37,604
Basic Earnings (Loss) per Share:
Earnings from continuing operations	$	.89	$	.75	$	.51
Earnings (loss) from discontinued operations, net of tax	$	.02	$	.21	$	(1.02	)
Basic earnings (loss) per share	$	.91	$	.96	$	(.51	)
Diluted Earnings (Loss) per Share:
Earnings from continuing operations	$	.87	$	.72	$	.50
Earnings (loss) from discontinued operations, net of tax	$	.02	$	.21	$	(1.00	)
Diluted earnings (loss) per share	$	.89	$	.93	$	(.50	)

Anti-dilutive potential common shares are not included in our earnings per share calculation. The Long-term Incentive Plan restricted stock units were excluded from our calculation due to the performance of vesting criteria not being met. Common shares assumed upon conversion of subordinate debentures were excluded from the fiscal 2004 calculation due to being anti-dilutive. These debentures were retired as of the end of 2004 and as a result will not have an effect on future calculations.

The number of anti-dilutive common share equivalents for the years ended December 31, 2006, December 25, 2005, and December 26, 2004 were as follows:

	December 31,		December 25,		December 26,
	2006		2005		2004
Weighted average common share equivalents associated with anti-dilutive stock options and restricted stock units excluded from the computation of diluted EPS:		540,675		422,586		1,214,000

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Note 12. DISCONTINUED OPERATIONS

On January 30, 2006 the Company completed the sale of its global barcode businesses, included in our Labeling Services segment, and the U.S. hand-held labeling and Turn-O-Matic® businesses included in the Retail Merchandising segment for cash proceeds of $37 million, plus the assumption of $5 million in liabilities. The Company recorded a pre-tax gain of $2.8 million ($1.4 million, net of tax), included in discontinued operations in the consolidated statement of operations. The recorded gain on sale is subject to certain post-closing working capital adjustments to be finalized in the first quarter of 2007.

The Company’s discontinued operations reflect the operating results for the disposal group through the date of disposition. The results for the years ended December 31, 2006, December 25, 2005 and December 26, 2004 have been reclassified to show the results of operations for the barcode labeling systems and U.S. hand-held labeling and Turn-O-Matic® businesses as discontinued operations. Below is a summary of these results:

(dollar amounts in thousands)

	December 31,			December 25,		December 26,
	2006			2005		2004
Net revenue	$	7,446		$	98,118	$	107,121
Gross profit		1,433			26,908		27,682
Selling, general, & administrative expense		2,239			13,901		16,909
Research and development		—			415		437
Asset impairment		—			—		14,780
Goodwill impairment		—			664		34,696
Operating (loss) income		(806	)		11,928		(39,140	)
Gain on disposal		2,768			—		—
Earnings (loss) from discontinued operations before income taxes		1,962			11,928		(39,140	)
Income taxes		1,059			3,820		(1,692	)
Earnings (loss) from discontinued operations, net of tax	$	903		$	8,108	$	(37,448	)

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Additionally, the Company made certain reclassifications to its December 25, 2005 consolidated balance sheet to reflect the assets and liabilities of discontinued operations that were classified as held for sale. As of December 25, 2005 the classification was as follows:

(dollar amounts in thousands)

	December 25,
	2005
Accounts receivables, net	$	16,191
Inventories		10,421
Property, plant and equipment, net		3,366
Goodwill		1,476
Other intangibles, net		932
Deferred income taxes		1,551
Other assets		317
Assets of discontinued operations held for disposal	$	34,254
Accrued compensation and related taxes	$	1,271
Other accrued expenses		233
Accrued pensions		3,861
Deferred income taxes		312
Other liabilities		781
Liabilities of discontinued operations held for disposal	$	6,458

Note 13. INCOME TAXES

The domestic and foreign components of earnings (loss) from continuing operations before income taxes and minority interest are:

(dollar amounts in thousands)

	2006			2005		2004
				(As Restated)		(As Restated)
Domestic(1)	$	(778	)	$	24,877	$	6,525
Foreign		42,753			15,250		14,506
Total	$	41,975		$	40,127	$	21,031

(1) The domestic component includes the earnings of our operations in Puerto Rico for 2005 and 2004.

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Provision for income taxes – continuing operations:

(dollar amounts in thousands)

	2006			2005			2004
				(As Restated)			(As Restated)
Currently payable
Federal	$	(760	)	$	6,292		$	(223	)
State		582			921			454
Puerto Rico		(58	)		(636	)		423
Foreign		7,645			9,310			2,763
Total currently payable		7,409			15,887			3,417
Deferred
Federal		1,315			(1,370	)		(1,025	)
State		—			—			—
Puerto Rico		(121	)		171			(235	)
Foreign		(1,616	)		(3,027	)		(93	)
Total deferred		(422	)		(4,226	)		(1,353	)
Total provision	$	6,987		$	11,661		$	2,064

Deferred tax assets/liabilities at December 31, 2006 and December 25, 2005 consist of:

(dollar amounts in thousands)

	December 31,			December 25,
	2006			2005
				(As Restated)
Inventory	$	5,475		$	5,956
Accounts receivable		2,804			1,968
Net operating loss and foreign tax credit carryforwards		51,782			43,707
Restructuring		268			192
Deferred revenue		665			1,434
Pension		10,748			8,480
Warranty		1,007			904
Deferred compensation		1,358			515
Stock based compensation		1,293			—
Valuation allowance		(34,510	)		(26,477	)
Deferred tax assets		40,890			36,679
Depreciation		1,529			1,694
Intangibles		12,168			11,306
Other		2,481			1,178
Withholding tax liabilities		1,031			2,124
Deferred tax liabilities		17,209			16,302
Net deferred tax asset	$	23,681		$	20,377

Net earnings generated by the operations of our Puerto Rico subsidiary were partially exempt from Federal income taxes under Section 936 of the Internal Revenue Code in 2005 and are substantially exempt from Puerto Rico’s income taxes. The tax exemption related to Section 936 expired on December 31, 2005.

In fiscal 2006, we repatriated all of Puerto Rico unremitted earnings resulting in a payment of “tollgate” tax of approximately $1.1 million in the first quarter of 2006. This repatriation had no effect on earnings.

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At December 31, 2006, the deferred tax asset related to net operating loss carryforwards is $45.6 million. The deferred tax asset related to foreign net operating losses is $33.4 million which is offset by a valuation allowance of $21.1 million. The tax effect of foreign net operating losses includes $7.8 million which was acquired in connection with the acquisition of ID Systems Group, Actron Group Limited and Meto AG. If the tax benefit of the ID Systems Group, Actron Group Limited and Meto AG foreign net operating losses is realized, it will be applied to the goodwill that was recorded with the acquisitions. Of the total foreign net operating loss carryforwards, $1.4 million has expiration dates ranging from 2008 to 2016 and the remaining portion carries forward indefinitely. The deferred tax asset related to state net operating loss carryforwards is $12.2 million which is offset by a full valuation allowance. The state net operating loss carryforwards have expiration dates ranging from 2007 to 2026. The company has U.S. foreign tax credit carryforwards of $6.1 million with expiration dates ranging from 2012 to 2016. The company expects to fully realize the benefit of the U.S. foreign tax credit carryforwards.

At December 31, 2006, unremitted earnings of subsidiaries outside the United State totaling $56.3 million were deemed to be permanently reinvested. No deferred tax liability has been recognized with regards to the remittance of such earnings. It is not practical to estimate the income tax liability that might be incurred if such earnings were remitted to the United States.

On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the “Act”). The Act created a temporary incentive in 2005 for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividend received deduction for certain dividends from controlled foreign corporations. In the fourth quarter, 2005, the company repatriated $14.0 million under the Act, resulting in additional income tax of $0.4 million.

A reconciliation of the tax provision at the statutory U.S. Federal income tax rate with the tax provision at the effective income tax rate follows:

(dollar amounts in thousands)

	2006			2005			2004
				(As Restated)			(As Restated)
Tax provision at the statutory Federal income tax rate	$	14,692		$	14,044		$	7,362
Tax exempt earnings of subsidiary in Puerto Rico		—			(1,467	)		(1,467	)
Non-deductible permanent items		260			485			375
State and local income taxes, net of Federal benefit		186			599			311
Benefit from extraterritorial income		(70	)		(619	)		(848	)
Foreign losses for which no tax benefit recognized		801			626			482
Foreign rate differentials		(6,982	)		(3,744	)		(3,620	)
Research and development credits		—			—			(637	)
Tax settlements		—			(452	)		783
Potential tax contingencies		(1,528	)		179			(577	)
Change in valuation allowance		(453	)		180			234
Tax restructuring and AJCA repatriation		—			2,039			—
Stock based compensation		308			—			—
Other		(227	)		(209	)		(334	)
Tax provision at the effective tax rate	$	6,987		$	11,661		$	2,064

Note 14. EMPLOYEE BENEFIT PLANS

Under our defined contribution savings plans, eligible employees may make basic (up to 6% of an employee’s earnings) and supplemental contributions. We match in cash 50% of the participant’s basic contributions. Company contributions vest to participants in increasing percentages over one to five years of service. Our contributions under the plans approximated $1.0 million, $1.2 million, and $1.1 million, in 2006, 2005, and 2004, respectively.

Generally, all employees in the U.S. may participate in our U.S. Savings Plan. All full-time employees of the Puerto Rico subsidiary who have completed three months of service may participate in our Puerto Rico Savings Plan.

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During fiscal 2005, we initiated a 423(b) Employee Stock Purchase Plan, which was adopted by the shareholders in the Annual Shareholder Meeting on April 29, 2004. This plan replaces the non-qualified Employee Stock Purchase Plan. Under the provisions of the 423(b) plan, eligible employees may contribute from 1% to 25% of their base compensation to purchase shares of our common stock at 85 percent of the fair market value on the offering date or the exercise date of the offering period, whichever is lower. Our expense for this plan was $0.2 million and $0.2 million for the years ended December 31, 2006 and December 25, 2005, respectively. As of December 31, 2006, there were 179,083 shares authorized and available to be issued. During fiscal year 2006, 45,680 shares were issued under this plan as compared to 25,237 shares in 2005.

We maintain deferred compensation plans for executives and non-employee directors. The executive deferred compensation plan allows certain executives to defer portions of their salary and bonus (up to 50% and 100%, respectively) into a deferred stock account. All deferrals in this plan are matched 25% by the Company. The match vests in thirds at each calendar year end for three years following the match. For executives over the age of 55 years old, the matching contribution vests immediately. The settlement of this deferred stock account is required by the plan to be made only in Company common stock. The deferral shares held in the deferred compensation plan are considered outstanding for purposes of calculating basic and diluted earnings per share. The unvested match is considered in the calculation of diluted earnings per share. Our match into the deferred stock account under the executive plan for fiscal years 2006 and 2005 were approximately $0.4 million and $0.3 million, respectively. The match will be expensed ratably over a three year vesting period.

The director deferred compensation plan allows non-employee directors to defer their compensation into a deferred stock account. All deferrals in this plan are matched 25% by the Company. The match vests immediately. The settlement of this deferred stock account is required by the plan to be made only in Company common stock. The deferral shares held in the deferred compensation plan are considered outstanding for purposes of calculating basic and diluted earnings per share. Our match into the deferred stock account under the director’s plan approximated $0.1 million for fiscal years 2006 and 2005.

Under our non-qualified Employee Stock Purchase Plan, employees in Canada, Puerto Rico, and the U.S., could contribute up to $80 per week for the purchase of our common stock at fair market value. We would match employee contributions up to a maximum of $20.75 per week. This plan has been replaced with the 423(b) plan described previously. Our contributions under this plan approximated $0.2 million for fiscal year 2004.

Pension Plans

We maintain several defined benefit pension plans, principally in Europe. The plans covered approximately 11% of the total workforce at December 31, 2006. The benefits accrue according to the length of service, age, and remuneration of the employee.

In September 2006, the Financial Accounting Standards Board issued Statement 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans: an amendment of FASB Statements No. 87, 88, 106, and 132(R). Statement 158 requires the Company to recognize the funded status of its defined benefit postretirement plan in the Company’s statement of financial position. The funded status was previously disclosed in the notes to the Company’s financial statements, but differed from the amount recognized in the statement of financial position.

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The amounts recognized in accumulated other comprehensive income at December 31, 2006, consist of:

(dollar amounts in thousands)
Transition obligation	$	691
Prior service costs		26
Actuarial losses		13,976
Total		14,693
Deferred tax		(5,468	)
Net	$	9,225

The amounts included in accumulated other comprehensive income at December 31, 2006, and expected to be recognized in net periodic pension cost during the year ended December 30, 2007, are as follows:

(dollar amounts in thousands)
Transition obligation	$	123
Prior service costs		2
Actuarial losses		460
Total	$	585

The Company does not expect to have any plan assets returned during the year ended December 30, 2007.

The pension plans included the following net cost components:

	2006			2005			2004
	(dollar amounts in thousands)
Service cost	$	1,350		$	1,380		$	1,308
Interest cost		3,505			3,837			3,861
Expected return on plan assets		(144	)		(4	)		(4	)
Amortization of actuarial loss (gain)		569			32			(38	)
Amortization of transition obligation		117			116			115
Amortization of prior service costs		2			2			2
Net periodic pension cost		5,399			5,363			5,244
Settlement loss		736			—			—
Special termination benefit recognized		226			—			—
Curtailment gain		(337	)		(664	)		—
Total pension expense	$	6,024		$	4,699		$	5,244

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The table below sets forth the funded status of our plans and amounts recognized in the accompanying balance sheets.

	December 31,			December 25,
	2006			2005
	(dollar amounts in thousands)
Change in benefit obligation
Net benefit obligation at beginning of year	$	83,312		$	85,379
Service cost		1,350			1,380
Interest cost		3,505			3,837
Actuarial loss (gain)		(274	)		7,230
Gross benefits paid		(3,570	)		(3,102	)
Plan settlements		(3,849	)		—
Curtailment gain		(337	)		(641	)
Special termination benefits		226			—
Foreign currency exchange rate changes		9,203			(10,771	)
Net benefit obligation at end of year	$	89,566		$	83,312
Change in plan assets
Fair value of plan assets at beginning of year	$	3,440		$	3,091
Actual return on assets		(202	)		194
Employer contributions		7,058			3,638
Gross benefits paid		(3,570	)		(3,102	)
Plan settlements		(3,849	)		—
Foreign currency exchange rate changes		357			(381	)
Fair value of plan assets at end of year	$	3,234		$	3,440
Reconciliation of funded status
Funded status at end of year	$	(86,332	)	$	(79,872	)
Unrecognized actuarial loss		—			13,732
Unrecognized transition obligation		—			731
Unrecognized prior service cost		—			25
Net amount recognized at end of year	$	(86,332	)	$	(65,384	)

	December 31,		December 25,
	2006		2005
	(dollar amounts in thousands)
Amounts recognized in accrued benefit consist of:
Accrued pensions — current	$	3,730	$	—
Accrued pensions		82,602		65,384
Net amount recognized at end of year	$	86,332	$	65,384
Other comprehensive income attributable to change in additional minimum liability recognition	$	681	$	5,625
Accumulated benefit obligation at end of year	$	83,768	$	77,809

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The following table sets forth additional fiscal year-ended information for pension plans for which the accumulated benefit is in excess of plan assets:

	December 31,		December 25,
	2006		2005
	(dollar amounts in thousands)
Projected benefit obligation	$	88,682	$	83,312
Accumulated benefit obligation	$	83,768	$	77,809
Fair value of plan assets	$	3,234	$	3,440

The weighted average rate assumptions used in determining pension costs and the projected benefit obligation are as follows:

	December 31,			December 25,
	2006			2005
Weighted average assumptions for year-end benefit obligations:
Discount rate(1)		4.50	%		4.25	%
Expected rate of increase in future compensation levels		2.50	%		2.50	%
Weighted average assumptions for net periodic benefit cost development:
Discount rate(1)		4.25	%		5.00	%
Expected rate of return on plan assets		3.80	%		3.75	%
Expected rate of increase in future compensation levels		2.50	%		2.50	%
Measurement Date:	December 31, 2006			December 31, 2005

(1) Represents the weighted average rate for all pension plans.

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 4.50% and 4.25% for 2006 and 2005, respectively.

The majority of our pension plans are unfunded plans. 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 3.80% long-term rate of return on asset assumption. For funded plans, all assets are held in foreign government bonds.

The benefits expected to be paid over the next five years and the five aggregated years after:

	(dollar amounts in
	thousands)
2007	$	3,865
2008		4,002
2009		4,091
2010		4,282
2011		4,634
2012 through 2016	$	27,629

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Note 15. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Our major market risk exposures are movements in foreign currency and interest rates. 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. We enter into forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts are entered into with major financial institutions, thereby minimizing the risk of credit loss. Our policy is to manage interest rates through the use of interest rate caps or swaps. We do not hold or issue derivative financial instruments for speculative or trading purposes. We are subject to other foreign exchange market risk exposure resulting from anticipated non-financial instrument foreign currency cash flows which are difficult to reasonably predict, and have therefore not been included in the table of Fair Values, which follows. All listed items described are non-trading.

Foreign Exchange Risk Management

We enter into currency forward exchange contracts to hedge short-term receivables denominated in currencies other than the U.S. dollar from our foreign sales subsidiaries. The term of the currency forward exchange contracts is rarely more than one year. Unrealized and realized gains and losses on these contracts are included in other gain, net. Notional amounts of currency forward exchange contracts outstanding at December 31, 2006 were $15.9 million, with various maturity dates ranging through the end of the first quarter 2007. At December 25, 2005, the notional amounts of currency forward exchange contracts outstanding were $16.4 million.

Aggregate foreign currency transaction (loss) gains in 2006, 2005, and 2004, were $(0.4) million, $(0.2) million, and $0.2 million, respectively, and are included in other gain, net on the consolidated statements of operations.

Additionally, there were no deferrals of gains or losses on currency forward exchange contracts at December 31, 2006.

Fair Values

The following table presents the carrying amounts and fair values of our financial instruments at December 31, 2006 and December 25, 2005:

	December 31, 2006				December 25, 2005
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
	(dollar amounts in thousands)
Long-term debt (including current maturities and excluding capital leases)(1)	$	9,067	$	9,067	$	25,421	$	25,421

(1) The carrying amounts are reported on the balance sheet under the indicated captions.

Long-term debt is carried at the original offering price, less any payments of principal. Rates currently available to us for long-term borrowings with similar terms and remaining maturities are used to estimate the fair value of existing borrowings as the present value of expected cash flows. The long-term debt agreement maturity date is in the year 2010.

The carrying value approximates fair value for cash, restricted cash, accounts receivable, and accounts payable.

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Note 16. PROVISION FOR RESTRUCTURING

2005 Restructuring Plan

In the second quarter of 2005, we initiated actions focused on reducing our overall operating expenses. This plan included the implementation of a cost reduction plan designed to consolidate certain administrative functions in Europe and a commitment to a plan to restructure a portion of our supply chain manufacturing to lower cost areas. During fourth quarter 2006, we continued to review the results of the overall initiatives and added an additional reduction focused on the reorganization of senior management to focus on key markets and customers. This additional restructuring reduced our management by 25%.

A net charge of $7.8 million was recorded in 2006 in connection with the 2005 Restructuring Plan. Included in the net charge was $7.2 million related to severance and a $0.7 million litigation settlement accrual related to employees previously terminated according to the restructuring plan in certain countries. Also included in the net charge was a $0.3 million pension curtailment gain related to employees previously terminated according to the restructuring plan in certain countries and an expense of $0.2 million for a special termination benefit provided to one employee according to the employee’s termination agreement.

The total restructuring charge for fiscal 2005 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 763 of which 671 have been terminated. Of the remaining 92 employees who have not yet been terminated, 73 employees were related to 2006 additions to the restructuring plan and 19 employees were notified in 2005. These terminations are expected to be completed by the end of the second quarter of 2007. The anticipated total cost is expected to approximate $24 million to $26 million of which $24 million has been incurred and $17 million has been paid. Termination benefits are planned to be paid 1 month to 24 months after termination.

Restructuring accrual activity was as follows:

Fiscal 2006

(dollar amounts are in thousands)

	Accrual at				Charge
	Beginning		Charged to		Reversed to			Cash			Exchange		Accrual at
	of Year		Earnings		Earnings			Payments			Rate Changes		12/31/06
Severance and other employee-related charges	$	10,121	$	9,140	$	(1,225	)	$	(11,989	)	$	739	$	6,786

Included in the 2006 restructuring liability is a $0.7 million litigation settlement accrual related to employees previously terminated according to the restructuring plan in certain countries.

Fiscal 2005

(dollar amounts are in thousands)

	Accrual at				Charge
	Beginning		Charged to		Reversed to			Cash			Exchange			Accrual at
	of Year		Earnings		Earnings			Payments			Rate Changes			12/25/05
Severance and other employee-related charges	$	—	$	16,911	$	(957	)	$	(5,357	)	$	(476	)	$	10,121

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2003 Restructuring Plan

During 2006, we reversed $0.8 million related to the 2003 plan. This was composed of $0.4 million related to the release of our lease reserve to income as we have obtained a sublease for the property previously reserved and a $0.4 million severance reversal.

During 2005, we reversed $1.0 million of previously accrued severance related to the 2003 plan.

Note 17. COMMITMENTS AND CONTINGENCIES

We lease certain production facilities, offices, distribution centers, and equipment. Rental expense for all operating leases approximated $14.7 million, $17.0 million, and $20.6 million, in 2006, 2005, and 2004, respectively.

Future minimum payments for operating leases and capital leases having non-cancelable terms in excess of one year at December 31, 2006 are:

	Capital		Operating
	Leases		Leases		Total
	(dollar amounts in thousands)
2007	$	1,059	$	12,917	$	13,976
2008		469		8,947		9,416
2009		237		6,493		6,730
2010		14		4,404		4,418
2011		—		2,782		2,782
Thereafter		—		1,257		1,257
Total minimum lease payments		1,779	$	36,800	$	38,579
Less: amounts representing interest		124
Present value of minimum lease payments	$	1,655

Contingencies

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.

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

On June 22, 2006, the Company settled the follow-on purported class action suits that were filed in connection with the ID Security Systems Canada Inc. litigation. The purported class action complaints generally alleged a claim of monopolization and were substantially based upon the same allegations as contained in the ID Security Systems Canada Inc. case as discussed above. The settlement was for $1.45 million in cash and credits for the purchase of 90 million radio frequency label tags. As a result, we recorded a pre-tax charge to earnings of $2.3 million. As a portion of the settlement is in the form of vouchers for the future purchases of tags, the settlement is anticipated to impact revenue and margin over the term of the redemption period for the vouchers.

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

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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. On January 29, 2007 the case went to trial. On February 13, 2007 a jury found in favor of the defendants. This decision is not expected to significantly impact revenue or margins since the original patent was scheduled to expire in March 2008.

Note 18. CONCENTRATION OF CREDIT RISK

Our foreign subsidiaries, along with many foreign distributors, provide diversified international sales thus minimizing credit risk to one or a few distributors. Domestically, our sales are well diversified among numerous retailers in the apparel, drug, home entertainment, mass merchandise, music, shoe, supermarket, and video markets. We perform ongoing credit evaluations of our customers’ financial condition and generally require no collateral from our customers.

Note 19. ACQUISITIONS

All acquisitions have been accounted for under the purchase method. The results of the operations of the acquired businesses are included in the consolidated financial statements from the date of acquisition.

In November 2006, the Company purchased ADS Worldwide (ADS), a privately held company, for $7.4 million, net of cash acquired. The transaction was paid in cash. The financial statements reflect the preliminary allocations of the purchase price based on estimated fair values at the date of acquisition. This allocation has resulted in acquired goodwill of $5.7 million, which is non-deductible for tax purposes. The allocation of the purchase price is expected to be completed during the year 2007. The results from the acquisition date through December 31, 2006 are included in the labeling segment and were not material to the consolidated financial statements.

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Note 20. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION

Our reportable business segments are strategic business units that offer distinctive products and services that are marketed through different channels. We have three reportable business segments:

i	Security – includes electronic article surveillance (EAS) systems, access control systems, closed-circuit television (CCTV) systems, and fire and intrusion systems.
ii	Labeling Services – includes service bureau (Check-Net), and radio frequency identification (RFID) systems.
iii	Retail Merchandising – includes hand-held labeling systems (HLS) and retail display systems (RDS).

The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

The business segment information set forth below is that viewed by the chief operating decision maker:

     (A) Business Segments

(dollar amounts in thousands)

	2006			2005			2004
				(As Restated)			(As Restated)
Business segment net revenue:
Security	$	499,835		$	550,440		$	508,227
Labeling Services		102,525			76,254			65,830
Retail Merchandising		85,415			91,298			96,396
Total	$	687,775		$	717,992		$	670,453
Business segment gross profit:
Security	$	215,495		$	239,186		$	235,224
Labeling Services		34,496			24,021			22,586
Retail Merchandising		41,700			48,323			51,662
Total gross profit		291,691			311,530			309,472
Operating expenses		253,608	(1)		270,728	(2)		283,225	(3)
Interest income (expense), net		2,751			(524	)		(5,435	)
Other gain (loss), net		1,141			(151	)		219
Earnings from continuing operations before income taxes and minority interest	$	41,975		$	40,127		$	21,031
Business segment total assets:
Security	$	540,411		$	491,730
Labeling Services		102,639			81,323
Retail Merchandising		138,141			131,938
Total	$	781,191		$	704,991	(4)

(1)	Includes a $7.0 million restructuring charge, a $2.3 million litigation settlement charge, and a $2.0 million gain from the settlement of a capital lease.
(2)	Includes $12.6 million restructuring charge and a $1.4 million impairment charge.
(3)	Includes a $3.0 million restructuring charge reversal, a $20.0 million litigation settlement and a $2.0 million impairment charge.
(4)	Fiscal year 2005 excludes assets held for disposal related to discontinued operations.

     (B) Geographic Information

Operating results are prepared on a “country of domicile” basis, meaning that net revenues and gross profit are included in the geographic area where the selling entity is located. Assets are included in the geographic area in which the producing entities are located. A direct sale from the U.S. to an unaffiliated customer in South America is reported as a sale in the U.S. Inter-area sales between our locations are made at transfer prices that approximate

80

market price and have been eliminated from consolidated net revenues. Gross profit for the individual area includes the profitability on a transfer price basis, generated by sales of our products imported from other geographic areas. International Americas is defined as all countries in North and South America, excluding the United States and Puerto Rico.

The following table shows net revenues, gross profit, and other financial information by geographic area for the years 2006, 2005, and 2004:

	United States
	and				International		Asia
	Puerto Rico		Europe		Americas		Pacific		Total
	(dollar amounts in thousands)
2006
Net revenues from unaffiliated customers	$	237,108	$	340,171	$	31,048	$	79,448	$	687,775
Gross profit		102,987		136,534		12,269		39,901		291,691
Long-lived assets	$	42,809	$	215,907	$	5,549	$	28,208	$	292,473
2005 (As Restated)
Net revenues from unaffiliated customers	$	270,174	$	346,513	$	29,885	$	71,420	$	717,992
Gross profit		113,460		155,799		9,612		32,659		311,530
Long-lived assets	$	44,668	$	197,805	$	5,669	$	26,980	$	275,122
2004 (As Restated)
Net revenues from unaffiliated customers	$	233,636	$	335,515	$	31,215	$	70,087	$	670,453
Gross profit	$	112,529	$	155,677	$	11,055	$	30,211	$	309,472

Note 21. MINORITY INTEREST

On July 1, 1997, Checkpoint Systems Japan Co. Ltd. (Checkpoint Japan), a wholly-owned subsidiary of the Company, issued newly authorized shares to Mitsubishi Materials Corporation (Mitsubishi) in exchange for cash.

In February 2006, Checkpoint Japan repurchased 26% of these shares from Mitsubishi in exchange for $0.2 million in cash. The remaining shares held by Mitsubishi represent 15% of the adjusted outstanding shares of Checkpoint Japan.

Our consolidated balance sheets include 100% of the assets and liabilities of Checkpoint Japan. Mitsubishi’s 15% interest in Checkpoint Japan and the earnings there from have been reflected as minority interest on our consolidated balance sheets and consolidated statements of operations, respectively.

81

Note 22. QUARTERLY INFORMATION (UNAUDITED)

As described in Note 1 of the Notes to the Consolidated Financial Statements, the Company has restated previously issued financial statements. The following quarterly financial data reflect the restatements for the quarters ended September 24, 2006, June 25, 2006, March 26, 2006, September 25, 2005, June 26, 2005, and March 27, 2005. The Company has not amended its Quarterly Reports on Form 10-Q for periods affected by the restatement adjustments, and accordingly the financial statements and related financial information contained in such reports should not be relied upon.

The following tables summarize the effects of the adjustments on net revenues, operating income, and net income for the quarters ended September 24, 2006, June 25, 2006, March 26, 2006, September 25, 2005, June 26, 2005, and March 27, 2005.

	Net Income
	Sept. 24,			June 25,			Mar. 26,			Sept. 25,			June 26,			Mar. 27,
	2006			2006			2006			2005			2005			2005
As previously Reported	$	12,119		$	5,190		$	2,485		$	14,220		$	9,501		$	3,831
Restatement Adjustments:
CheckNet® Revenue Adjustments		(135	)		113			63			41			(5	)		(66	)
Japan Revenue Adjustments		(50	)		(400	)		(350	)		(115	)		(8	)		(141	)
Other Japan Adjustments		47			(43	)		(244	)		(104	)		(8	)		(29	)
Income Tax Adjustments		—			—			—			486			(208	)		—
Other Adjustments		(281	)		(241	)		(351	)		(135	)		(52	)		(13	)
As Restated	$	11,700		$	4,619		$	1,603		$	14,393		$	9,220		$	3,582

	Operating Income
	Sept. 24,			June 25,			Mar. 26,			Sept. 25,			June 26,			Mar. 27,
	2006			2006			2006			2005			2005			2005
As previously Reported	$	11,115		$	6,119		$	129		$	16,267		$	10,931		$	2,560
Restatement Adjustments:
CheckNet® Revenue Adjustments		(192	)		160			90			58			(8	)		(93	)
Japan Revenue Adjustments		(101	)		(812	)		(732	)		(247	)		(18	)		(305	)
Other Japan Adjustments		88			(78	)		(442	)		(198	)		(12	)		(49	)
Other Adjustments		(356	)		46			(173	)		(179	)		(88	)		30
As Restated	$	10,554		$	5,435		$	(1,128	)	$	15,701		$	10,805		$	2,143

	Net Revenues
	Sept. 24,			June 25,			Mar. 26,			Sept. 25,			June 26,			Mar. 27,
	2006			2006			2006			2005			2005			2005
As previously Reported	$	167,799		$	165,001		$	142,219		$	185,555		$	185,635		$	156,388
Restatement Adjustments:
CheckNet® Revenue Adjustments		(312	)		226			193			48			(8	)		(104	)
Japan Revenue Adjustments		198			(966	)		(2,171	)		(770	)		(107	)		(671	)
Other Adjustments		(63	)		(398	)		(248	)		(134	)		(212	)		(105	)
As Restated	$	167,622		$	163,863		$	139,993		$	184,699		$	185,308		$	155,508

Comparison of restated financial data to financial data as originally reported

The following tables compare our previously reported consolidated statements of operations, stockholders’ equity, comprehensive income (loss), cash flows, and the consolidated balance sheets for the quarters ended September 24, 2006, June 25, 2006, March 26, 2006, September 25, 2005, June 26, 2005, and March 27, 2005 and the corresponding financial statements for those years as restated. We have also included the results of operations for the quarter ended December 25, 2005 for informational purposes.

82

CONSOLIDATED BALANCE SHEETS (unaudited)

(dollar amounts in thousands)

	Period Ended						Period Ended
	September 24, 2006						June 25, 2006
	As						As
	Previously			As			Previously			As
	Reported			Restated			Reported			Restated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	121,431		$	121,431		$	116,405		$	116,405
Restricted cash		2,093			2,093			2,057			2,057
Accounts receivable, net of allowance of $11,176 and $11,670		151,868			148,195			137,604			134,365
Inventories		98,544			100,084			92,708			94,558
Other current assets		30,730			30,428			39,266			39,241
Deferred income taxes		11,584			13,845			12,948			15,001
Total Current Assets		416,250			416,076			400,988			400,100
REVENUE EQUIPMENT ON OPERATING LEASE, net		5,371			4,672			4,822			4,187
PROPERTY, PLANT, AND EQUIPMENT, net		72,568			72,568			72,336			72,336
GOODWILL		176,507			176,507			173,169			173,169
OTHER INTANGIBLES, net		33,019			33,019			33,216			33,216
DEFERRED INCOME TAXES		34,296			34,296			33,256			33,256
OTHER ASSETS		10,077			10,056			11,873			11,853
TOTAL ASSETS	$	748,088		$	747,194		$	729,660		$	728,117
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt	$	5,270		$	5,848		$	4,378		$	5,671
Accounts payable		47,885			47,871			44,476			44,647
Accrued compensation and related taxes		27,904			27,904			27,789			27,789
Other accrued expenses		29,700			29,712			29,389			29,401
Income taxes		20,971			21,442			25,163			25,619
Unearned revenues		19,520			21,426			19,653			21,127
Restructuring reserve		3,315			3,315			3,332			3,332
Other current liabilities		17,103			17,104			16,567			16,566
Total Current Liabilities		171,668			174,622			170,747			172,625
LONG-TERM DEBT, LESS CURRENT MATURITIES		21,797			21,797			26,831			26,831
ACCRUED PENSIONS		78,117			78,117			76,056			76,056
DEFERRED INCOME TAXES		19,908			19,908			19,923			19,923
OTHER LONG-TERM LIABILITIES		4,139			4,139			4,079			4,079
MINORITY INTEREST		1,053			1,044			1,002			961
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, no par value, authorized 500,000 shares, none issued		—			—			—			—
Common stock, par value $.10 per share, authorized 100,000,000 shares, issued 41,294,984 and 41,265,294		4,129			4,129			4,126			4,126
Additional capital		343,132			343,132			340,792			340,792
Retained earnings		132,429			128,658			120,310			116,958
Common stock in treasury, at cost, 2,035,912 shares and 2,035,912 shares		(20,621	)		(20,621	)		(20,621	)		(20,621	)
Accumulated other comprehensive (loss) income		(7,663	)		(7,731	)		(13,585	)		(13,613	)
TOTAL STOCKHOLDERS’ EQUITY		451,406			447,567			431,022			427,642
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	748,088		$	747,194		$	729,660		$	728,117

83

CONSOLIDATED BALANCE SHEETS (unaudited)

(dollar amounts in thousands)

	Period Ended
	March 26, 2006
	As
	Previously			As
	Reported			Restated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	123,738		$	123,738
Restricted cash		2,025			2,025
Accounts receivable, net of allowance of $11,323		131,736			129,478
Inventories		85,722			87,592
Other current assets		38,520			38,915
Deferred income taxes		12,719			14,455
Assets of discontinued operations held for sale		—			—
Total Current Assets		394,460			396,203
REVENUE EQUIPMENT ON OPERATING LEASE, net		4,732			4,175
PROPERTY, PLANT, AND EQUIPMENT, net		71,571			71,571
GOODWILL		167,405			167,405
OTHER INTANGIBLES, net		32,915			32,915
DEFERRED INCOME TAXES		32,246			32,246
OTHER ASSETS		12,797			12,779
TOTAL ASSETS	$	716,126		$	717,294
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt	$	4,768		$	6,177
Accounts payable		42,245			42,998
Accrued compensation and related taxes		28,402			28,402
Other accrued expenses		26,417			26,424
Income taxes		23,736			23,957
Unearned revenues		19,095			20,650
Restructuring reserve		7,012			7,012
Accrued pensions — current		—			—
Other current liabilities		18,527			18,528
Liabilities of discontinued operations held for sale		—			—
Total Current Liabilities		170,202			174,148
LONG-TERM DEBT, LESS CURRENT MATURITIES		35,331			35,331
ACCRUED PENSIONS		72,768			72,768
OTHER LONG-TERM LIABILITIES		4,076			4,076
DEFERRED INCOME TAXES		19,865			19,865
MINORITY INTEREST		965			975
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, no par value, authorized 500,000 shares, none issued		—			—
Common stock, par value $.10 per share, authorized 100,000,000 shares, issued 41,162,607		4,116			4,116
Additional capital		337,114			337,114
Retained earnings		115,120			112,339
Common stock in treasury, at cost, 2,035,912 shares		(20,621	)		(20,621	)
Accumulated other comprehensive (loss) income		(22,810	)		(22,817	)
TOTAL STOCKHOLDERS’ EQUITY		412,919			410,131
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	716,126		$	717,294

84

CONSOLIDATED BALANCE SHEETS (unaudited)

(dollar amounts in thousands)

	Period Ended						Period Ended
	September 25, 2005						June 26, 2005
	As						As
	Previously			As			Previously			As
	Reported			Restated			Reported			Restated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	75,259		$	75,259		$	73,797		$	73,063
Accounts receivable, net of allowance of $11,814 and $12,022		151,964			152,245			162,207			162,480
Inventories		84,561			85,556			96,784			97,540
Other current assets		26,002			26,236			29,614			29,688
Deferred income taxes		17,812			20,468			18,296			20,243
Assets of discontinued operations held for sale		36,920			36,920			—			—
Total Current Assets		392,518			396,684			380,698			383,014
REVENUE EQUIPMENT ON OPERATING LEASE, net		5,141			4,668			4,718			4,267
PROPERTY, PLANT, AND EQUIPMENT, net		76,586			76,586			84,681			84,681
GOODWILL		167,684			167,684			170,419			170,419
OTHER INTANGIBLES, net		34,702			34,702			36,481			36,481
DEFERRED INCOME TAXES		19,993			19,993			20,435			20,435
OTHER ASSETS		15,643			15,624			15,548			15,532
TOTAL ASSETS	$	712,267		$	715,941		$	712,980		$	714,829
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt	$	4,566		$	6,681		$	3,759		$	4,495
Accounts payable		41,255			41,352			52,136			51,979
Accrued compensation and related taxes		30,251			30,251			29,621			29,621
Other accrued expenses		32,117			32,117			33,288			33,288
Income taxes		17,546			17,521			16,529			16,524
Unearned revenues		21,857			22,651			25,131			25,897
Restructuring reserve		11,641			11,641			8,650			8,650
Other current liabilities		14,581			14,581			13,604			13,604
Liabilities of discontinued operations held for sale		11,400			11,400			—			—
Total Current Liabilities		185,214			188,195			182,718			184,058
LONG-TERM DEBT, LESS CURRENT MATURITIES		48,981			48,981			63,756			63,756
ACCRUED PENSIONS		66,449			66,449			70,230			70,230
OTHER LONG-TERM LIABILITIES		4,292			4,292			4,195			4,195
DEFERRED INCOME TAXES		17,677			17,677			21,846			21,846
MINORITY INTEREST		1,166			1,286			1,145			1,263
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, no par value, authorized 500,000 shares, none issued		—			—			—			—
Common stock, par value $.10 per share, authorized 100,000,000 shares, issued 40,430,797 and 39,940,022		4,043			4,043			3,994			3,994
Additional capital		320,904			320,904			313,448			313,448
Retained earnings		100,782			101,410			86,562			87,017
Common stock in treasury, at cost, 2,035,912 shares and 2,041,519 shares		(20,621	)		(20,621	)		(20,678	)		(20,678	)
Accumulated other comprehensive (loss) income		(16,620	)		(16,675	)		(14,236	)		(14,300	)
TOTAL STOCKHOLDERS’ EQUITY		388,488			389,061			369,090			369,481
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	712,267		$	715,941		$	712,980		$	714,829

85

CONSOLIDATED BALANCE SHEETS (unaudited)

(dollar amounts in thousands)

	Period Ended
	March 27, 2005
	As
	Previously			As
	Reported			Restated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	76,253		$	75,407
Accounts receivable, net of allowance of $12,007		155,084			155,087
Inventories		96,758			97,462
Other current assets		30,178			30,257
Deferred income taxes		17,194			19,320
Total Current Assets		375,467			377,533
REVENUE EQUIPMENT ON OPERATING LEASE, net		4,640			4,203
PROPERTY, PLANT, AND EQUIPMENT, net		88,541			88,541
GOODWILL		184,221			184,221
OTHER INTANGIBLES, net		37,681			37,681
DEFERRED INCOME TAXES		19,160			19,160
OTHER ASSETS		18,516			18,494
TOTAL ASSETS	$	728,226		$	729,833
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt	$	5,108		$	5,393
Accounts payable		46,554			46,304
Accrued compensation and related taxes		35,029			35,029
Other accrued expenses		26,143			26,143
Income taxes		17,650			17,666
Unearned revenues		29,007			29,802
Restructuring reserve		3,539			3,539
Other current liabilities		18,600			18,600
Total Current Liabilities		181,630			182,476
LONG-TERM DEBT, LESS CURRENT MATURITIES		71,134			71,134
ACCRUED PENSIONS		74,749			74,749
OTHER LONG-TERM LIABILITIES		6,168			6,168
DEFERRED INCOME TAXES		20,427			20,427
MINORITY INTEREST		1,134			1,236
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, no par value, authorized 500,000 shares, none issued		—			—
Common stock, par value $.10 per share, authorized 100,000,000 shares, issued 39,875,379		3,987			3,987
Additional capital		310,061			310,061
Retained earnings		77,061			77,797
Common stock in treasury, at cost, 2,041,519 shares		(20,678	)		(20,678	)
Accumulated other comprehensive (loss) income		2,553			2,476
TOTAL STOCKHOLDERS’ EQUITY		372,984			373,643
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	728,226		$	729,833

86

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(dollar amounts in thousands, except per share data)

	13 Weeks Ended
	September 24, 2006						June 25, 2006
	As Previously			As			As Previously			As
	Reported			Restated			Reported			Restated
Net revenues	$	167,799		$	167,622		$	165,001		$	163,863
Cost of revenues		95,834			96,026			94,927			94,217
Gross profit		71,965			71,596			70,074			69,646
Selling, general, and administrative expenses		54,373			54,373			56,351			56,351
Research and development		4,865			5,057			4,744			5,000
Restructuring expense		1,612			1,612			609			609
Litigation settlement		—			—			2,251			2,251
Operating income		11,115			10,554			6,119			5,435
Interest income		1,264			1,264			1,149			1,149
Interest expense		447			449			552			555
Other gain, net		300			300			44			44
Earnings from continuing operations before income taxes and minority interest		12,232			11,669			6,760			6,073
Income taxes		49			(127	)		1,482			1,417
Minority interest		52			84			33			(18	)
Net earnings from continuing operations		12,131			11,712			5,245			4,674
Loss from discontinued operations, net of tax		(12	)		(12	)		(55	)		(55	)
Net earnings	$	12,119		$	11,700		$	5,190		$	4,619
Basic Earnings per Share:
Earnings from continuing operations	$	.31		$	.30		$	.13		$	.12
Earnings from discontinued operations, net of tax		—			—			—			—
Basic Earnings per Share	$	.31		$	.30		$	.13		$	.12
Diluted Earnings per Share:
Earnings from continuing operations	$	.30		$	.29		$	.13		$	.11
Earnings from discontinued operations, net of tax		—			—			—			—
Diluted Earnings per Share	$	.30		$	.29		$	.13		$	.11

87

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(dollar amounts in thousands, except per share data)

	13 Weeks Ended
	March 25, 2006
	As Previously		As
	Reported		Restated
Net revenues	$	142,219	$	139,993
Cost of revenues		84,963		83,635
Gross profit		57,256		56,358
Selling, general, and administrative expenses		52,871		52,871
Research and development		4,009		4,368
Restructuring expense		247		247
Operating income		129		(1,128	)
Interest income		1,125		1,125
Interest expense		403		414
Other gain, net		372		372
Earnings from continuing operations before income taxes and minority interest		1,223		(45	)
Income taxes		289		(24	)
Minority interest		22		(51	)
Net earnings from continuing operations		912		30
Earnings from discontinued operations, net of tax		1,573		1,573
Net earnings	$	2,485	$	1,603
Basic Earnings per Share:
Earnings from continuing operations	$	.02	$	—
Earnings from discontinued operations, net of tax		.04		.04
Basic Earnings per Share	$	.06	$	.04
Diluted Earnings per Share:
Earnings from continuing operations	$	.02	$	—
Earnings from discontinued operations, net of tax		.04		.04
Diluted Earnings per Share	$	.06	$	.04

88

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(dollar amounts in thousands, except per share data)

	13 Weeks Ended
	December 25, 2005						September 25, 2005
	As Previously			As			As Previously		As
	Reported			Restated			Reported		Restated
Net revenues	$	193,440		$	192,477		$	185,555	$	184,699
Cost of revenues		110,168			110,133			105,529		105,109
Gross profit		83,272			82,344			80,026		79,590
Selling, general, and administrative expenses		60,971			60,971			55,811		55,811
Research and development		4,838			5,026			4,450		4,580
Asset impairment		1,396			1,396			—		—
Restructuring expense		2,798			2,798			3,498		3,498
Operating income		13,269			12,153			16,267		15,701
Interest income		687			687			582		582
Interest expense		246			254			717		724
Other (loss) gain, net		(349	)		(349	)		67		67
Earnings from continuing operations before income taxes and minority interest		13,361			12,237			16,199		15,626
Income taxes		4,276			5,723			3,260		2,515
Minority interest		15			(29	)		39		38
Earnings from continuing operations		9,070			6,543			12,900		13,073
Earnings from discontinued operations, net of tax		2,783			2,783			1,320		1,320
Net earnings	$	11,853		$	9,326		$	14,220	$	14,393
Basic Earnings per Share:
Earnings from continuing operations	$	.24		$	.17		$	.34	$	.34
Earnings from discontinued operations, net of tax		.07			.07			.03		.04
Basic Earnings per Share	$	.31		$	.24		$	.37	$	.38
Diluted Earnings per Share:
Earnings from continuing operations	$	.23		$	.16		$	.33	$	.33
Earnings from discontinued operations, net of tax		.07			.07			.03		.04
Diluted Earnings per Share	$	.30		$	.23		$	.36	$	.37

89

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(dollar amounts in thousands, except per share data)

	13 Weeks Ended
	June 26, 2005						March 27, 2005
	As Previously			As			As Previously		As
	Reported			Restated			Reported		Restated
Net revenues	$	185,635		$	185,308		$	156,388	$	155,508
Cost of revenues		103,621			103,420			88,263		87,800
Gross profit		82,014			81,888			68,125		67,708
Selling, general, and administrative expenses		60,086			60,086			60,786		60,786
Research and development		4,723			4,723			4,779		4,779
Restructuring expense		6,274			6,274			—		—
Operating income		10,931			10,805			2,560		2,143
Interest income		483			483			586		586
Interest expense		908			910			973		974
Other (loss) gain, net		(47	)		(47	)		178		178
Earnings from continuing operations before income taxes and minority interest		10,459			10,331			2,351		1,933
Income taxes		2,895			3,033			539		390
Minority interest		26			41			23		3
Net earnings from continuing operations		7,538			7,257			1,789		1,540
Earnings from discontinued operations, net of tax		1,963			1,963			2,042		2,042
Net earnings	$	9,501		$	9,220		$	3,831	$	3,582
Basic Earnings per Share:
Earnings from continuing operations	$	.20		$	.19		$	.05	$	.04
Earnings from discontinued operations, net of tax		.05			.05			.05		.05
Basic Earnings per Share	$	.25		$	.24		$	.10	$	.09
Diluted Earnings per Share:
Earnings from continuing operations	$	.20		$	.19		$	.05	$	.04
Earnings from discontinued operations, net of tax		.05			.05			.05		.05
Diluted Earnings per Share	$	.25		$	.24		$	.10	$	.09

90

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THREE, SIX AND NINE MONTHS IN 2006 (unaudited)

(dollar amounts in thousands)

					Accumulated Other
	Retained Earnings				Comprehensive Income (Loss)						Total Stockholders’ Equity
	As				As						As
	Previously		As		Previously			As			Previously		As
	Reported		Restated		Reported			Restated			Reported		Restated
Balance, Dec. 25, 2005	$	112,635	$	110,736	$	(24,715	)	$	(24,718	)	$	398,322	$	396,420
Net earnings		2,485		1,603								2,485		1,603
Exercise of stock-based compensation												6,489		6,489
Tax benefit on stock-based compensation												1,069		1,069
Stock-based compensation expense												1,472		1,472
Deferred compensation plan												1,177		1,177
Foreign currency translation adjustment						1,905			1,901			1,905		1,901
Balance, March 26, 2006	$	115,120	$	112,339	$	(22,810	)	$	(22,817	)	$	412,919	$	410,131
Balance, Dec. 25, 2005	$	112,635	$	110,736	$	(24,715	)	$	(24,718	)	$	398,322	$	396,420
Net earnings		7,675		6,222								7,675		6,222
Exercise of stock-based compensation												7,986		7,986
Tax benefit on stock-based compensation												1,412		1,412
Stock-based compensation expense												2,890		2,890
Deferred compensation plan												1,607		1,607
Foreign currency translation adjustment						11,130			11,105			11,130		11,105
Balance, June 25, 2006	$	120,310	$	116,958	$	(13,585	)	$	(13,613	)	$	431,022	$	427,642
Balance, Dec. 25, 2005	$	112,635	$	110,736	$	(24,715	)	$	(24,718	)	$	398,322	$	396,420
Net earnings		19,794		17,922								19,794		17,922
Exercise of stock-based compensation												8,397		8,397
Tax benefit on stock-based compensation												1,460		1,460
Stock-based compensation expense												4,577		4,577
Deferred compensation plan												1,804		1,804
Foreign currency translation adjustment						17,052			16,987			17,052		16,987
Balance, September 24, 2006	$	132,429	$	128,658	$	(7,663	)	$	(7,731	)	$	451,406	$	447,567

91

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THREE, SIX, AND NINE MONTHS IN 2005 (unaudited)

(dollar amounts in thousands)

					Accumulated Other
	Retained Earnings				Comprehensive Income (Loss)						Total Stockholders’ Equity
	As				As						As
	Previously		As		Previously			As			Previously			As
	Reported		Restated		Reported			Restated			Reported			Restated
Balance, Dec. 26, 2004	$	73,230	$	74,215	$	12,724		$	12,621		$	378,763		$	379,645
Net earnings		3,831		3,582								3,831			3,582
Proceeds from the exercise of stock options												364			364
Tax benefit related to stock option												87			87
Non-employee stock compensation expense												110			110
Foreign currency translation adjustment						(10,171	)		(10,145	)		(10,171	)		(10,145	)
Balance, March 27, 2005	$	77,061	$	77,797	$	2,553		$	2,476		$	372,984		$	373,643
Balance, Dec. 26, 2004	$	73,230	$	74,215	$	12,724		$	12,621		$	378,763		$	379,645
Net earnings		13,332		12,802								13,332			12,802
Proceeds from the exercise of stock options												1,088			1,088
Tax benefit related to stock option												208			208
Non-employee stock compensation expense												177			177
Deferred compensation plan												2,482			2,482
Foreign currency translation adjustment						(26,960	)		(26,921	)		(26,960	)		(26,921	)
Balance, June 26, 2005	$	86,562	$	87,017	$	(14,236	)	$	(14,300	)	$	369,090		$	369,481
Balance, Dec. 26, 2004	$	73,230	$	74,215	$	12,724		$	12,621		$	378,763		$	379,645
Net earnings		27,552		27,195								27,552			27,195
Proceeds from the exercise of stock options												6,887			6,887
Tax benefit related to stock option												1,312			1,312
Non-employee stock compensation expense												284			284
Deferred compensation plan												3,034			3,034
Foreign currency translation adjustment						(29,344	)		(29,296	)		(29,344	)		(29,296	)
Balance, September 25, 2005	$	100,782	$	101,410	$	(16,620	)	$	(16,675	)	$	388,488		$	389,061

92

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)

(dollar amounts in thousands)

	13 Weeks Ended
	September 24, 2006				June 25, 2006
	As Previously		As		As Previously		As
	Reported		Restated		Reported		Restated
Net earnings	$	12,119	$	11,700	$	5,190	$	4,619
Foreign currency translation adjustment		5,922		5,882		9,225		9,204
Comprehensive income	$	18,041	$	17,522	$	14,415	$	13,823

	13 Weeks Ended
	March 26, 2006
	As Previously		As
	Reported		Restated
Net earnings	$	2,485	$	1,603
Foreign currency translation adjustment		1,905		1,901
Comprehensive income	$	4,390	$	3,504

93

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

(dollar amounts in thousands)

	13 Weeks Ended
	September 25, 2005						June 26, 2005
	As Previously			As			As Previously			As
	Reported			Restated			Reported			Restated
Net earnings	$	14,220		$	14,393		$	9,501		$	9,220
Foreign currency translation adjustment		(2,385	)		(2,375	)		(16,789	)		(16,776	)
Comprehensive income (loss)	$	11,835		$	12,018		$	(7,288	)	$	(7,556	)

	13 Weeks Ended
	March 27, 2005
	As Previously			As
	Reported			Restated
Net earnings	$	3,831		$	3,582
Foreign currency translation adjustment		(10,171	)		(10,145	)
Comprehensive loss	$	(6,340	)	$	(6,563	)

94

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts in thousands)

	Nine Months Ended						Six Months Ended
	September 24, 2006						June 25, 2006
	As Previously			As			As Previously			As
	Reported			Restated			Reported			Restated
Cash flows from operating activities:
Net earnings	$	19,794		$	17,922		$	7,675		$	6,222
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		14,329			14,183			9,783			9,692
Deferred taxes		826			(199	)		—			(833	)
Stock-based compensation		4,577			4,577			2,890			2,890
Provision for losses on accounts receivable		1,599			1,599			1,335			1,335
Excess tax benefit on stock compensation		(1,313	)		(1,313	)		(1,275	)		(1,275	)
Gain on sale of discontinued operations		(1,299	)		(1,299	)		(1,299	)		(1,299	)
Loss on disposal of fixed assets		4			4			4			4
(Increase) decrease in current assets, net of the effects of acquired companies:
Accounts receivable		(4,905	)		(594	)		6,621			10,499
Inventories		(18,096	)		(18,101	)		(12,632	)		(13,058	)
Other current assets		10,369			11,068			343			766
Increase (decrease) in current liabilities, net of the effects of acquired companies:
Accounts payable		(15,010	)		(15,526	)		(17,823	)		(18,148	)
Income taxes		(5,846	)		(5,375	)		(1,556	)		(1,100	)
Unearned revenues		(3,752	)		(3,539	)		(3,252	)		(3,438	)
Restructuring reserve		(8,887	)		(8,887	)		(8,752	)		(8,752	)
Other current and accrued liabilities		(9,189	)		(9,269	)		(9,650	)		(9,761	)
Net cash used in operating activities		(16,799	)		(14,749	)		(27,588	)		(26,256	)
Cash flows from investing activities:
Acquisition of property, plant, and equipment		(8,311	)		(8,311	)		(5,420	)		(5,420	)
Proceeds from the sales of discontinued operations		31,859			31,859			32,058			32,058
Other investing activities		174			174			54			54
Net cash provided by investing activities		23,722			23,722			26,692			26,692
Cash flows from financing activities:
Proceeds from stock issuances		8,397			8,397			7,986			7,986
Excess tax benefit on stock compensation		1,313			1,313			1,275			1,275
Net change in short-term debt		3,430			1,380			2,541			1,208
Increase in overdraft borrowings		—			—			397			397
Repayment of long-term debt		(15,281	)		(15,281	)		(9,917	)		(9,916	)
Net cash (used in) provided by financing activities		(2,141	)		(4,191	)		2,282			950
Effect of foreign currency rate fluctuations on cash and cash equivalents		3,426			3,426			1,796			1,796
Net increase in cash and cash equivalents		8,208			8,208			3,182			3,182
Cash and cash equivalents:
Beginning of year		113,223			113,223			113,223			113,223
End of year	$	121,431		$	121,431		$	116,405		$	116,405

95

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts in thousands)

	Three Months Ended
	March 26, 2006
	As Previously			As
	Reported			Restated
Cash flows from operating activities:
Net earnings (loss)	$	2,485		$	1,603
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Revenue equipment under operating lease		—			—
Depreciation and amortization		4,642			4,597
Deferred taxes		—			(534	)
Stock-based compensation		1,472			1,472
Provision for losses on accounts receivable		612			612
Excess tax benefit on stock compensation		(969	)		(969	)
Gain on sale of discontinued operations		(1,299	)		(1,299	)
Gain on disposal of fixed assets		(4	)		(4	)
(Increase) decrease in current assets, net of the effects of acquired companies:
Accounts receivable		8,700			11,577
Inventories		(6,370	)		(6,963	)
Other current assets		(153	)		(148	)
Increase (decrease) in current liabilities, net of the effects of acquired companies:
Accounts payable		(19,002	)		(18,731	)
Income taxes		(2,504	)		(2,283	)
Unearned revenues		(3,175	)		(3,237	)
Restructuring reserve		(4,848	)		(4,848	)
Other current and accrued liabilities		(11,305	)		(11,371	)
Net cash used in operating activities		(31,718	)		(30,526	)
Cash flows from investing activities:
Acquisition of property, plant, and equipment		(2,189	)		(2,189	)
Acquisitions of businesses, net of cash acquired		(31	)		(31	)
Proceeds from sale of discontinued operations		33,466			33,466
Net cash provided by investing activities		31,246			31,246
Cash flows from financing activities:
Proceeds from stock issuances		6,489			6,489
Excess tax benefit on stock compensation		969			969
Net change in short-term debt		2,979			1,787
Increase in overdraft borrowings		795			795
Payment of long-term debt		(218	)		(218	)
Net cash provided by financing activities		11,014			9,822
Effect of foreign currency rate fluctuations on cash and cash equivalents		(27	)		(27	)
Net increase in cash and cash equivalents		10,515			10,515
Cash and cash equivalents:
Beginning of year		113,223			113,223
End of period	$	123,738		$	123,738

96

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts in thousands)

	Nine Months Ended						Six Months Ended
	September 25, 2005						June 26, 2005
	As Previously			As			As Previously			As
	Reported			Restated			Reported			Restated
Cash flows from operating activities:
Net earnings	$	27,552		$	27,195		$	13,332		$	12,802
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation and amortization		17,643			17,498			12,145			12,050
Deferred taxes		(4,701	)		(5,432	)		—			(7	)
Stock-based compensation		284			284			177			177
Provision for losses on accounts receivable		1,816			1,816			1,153			1,153
Loss on disposal of fixed assets		206			206			37			37
Impairments of goodwill and long-lived assets		1,078			1,078			—			—
(Increase) decrease in current assets, net of the effects of acquired companies:
Accounts receivable		(22,501	)		(22,044	)		(13,209	)		(12,728	)
Inventories		(11,285	)		(11,812	)		(10,075	)		(10,406	)
Other current assets		2,421			2,226			(1,699	)		(1,726	)
Increase (decrease) in current liabilities, net of the effects of acquired companies:
Accounts payable		(15,844	)		(15,469	)		(11,391	)		(11,282	)
Income taxes		(4,101	)		(4,126	)		(6,780	)		(6,784	)
Unearned revenues		(3,560	)		(3,432	)		(708	)		(609	)
Restructuring reserve		7,760			7,760			4,710			4,710
Other current and accrued liabilities		382			376			(1,007	)		(1,012	)
Net cash used in operating activities		(2,850	)		(3,876	)		(13,315	)		(13,625	)
Cash flows from investing activities:
Acquisition of property, plant, and equipment		(7,796	)		(7,796	)		(6,850	)		(6,850	)
Acquisitions of businesses, net of cash acquired		(1,989	)		(1,989	)		(1,976	)		(1,976	)
Other investing activities		295			295			610			610
Net cash used in investing activities		(9,490	)		(9,490	)		(8,216	)		(8,216	)
Cash flows from financing activities:
Proceeds from stock issuances		6,887			6,887			1,088			1,088
Net change in short-term debt		2,664			3,690			1,834			1,387
Proceeds of long-term debt		40,000			40,000			40,000			40,000
Payment of long-term debt		(58,207	)		(58,207	)		(43,989	)		(43,989	)
Net cash used in financing activities		(8,656	)		(7,630	)		(1,067	)		(1,514	)
Effect of foreign currency rate fluctuations on cash and cash equivalents		(6,439	)		(6,439	)		(6,299	)		(6,276	)
Net decrease in cash and cash equivalents		(27,435	)		(27,435	)		(28,897	)		(29,631	)
Cash and cash equivalents:
Beginning of year		102,694			102,694			102,694			102,694
End of period	$	75,259		$	75,259		$	73,797		$	73,063

97

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts in thousands)

	Three Months Ended
	March 27, 2005
	As Previously			As
	Reported			Restated
Cash flows from operating activities:
Net earnings (loss)	$	3,831		$	3,582
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation and amortization		6,322			6,275
Deferred taxes		—			(166	)
Stock-based compensation		110			110
Provision for losses on accounts receivable		362			362
Loss on disposal of fixed assets		42			42
(Increase) decrease in current assets, net of the effects of acquired companies:
Accounts receivable		(2,370	)		(1,599	)
Inventories		(6,533	)		(6,820	)
Other current assets		(1,503	)		(1,531	)
Increase (decrease) in current liabilities, net of the effects of acquired companies:
Accounts payable		(17,520	)		(17,513	)
Income taxes		(2,709	)		(2,693	)
Unearned revenues		2,091			2,164
Restructuring reserve		(951	)		(951	)
Other current and accrued liabilities		(6,891	)		(6,911	)
Net cash used in operating activities		(25,719	)		(25,649	)
Cash flows from investing activities:
Acquisition of property, plant, and equipment		(3,458	)		(3,458	)
Other investing activities		235			235
Net cash used in investing activities		(3,223	)		(3,223	)
Cash flows from financing activities:
Proceeds from stock based compensation		364			364
Net change in short-term debt		3,102			2,169
Proceeds of long-term debt		35,000			35,000
Payment of long-term debt		(32,804	)		(32,804	)
Net cash provided by financing activities		5,662			4,729
Effect of foreign currency rate fluctuations on cash and cash equivalents		(3,161	)		(3,144	)
Net decrease in cash and cash equivalents		(26,441	)		(27,287	)
Cash and cash equivalents:
Beginning of year		102,694			102,694
End of period	$	76,253		$	75,407

98

SELECTED QUARTERLY FINANCIAL DATA

QUARTERS (unaudited)

(dollar amounts are in thousands, except per share data)

	First			Second			Third			Fourth			Year
	(As Restated)			(As Restated)			(As Restated)
2006
Net revenues	$	139,993		$	163,863		$	167,622		$	216,297		$	687,775
Gross profit	$	56,358		$	69,646		$	71,596		$	94,091		$	291,691
Earnings from continuing operations		30	(1)		4,674	(3)		11,712	(4)		18,603	(5)		35,019
Net earnings		1,603	(2)		4,619	(3)		11,700	(4)		18,000	(5)		35,922
Earnings per share from continuing operations:
Basic	$	—		$	.12		$	.30		$	.47		$	.89
Diluted	$	—		$	.11		$	.29		$	.46		$	.87
Net earnings per share:
Basic	$	.04		$	.12		$	.30		$	.46		$	.91
Diluted	$	.04		$	.11		$	.29		$	.45		$	.89

(dollar amounts are in thousands, except per share data)

	First		Second			Third			Fourth			Year
	(As Restated)		(As Restated)			(As Restated)			(As Restated)			(As Restated)
2005
Net revenues	$	155,508	$	185,308		$	184,699		$	192,477		$	717,992
Gross profit	$	67,708	$	81,888		$	79,590		$	82,344		$	311,530
Earnings from continuing operations		1,540		7,257	(6)		13,073	(7)		6,543			28,413
Net earnings		3,582		9,220	(6)		14,393	(8)		9,326	(9)		36,521
Earnings per share from continuing operations:
Basic	$	.04	$	.19		$	.34		$	.17		$	.75
Diluted	$	.04	$	.19		$	.33		$	.16		$	.72
Net earnings per share:
Basic	$	.09	$	.24		$	.38		$	.24		$	.96
Diluted	$	.09	$	.24		$	.37		$	.23		$	.93

(1)	Includes a $0.1 million restructuring charge (net of tax).
(2)	Includes a $1.4 million (net of tax) gain from the disposal of our bar-code business.
(3)	Includes a $0.4 million restructuring charge (net of tax) and a $1.5 million litigation settlement charge (net of tax).
(4)	Includes a $1.2 million restructuring charge (net of tax).
(5)	Includes a $3.1 million restructuring charge (net of tax) and $1.1 million (net of tax) gain from the settlement of a capital lease.
(6)	Includes a $4.4 million restructuring charge (net of tax).
(7)	Includes a $2.2 million restructuring charge (net of tax) and a $0.4 million impairment charge (net of tax).
(8)	Includes a $2.2 million restructuring charge (net of tax) and a $1.0 million impairment charge (net of tax).
(9)	Includes a $1.8 million restructuring charge (net of tax) and a $1.0 million impairment charge (net of tax).

99

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There are no changes or disagreements to report under this item.

Item 9A. DISCLOSURE CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Checkpoint Systems, Inc.’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2006, the end of the period covered by this report, our disclosure controls and procedures were not effective because of the material weakness discussed below in Management’s Report on Internal Control Over Financial Reporting.

Inherent Limitations on Effectiveness of Controls

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper override. Because of such limitations, there is a risk that internal control over financial reporting may not prevent or detect material misstatements on a timely basis. However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management’s Report on Internal Control Over Financial Reporting

Checkpoint’s management is responsible for establishing and maintaining adequate internal control over financial reporting in order to provide reasonable assurance regarding the reliability of financial reporting. Checkpoint’s internal control over financial reporting includes those policies and procedures that:

(i)	pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of Checkpoint’s assets;
(ii)	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that Checkpoint’s receipts and expenditures are being made only in accordance with authorizations of Checkpoint’s management and directors; and
(iii)	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Checkpoint’s assets that could have a material effect on the financial statements.

Management assessed the effectiveness of Checkpoint’s internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its Internal Control—Integrated Framework.

100

The Public Company Accounting Oversight Board’s Auditing Standard No. 2 defines a material weakness as a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

Management identified the following material weakness in our internal control over financial reporting as of December 31, 2006:

The Company did not maintain effective controls over the financial reporting and close process. Specifically, the Company’s controls to monitor the financial position and results of operations of subsidiaries, and controls to accurately record non-routine and non-systematic transactions in accordance with accounting principles generally accepted in the United States of America, were not effective. This control deficiency contributed to errors resulting in the restatement of the Company’s consolidated financial statements for 2005 and 2004, each of the interim periods in 2005 and the first three quarters of 2006 affecting revenues and cost of revenue. Additionally, this control deficiency could result in a material misstatement in any account or disclosure that would not be prevented or detected.

As a result of this material weakness, management has concluded that our internal control over financial reporting was ineffective as of December 31, 2006.

The scope of management’s assessment of internal control over financial reporting as of December 31, 2006 excluded ADS Worldwide (ADS), which we acquired in November 2006. ADS represented 2.4% of total assets at December 31, 2006, and generated 0.3% of our total revenue during fiscal year 2006.

Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has issued an audit report on management’s assessment of our internal control over financial reporting, expressing an unqualified opinion on management’s assessment and an adverse opinion on the effectiveness of our internal control over financial reporting as of December 31, 2006, which appears in Item 8 of this Annual Report on Form 10-K.

Plan for Remediation of the Material Weakness

To remediate the material weakness described above and to enhance our internal control over financial reporting, management will supplement its financial reporting and close procedures to enhance the focus on complex transaction activity determined to present a relatively higher degree of risk. Management will implement a formal process of detailed reviews of subsidiary financial results, conducted by regional controllers and other qualified personnel. Checkpoint’s internal audit function will expand its substantive testing at the subsidiary level with greater emphasis on such transactions. As part of these efforts, management will expand the training of all key finance personnel in corporate, regional and subsidiary reporting teams in the application of accounting principles generally accepted in the United States of America and the company’s accounting policies and procedures. Management has begun to adopt these measures and expects that the remediation of the material weakness will be completed in 2007.

Notwithstanding the material weakness, management believes that the financial statements included in this report fairly present in all material respects our financial position, results of operations and cash flows for the periods presented.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2006 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

101

Item 9B. OTHER INFORMATION

None.

PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item (except for the information regarding executive officers called for by Item 401 of Regulation S-K, which is included in Part I hereof in accordance with General Instruction G (3)) is hereby incorporated by reference to the Registrant’s Definitive Proxy Statement for its Annual Meeting of Shareholders presently scheduled to be held on May 31, 2007, which management expects to file with the SEC within 120 days of the end of the Registrant’s fiscal year.

We have adopted a code of business conduct and ethics (the “Code of Ethics”) as required by the listing standards of the New York Stock Exchange and the rules of the SEC. This Code of Ethics applies to all of our directors, officers and employees. We have also adopted corporate governance guidelines (the “Governance Guidelines”) and a charter for each of our Audit Committee, Compensation Committee and Governance and Nominating Committee (collectively, the “Committee Charters”). 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 its directors or executive officers. The foregoing information will also be available in print upon request.

Item 11. EXECUTIVE COMPENSATION

The information required by this Item is hereby incorporated by reference to the Registrant’s Definitive Proxy Statement for its Annual Meeting of Shareholders presently scheduled to be held on May 31, 2007, which management expects to file with the SEC within 120 days of the end of the Registrant’s fiscal year.

Note that the sections of our Definitive Proxy Statement entitled “Compensation and Stock Option Committee Report on Executive Compensation” pursuant to Regulation S-K Item 402 (a)(9) are not deemed “soliciting material” or “filed” as part of this report.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is hereby incorporated by reference to the Registrant’s Definitive Proxy Statement for its Annual Meeting of Shareholders presently scheduled to be held on May 31, 2007, which management expects to file with the SEC within 120 days of the end of the Registrant’s fiscal year.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item is hereby incorporated by reference to the Registrant’s Definitive Proxy Statement for its Annual Meeting of Shareholders presently scheduled to be held on May 31, 2007, which management expects to file with the SEC within 120 days of the end of the Registrant’s fiscal year.

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this Item is hereby incorporated by reference to the Registrant’s Definitive Proxy Statement for its Annual Meeting of Shareholders presently scheduled to be held on May 31, 2007, which management expects to file with the SEC within 120 days of the end of the Registrant’s fiscal year.

PART IV

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

All other schedules are omitted either because they are not applicable, not required, or because the required information is included in the financial statements or notes thereto:

102

1.	The following consolidated financial statements of Checkpoint Systems, Inc. were included in Item 8.
	Consolidated Balance Sheets as of December 31, 2006 and December 25, 2005		42
	Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2006		43
	Consolidated Statements of Stockholders’ Equity for each of the years in the three-year period ended December 31, 2006		44
	Consolidated Statements of Comprehensive Income (Loss) for each of the years in the three-year period ended December 31, 2006		45
	Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2006		46
	Notes to Consolidated Financial Statements	47-82
2.	The following consolidated financial statements schedules of Checkpoint Systems, Inc. is included.
	Financial Statement Schedule, Schedule II – Valuation and Qualifying Accounts		107

103

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in Thorofare, New Jersey, on March 30, 2007.

CHECKPOINT SYSTEMS, INC.

/s/ George W. Off                                     
President and Chief Executive Officer

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

SIGNATURE	TITLE	DATE
/s/ George W. Off	Chairman of the Board of Directors, President and Chief Executive Officer	March 30, 2007
/s/ W. Craig Burns	Executive Vice President, Chief Financial Officer, Treasurer	March 30, 2007
/s/ Raymond Andrews	Vice President, Chief Accounting Officer	March 30, 2007
/s/ William S. Antle III	Director	March 30, 2007
/s/ George Babich, Jr.	Director	March 30, 2007
David W. Clark, Jr.	Director	March 30, 2007
/s/ Harold Einsmann	Director	March 30, 2007
/s/ R. Keith Elliott	Director	March 30, 2007
/s/ Alan R. Hirsig	Director	March 30, 2007
/s/ Jack W. Partridge	Director	March 30, 2007
/s/ Sally Pearson	Director	March 30, 2007

104

3. Exhibits

Exhibit 3.1	Articles of Incorporation, as amended, are hereby incorporated by reference to Item 14(a), Exhibit 3(i) of the Registrant’s 1990 Form 10-K, filed with the SEC on March 14, 1991.
Exhibit 3.2	By-Laws, as Amended and Restated, are hereby incorporated by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on February 22, 2007.
Exhibit 4.1	Rights Agreement by and between Registrant and American Stock and Transfer and Trust Company dated as of March 10, 1997, is hereby incorporated by reference to Item 14(a), Exhibit 4.1 of the Registrant’s 1996 Form 10-K filed with the SEC on March 17, 1997.
Exhibit 4.2	Amendment No. 1 to Rights Agreement dated as of March 2, 2007 is hereby incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on March 8, 2007.
Exhibit 10.1*	Amended and Restated Stock Option Plan (1992) is hereby incorporated by reference to Registrant’s Form 10-K for 1997 filed with the SEC on March 23, 1998.
Exhibit 10.2	Consulting and Deferred Compensation Agreement with Albert E. Wolf, are incorporated by reference to Item (a), Exhibit 10(c) of the Registrant’s 1994 Form 10-K.
Exhibit 10.3*	Amended and Restated Employee Stock Purchase Plan as Appendix A to the Company’s Definitive Proxy Statement, filed with the SEC on March 22, 1996, is incorporated by reference.
Exhibit 10.4	Credit Agreement dated March 4, 2005, by and among Registrant, Wachovia Bank N.A., as Administrative Agent, and the lenders named therein, is incorporated herein by reference to Exhibit 99.1 of the Registrant’s Form 8-K filed on March 9, 2005.
Exhibit 10.5*	Employment Agreement with George W. Off is incorporated by reference to Item 6(a), Exhibit 10.1 of the Registrant’s Form 10-Q filed on November 12, 2002.
Exhibit 10.6*	Employment Agreement with W. Craig Burns is incorporated herein by reference to Item 6(a), Exhibit 10.1 of the Registrant’s Form 10-Q filed on May 13, 2004.
Exhibit 10.7*	Employment Agreement with John E. Davies, Jr. is incorporated herein by reference to Item 6(a), Exhibit 10.2 of the Registrant’s Form 10-Q filed on May 13, 2004.
Exhibit 10.8*	First Amendment to Employment Agreement with John E. Davies, Jr. is incorporated by reference to Item 6(a), Exhibit 10.3 of the Registrant’s Form 10-Q filed on May 13, 2004.
Exhibit 10.9*	Employment Agreement with Per Harold Levin is incorporated by reference to Item 6(a), Exhibit 10.4 of the Registrant’s Form 10-Q filed on May 13, 2004.

105

Exhibit 10.10*	Amendment to Employment Agreement with Per Harold Levin is incorporated by reference to Item 6(a), Exhibit 10.5 of the Registrant’s Form 10-Q filed on May 13, 2004.
Exhibit 10.11*	Employment Agreement with John R. Van Zile is Incorporated by reference to Item 6(a), Exhibit 10.7 of the Registrant’s Form 10-Q filed on May 13, 2004.
Exhibit 10.12*	Employment Agreement with David C. Donnan is Incorporated by reference to Item 6(a), Exhibit 10.1 of the Registrant’s Form 10-Q filed on November 5, 2004.
Exhibit 10.13*	2004 Omnibus Incentive Compensation Plan as Appendix A to the Company’s Definitive Proxy Statement, filed with the SEC on March 29, 2004, is incorporated by reference.
Exhibit 10.14*	423 Employee Stock Purchase Plan as Appendix A to the Company’s Definitive Proxy Statement, filed with the SEC on March 22, 1996, is incorporated by reference.
Exhibit 10.15*	Amended and Restated Employment Agreement by and between George Off and Checkpoint Systems, Inc. dated December 7, 2005 is hereby incorporated by reference to Item 1.01 of the Registrant’s Form 8-K filed on December 12, 2005.
Exhibit 12	Ratio of Earnings to Fixed Charges.
Exhibit 21	Subsidiaries of Registrant.
Exhibit 23	Consent of Independent Registered Public Accounting Firm.
Exhibit 24	Power of Attorney, contained in Signature Page.
Exhibit 31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32	Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.

* Management contract or compensatory plan or arrangement.

106

SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS

Allowance For Doubtful Accounts

			Balance at		Additions		Charged to			Deductions
			Beginning		Through		Costs and			(Write-Offs and			Balance at
Year			of Year		Acquisition		Expenses			Recoveries, net)			End of Year
			(dollar amounts in thousands)
2006			$	11,823	$	—	$	2,442		$	(1,848	)	$	12,417
2005			$	12,647	$	—	$	2,573		$	(3,397	)	$	11,823
2004			$	12,003	$	—	$	1,673		$	(1,029	)	$	12,647
Deferred Tax Valuation Allowance
										Release of
					Allowance					allowance on
	Balance at		Additions		Recorded on		Release of			Losses
	Beginning		Through		Current Year		Allowance on			Expired or			Balance at
Year	of Year		Acquisition		Losses		End of Year			Revalued			End of Year
	(dollar amounts in thousands)
2006	$	26,477	$	—	$	801	$	(151	)	$	7,383		$	34,510
2005	$	31,275	$	—	$	626	$	(384	)	$	(5,040	)	$	26,477
2004	$	32,650	$	—	$	779	$	—		$	(2,154	)	$	31,275

107

EX-12

                                                                               .
                                                                               .
                                                                               .

EXHIBIT 12


                            CHECKPOINT SYSTEMS, INC.
                       RATIO OF EARNINGS TO FIXED CHARGES
                                   (UNAUDITED)



(AMOUNTS IN THOUSANDS)                                     2006         2005        2004         2003         2002
- ----------------------------------------------------------------------------------------------------------------------
                                                                            (AS         (AS          (AS           (AS
                                                                       RESTATED)   RESTATED)    RESTATED)     RESTATED)
                                                                                           
Interest expense (1)..................................  $    2,307  $     4,192  $    8,467   $   13,067  $     18,089
Interest factor in rental expense.....................       4,898        5,673       6,871        7,196         5,136
                                                        ----------  -----------  ----------   ----------  ------------
(a) Fixed charges, as defined.........................  $    7,205  $     9,865  $   15,338   $   20,263  $     23,225
                                                        ----------  -----------  ----------   ----------  ------------
Earnings (loss) from continuing operations before       $   41,975  $    40,127  $   21,031   $   29,443  $     22,801
   income taxes and minority interest.................
Fixed charges.........................................       7,205        9,865      15,338       20,263        23,225
                                                        ----------  -----------  ----------   ----------  ------------
(b) Earnings, as defined..............................  $   49,180  $    49,992  $   36,369   $   49,706  $     46,026
                                                        ----------  -----------  ----------   ----------  ------------
(c) Ratio of earnings to fixed charges (b / a)........        6.8x         5.1x        2.4x         2.5x          2.0x
                                                        ==========  ===========  ==========   ==========  ============

(1)     Includes amortization of finance costs.

The ratio of earnings to fixed charges is computed by dividing earnings by fixed
charges. "Earnings" consist of earnings from continuing operations before income
taxes and minority interest plus income from an equity method investee plus
fixed charges. "Fixed Charges" consist of interest expense plus one-third of
rental expense (which amount is considered representative of the interest factor
in rental expense).

EX-21

EXHIBIT 21

CHECKPOINT SYSTEMS, INC. SUBSIDIARIES

Checkpoint Systems, S.A. - Argentina
Checkpoint Systems (Aust/ NZ) Pty Ltd - Australia
Checkpoint Systems GmbH - Austria
Actron Belgium and Luxemburg N.V. - Belgium
Checkpoint Europe N.V. - Belgium
Checkpoint Systems Belgium N.V. - Belgium
D & D Security N.V. - Belgium
Meto N.V. - Belgium
Checkpoint do Brasil Ltda. - Brazil
Checkpoint Caribbean Ltd. - Cayman Island
Checkpoint Canada, Inc. - Canada
Meto Canada, Inc. -- Canada
Checkpoint Commercial (Shanghai) Co., Ltd. - China
Zhangjiagang Free Trade Zone Avenue Ticker & Label Manufacturing Co., Ltd.-China
Checkpoint Systems (CZ) s.r.o. - Czech Republic
Checkpoint Systems Danmark A/S - Denmark
Checkpoint Meto Finland OY - Finland
Checkpoint Systems France S.A.S. - France
Checkpoint Systems GmbH - Germany
Checkpoint Systems Holding GmbH - Germany
Checkpoint Systems International GmbH - Germany
Checkpoint Systems Europe GmbH - Germany
Checkpoint Solutions GmbH -- Germany
ADS Asia Limited -- Hong Kong
Checkpoint Systems Hong Kong Ltd. - Hong Kong
ADS India Private Limited - India
Checkpoint Systems India Pvt - India
Checkpoint Systems Italia S.p.A. - Italy
Checkpoint Systems Japan Co. Ltd. - Japan
Checkpoint Manufacturing Japan Co. Ltd. - Japan
UAB Checkpoint Vilnius - Lithuania
Checkpoint Systems (M) Sdn. Bhd. - Malaysia
Checkpoint Systems Sales (M) Sdn. Bhd. - Malaysia
Checkpoint de Mexico, S.A. de C.V. - Mexico
Checkpoint Holland Holding B.V. - The Netherlands
Checkpoint Holland Trading B.V. -- The Netherlands
CP International Systems C.V. - The Netherlands
Checkpoint Meto Benelux B.V. - The Netherlands
Checkpoint Systems Europe B.V. - The Netherlands
ID Systems Europe B.V. - The Netherlands
ID Systems Productie B.V. - The Netherlands
Kimball Systems B.V. - The Netherlands
Checkpoint Systems Ltd. - New Zealand
Checkpoint Meto Norge A/S - Norway
Checkpoint Systems (CEE) Spolka z.o.o. -- Poland
Checkpoint Portugal Sistemas Anti-Furto, S.A. - Portugal
Checkpoint Systems (SK) s.r.o.- Slovakia
Checkpoint Systems Espana S.L.- Spain
Checkpoint Systems Sverige A.B. - Sweden
Turn-O-Matic International A.B. - Sweden
Checkpoint Export A.G. - Switzerland
Checkpoint Systems A.G. -- Switzerland
ADS Eticket Limited Sirketi - Turkey
Actron Group Ltd. - United Kingdom
Actron U.K. Ltd. - United Kingdom
ADS Solutions Limited -- United Kingdom
ADS UK Ltd. -- United Kingdom
ADS (United Kingdom) Ltd. - United Kingdom



ADS Worldwide Ltd. -- United Kingdom
Avenue Data Systems Ltd - United Kingdom
Checkpoint Systems U.K. Ltd. - United Kingdom
Evagard Ltd. - United Kingdom
Meto U.K. Ltd. - United Kingdom
Checkpoint International LLC - USA
Checkpoint Security Systems Group, Inc. - USA

EX-23

                                                                      EXHIBIT 23


            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration
Statement on Forms S-8 (Registration No. 333-35539, No. 333-83842, and No.
333-126981) of Checkpoint Systems, Inc. of our report dated March 30, 2007
relating to the financial statements, financial statement schedule, management's
assessment of the effectiveness of internal control over financial reporting and
the effectiveness of internal control over financial reporting, which appears in
this Form 10-K.


/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 30, 2007

EX-31.1

EXHIBIT 31.1


                                 CERTIFICATIONS

I, George W. Off, certify that:

      1.    I have reviewed this annual report on Form 10-K of Checkpoint
            Systems, Inc.;

      2.    Based on my knowledge, this report does not contain any untrue
            statement of a material fact or omit to state a material fact
            necessary to make the statements made, in light of the circumstances
            under which such statements were made, not misleading with respect
            to the period covered by this report;

      3.    Based on my knowledge, the financial statements, and other financial
            information included in this report, fairly present in all material
            respects the financial condition, results of operations and cash
            flows of the registrant as of, and for, the periods presented in
            this report;

      4.    The registrant's other certifying officer(s) and I are responsible
            for establishing and maintaining disclosure controls and procedures
            (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
            internal control over financial reporting (as defined in Exchange
            Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

            a)    Designed such disclosure controls and procedures, or caused
                  such disclosure controls and procedures to be designed under
                  our supervision, to ensure that material information relating
                  to the registrant, including its consolidated subsidiaries, is
                  made known to us by others within those entities, particularly
                  during the period in which this report is being prepared;

            b)    Designed such internal control over financial reporting, or
                  caused such internal control over financial reporting to be
                  designed under our supervision, to provide reasonable
                  assurance regarding the reliability of financial reporting and
                  the preparation of financial statements for external purposes
                  in accordance with generally accepted accounting principles;

            c)    Evaluated the effectiveness of the registrant's disclosure
                  controls and procedures and presented in this report our
                  conclusions about the effectiveness of the disclosure controls
                  and procedures, as of the end of the period covered by this
                  report based on such evaluation; and

            d)    Disclosed in this report any change in the registrant's
                  internal control over financial reporting that occurred during
                  the registrant's most recent fiscal quarter that has
                  materially affected, or is reasonably likely to materially
                  affect, the registrant's internal control over financial
                  reporting; and

      5.    The registrant's other certifying officer(s) and I have disclosed,
            based on our most recent evaluation of internal control over
            financial reporting, to the registrant's auditors and the audit
            committee of registrant's board of directors (or persons performing
            the equivalent functions):

            a)    All significant deficiencies and material weaknesses in the
                  design or operation of internal control over financial
                  reporting which are reasonably likely to adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial information; and

            b)    Any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal control over financial reporting.


                              By:    /s/ George W. Off
                                     ------------------------------------------
                              Name:  George W. Off
                              Title: Chairman of the Board, President and Chief
                                     Executive Officer

Date: March 30, 2007

EX-31.2

EXHIBIT 31.2


                                 CERTIFICATIONS

I, W. Craig Burns, certify that:

      1.    I have reviewed this annual report on Form 10-K of Checkpoint
            Systems, Inc.;

      2.    Based on my knowledge, this report does not contain any untrue
            statement of a material fact or omit to state a material fact
            necessary to make the statements made, in light of the circumstances
            under which such statements were made, not misleading with respect
            to the period covered by this report;

      3.    Based on my knowledge, the financial statements, and other financial
            information included in this report, fairly present in all material
            respects the financial condition, results of operations and cash
            flows of the registrant as of, and for, the periods presented in
            this report;

      4.    The registrant's other certifying officer(s) and I are responsible
            for establishing and maintaining disclosure controls and procedures
            (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
            internal control over financial reporting (as defined in Exchange
            Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

            a.    Designed such disclosure controls and procedures, or caused
                  such disclosure controls and procedures to be designed under
                  our supervision, to ensure that material information relating
                  to the registrant, including its consolidated subsidiaries, is
                  made known to us by others within those entities, particularly
                  during the period in which this report is being prepared;

            b.    Designed such internal control over financial reporting, or
                  caused such internal control over financial reporting to be
                  designed under our supervision, to provide reasonable
                  assurance regarding the reliability of financial reporting and
                  the preparation of financial statements for external purposes
                  in accordance with generally accepted accounting principles;

            c.    Evaluated the effectiveness of the registrant's disclosure
                  controls and procedures and presented in this report our
                  conclusions about the effectiveness of the disclosure controls
                  and procedures, as of the end of the period covered by this
                  report based on such evaluation; and

            d.    Disclosed in this report any change in the registrant's
                  internal control over financial reporting that occurred during
                  the registrant's most recent fiscal quarter that has
                  materially affected, or is reasonably likely to materially
                  affect, the registrant's internal control over financial
                  reporting; and

      5.    The registrant's other certifying officer(s) and I have disclosed,
            based on our most recent evaluation of internal control over
            financial reporting, to the registrant's auditors and the audit
            committee of registrant's board of directors (or persons performing
            the equivalent functions):

            a.    All significant deficiencies and material weaknesses in the
                  design or operation of internal control over financial
                  reporting which are reasonably likely to adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial information; and

            b.    Any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal control over financial reporting.


                              By:     /s/ W. Craig Burns
                                      -----------------------------------------
                              Name:   W. Craig Burns
                              Title:  Executive Vice President, Chief Financial
                                      Officer and Treasurer

Date: March 30, 2007

EX-32

EXHIBIT 32


           CERTIFICATION FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350
                    AS ADOPTED PURSUANT TO SECTION 906 OF THE
                           SARBANES-OXLEY ACT OF 2002

The undersigned executive officers of the Registrant hereby certify that this
Report on Form 10-K for the year ended December 31, 2006 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, and the information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Registrant.


                              By:    /s/ George W. Off
                                     ------------------------------------------
                              Name:  George W. Off
                              Title: Chairman of the Board, President and Chief
                                     Executive Officer

                              By:    /s/ W. Craig Burns
                                     ------------------------------------------
                              Name:  W. Craig Burns
                              Title: Executive Vice President, Chief Financial
                                     Officer and Treasurer


A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission upon request. This certification accompanies
the Report and shall not be treated as having been filed as part of the Report.

Date: March 30, 2007