Through our wholly owned subsidiaries, Quipp Systems, Inc. ("Quipp Systems") and Newstec, Inc. ("Newstec"), we design, manufacture, sell, and install material handling equipment and systems that automate the post-press production process for newspaper publishers. In the post-press stage of newspaper operations, newspapers move from the pressroom in a continuous stream and are assembled, stacked, bundled and transferred to shipping docks, from which they are loaded into delivery trucks, or loaded into carts or stored on pallets for further distribution. Our equipment and control systems facilitate the automated movement of newspapers from the printing press to the delivery truck.

Our product line includes the following equipment, which we sell individually or as part of integrated post-press system installations that include several of our products and, in some instances, products of other manufacturers.

NEWSPAPER STACKERS - The Series 500 Stacker counts and batches stacks of newspapers at maximum speeds of 85,000 copies per hour. The Series 500C Stacker can be adjusted to count and stack a variety of newspaper sizes. The Quipp Off-Press counter stacker, marketed to smaller volume newspapers, counts and batches stacks of newspapers at maximum speeds of 30,000 copies per hour.

VIPER BOTTOMWRAPPER - The Quipp Viper applies wrapping paper to the bottom or three sides of a newspaper bundle to protect against product damage. The Viper can be equipped with an inkjet printing device that provides delivery location and copy count information on the wrapping paper.

PACKMAN PACKAGING SYSTEM - The Quipp Packman packaging system combines a stacker, bottomwrapper, ink-jet printer and a strapping unit into one integrated machine. The Quipp Packman can be used in press and insert applications and can stack, wrap, strap, and provide text messages on each bundle of newspapers at a rate of up to 40 bundles per minute.

IN-LINE INSERTER - The Quipp In-Line inserting system automates the process of inserting sections of newspapers or advertisements into the main section of the newspaper. The In-Line inserting system has been designed to handle inserting requirements primarily for small to medium sized newspaper operations and can insert documents ranging from 3" x 5" cards or coupon books to full broadsheets at a machine speed up to 12,000 copies per hour.

NEWSTEC SLS 1000(R) - With maximum machine speeds up to 25,000 copies per hour, the NEWSTEC SLS-1000(R) is designed to handle inserting requirements for medium and large newspaper operations.

AUTOMATIC CART LOADING SYSTEM - This system loads strapped bundles of newspapers into carts for transportation to remote distribution centers. Quipp's Automatic Cart Loading System handles bundles of various shapes and sizes. Upon completion of loading, the cart is discharged from the cart loader and placed in a truck for delivery to the distribution site.

AUTOMATIC PALLETIZER SYSTEM - The palletizer system receives newspaper bundles from conveyors, stacks the bundles onto a pallet and places stretch wrap film around the pallet and newspapers to prevent movement during transportation to a distribution site.

NEWSPAPER CONVEYOR SYSTEMS - Our conveyor systems, including the Quipp-Gripp III, Quipp Twin-Trak and Quipp Rollerslat, transport newspapers from pressrooms to various locations throughout the post-press operation. The conveyor systems include both horizontal and vertical conveyor modules, which can be integrated with directional switches and special purpose components to accommodate the layout of the newspaper plant. The Quipp-Gripp III uses a series of grippers mounted on an articulating chain to pick up and transport newspapers. Each Quipp-Gripp III gripper carries a single copy of the product. The Quipp Twin-Trak is a twin-belt newspaper conveyor that transports newspapers in an overlapping stream with maximum surface speeds of approximately 80,000 newspapers per hour. The Quipp Rollerslat conveyor employs an array of independently rotating rollers and is used in the processing of newspaper stacks prior to bundling.

OTHER PRODUCTS - We manufacture other products for post-press operations, including stream aligners, centering pacers, fold compressors, newspaper sensors, press production monitors, automated waste handling systems and other equipment.

AFTERMARKET SPARE PARTS AND SERVICE - We provide spare and repair parts and services for our products.

ORIGINAL EQUIPMENT MANUFACTURERS' (OEM) EQUIPMENT - We also sell OEM products to complement our product line. Our primary market includes newspaper publishers with circulation exceeding 50,000 copies daily.

With our recent acquisition of Newstec, we have a more complete post-press product offering, enabling us to offer complete systems to meet the needs for most post-press applications and provide our customers a single source for integrated post-press material handling systems. With the Quipp In-Line inserter and Quipp Off-Press counter stacker, we have also focused sales and marketing efforts on newspapers with daily circulation under 50,000, and on newspapers and commercial printers that print weekly or monthly publications.

Our equipment prices range from $5,000 to $1,200,000, and post-press systems, which usually include an integration of equipment, software, and controls, can be priced much higher. Equipment and basic system orders normally require a lead-time from six to 13 weeks from order date to installation date. Complex systems may require lead-times of up to 26 weeks.

Our manufacturing activities consist primarily of the assembly of purchased components, the fabrication of mechanical and conveyor frames and the testing of completed products. We use approximately 300 vendors to supply parts, materials and components for our various products. We believe that alternative sources of supply are available for all required components. If necessary, certain parts could be manufactured in our in-house machine shop, which is used primarily for custom engineering and development of prototype equipment.

We market, install and service our products both domestically and internationally. All of our products have a minimum one-year warranty, and our staff of technicians or outside vendors provide installation and repair services. In addition to the manufacture and sale of products, we sell spare parts for our equipment. In 2005, 2004, and 2003, spare parts sales accounted for approximately 10%, 9%, and 10% of our net sales, respectively.

We sell most of our products to newspaper publishers in the United States. Our foreign sales accounted for 7%, 9%, and 11% of total sales in 2005, 2004, and 2003, respectively. The following table indicates the amount of sales by geographic area during the past three years:

SALES BY GEOGRAPHIC AREA

2005 2004 2003 -------------------------------------------------------

United States $24,096,107 $22,517,519 $17,353,571 Canada 564,362 1,821,042 1,478,233 Latin America 613,421 302,213 400,462 Europe 1,354 -- 130,681 Other 507,635 49,281 157,746 ----------- ----------- -----------

$25,782,879 $24,690,055 $19,520,693

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

As of December 31, 2005, our backlog of orders was approximately $13,524,000 as compared to $8,631,000 on December 31, 2004. In addition to orders in process at our production facility, our backlog includes orders that have been shipped to customers but, in accordance with our revenue recognition policy, are not yet reflected in net sales (see note 1 to the consolidated financial statements included in this report). We expect to ship all orders included in our December 31, 2005 backlog within the next 12 months. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview" in Item 7.

For the years ended December 31, 2005, 2004, and 2003, no single newspaper customer accounted for ten percent or more of our net sales. A number of our newspaper customers are part of large newspaper chains, including newspaper chains that are part of larger media groups. Management believes that purchase decisions regarding individual pieces of equipment are made by the individual newspapers, while decisions regarding the purchase of complex systems involve input from the corporate office of the newspaper chain or media group. Newspapers owned by Gannett Co, Inc. and The New York Times Company each accounted for 11% of our net sales in 2005. Newspapers owned by Gannett Co, Inc. and Advance Publications, Inc. accounted for 17% and 10% of our net sales in 2004, respectfully. Newspapers owned by Advance Publications, Inc. and Gannett Co, Inc. accounted for 15% and 10% of our net sales in 2003, respectively. Since our equipment is designed to have an extended life, our largest individual newspaper customers usually change from year to year.

OEM sales accounted for approximately 6.3%, 4.5%, and 7.1% of our total sales in 2005, 2004, and 2003, respectively.

COMPETITION The newspaper industry has experienced a decrease in size in recent years, as the number of newspapers in the country has declined and ownership of newspapers has been consolidated. Moreover, in recent years, there has been consolidation among manufacturers of newspaper material handling equipment, as well as new entrants into the market. These developments have increased competition in the industry, and some of our competitors have much greater financial resources than ours.

We believe we have two principal competitors for the newspaper post-press system business in the United States: the post-press division of Goss International Corporation, a U.S. company and GMA, a domestic subsidiary of Muller-Martini Versand-Systeme AG, a Swiss company. In addition, there are several companies that compete with respect to certain of our products. We have experienced competition on the basis of price with respect to most of our products and anticipate that price competition will continue, although product performance and customer service are also important competitive factors.

MARKETING In North America, we sell our products through direct sales representatives. We use international dealers to market and sell our products in the rest of the world. Domestically, we market products by direct solicitation, trade shows and national and regional trade journal advertising. International marketing efforts are coordinated through foreign dealers. Some of the international dealers are commissioned, while others purchase our products for resale. Advertising costs totaled $75,495, $71,182, and $82,001 in 2005, 2004, and 2003, respectively.

PATENTS AND TRADEMARKS We hold 34 U.S. and foreign patents, which expire during the period from 2006 to 2021. We have one patent pending and continue to apply for patent protection when deemed advisable; however, we believe that the success of our products ultimately is dependent upon performance, reliability and engineering, and that our patents are not material to our business. "Quipp" is a registered trademark of Quipp, Inc.

RESEARCH AND DEVELOPMENT Research and development costs totaled $393,600, $707,147, $581,121 in 2005, 2004, and 2003, respectively. In 2005, we continued to develop and test our In-Line-C inserting/collating system with poly-wrapping capabilities and commenced development of new controls for some of our equipment. In 2004, we focused much of our research and development efforts on our new In-Line C inserting/collating system with poly-wrapping capabilities. Additionally, we expended research and development resources to redesign our gripper conveyor to enhance the performance of the product in certain applications, and completed the software for the Quipp Packman packaging system. In 2003, we focused much of our engineering and technical efforts on the development of the Quipp Packman packaging system.

EMPLOYEES As of December 31, 2005, we had 120 full-time employees. None of our employees are represented by a union, and we consider our employee relations to be good.

RECENT DEVELOPMENTS On February 28, 2006, we announced that our Board of Directors has decided to evaluate strategic alternatives to determine whether a strategic transaction, including a possible sale of Quipp, is feasible and desirable. We have engaged Capitalink L.C., of Coral Gables, Florida, to assist us in this endeavor. Capitalink has previously rendered investment banking serves to us, including in connection with our acquisition of Newstec.

We have not determined to sell our company. It is possible that, as a result of the Board's evaluation, we will conclude that a sale is not in our best interest and will determine to continue our current mode of operations, or consider other alternatives. Moreover, we are not modifying our previously disclosed acquisition strategy and will maintain management focus on expanding our business while strategic options are being reviewed.

In order to facilitate the effectiveness of the evaluation process, our Board has extended, for another 18 months, the expiration date of our Shareholder Rights Plan, which was adopted in March 2003 and had been scheduled to expire on March 2, 2006. The new expiration date is September 4, 2007. We believe that this extension will help to ensure the orderly completion of the evaluation process.

SLS 1000(R) is a registered trademark of GMA, Inc.

ITEM 1A - RISK FACTORS

OUR OPERATIONS ARE LARGELY DEPENDENT ON THE NEWSPAPER INDUSTRY; ADVERSE CONDITIONS IN THE NEWSPAPER INDUSTRY ADVERSELY AFFECT OUR BUSINESS.

Virtually all of our sales are to newspapers or to other companies servicing the newspaper industry. We believe that capital spending decisions by newspapers are affected by their operating performance. In periods of decline in the newspaper industry, we have experienced a decline in orders, which has adversely affected our sales and net income.

The newspaper industry is very mature, and has been experiencing reductions in circulation in recent years. Moreover, a series of circulation copy count restatements at some newspapers also adversely affected the newspaper industry. These factors have contributed to increasing challenges for newspapers in maintaining or increasing advertising revenues. As a result of conditions generally in the newspaper industry over the past several years, we have been unable to approach the level of net sales and net income we realized in 2000. We are attempting to address these constraints by pursuing an acquisition program designed to expand our presence in the post press market and to enable us to enter into complimentary markets. However, we cannot predict if these efforts will be successful and, in any event, an extended decline in the financial performance of the newspaper industry would materially adversely affect our business.

WE FACE FORMIDABLE COMPETITION FROM A NUMBER OF COMPANIES, SOME OF WHICH HAVE MUCH GREATER RESOURCES THAN WE HAVE.

We confront aggressive competition in the sale of post-press equipment. Our two largest competitors are the post press division of Goss International Corporation and GMA, a subsidiary of Muller-Martini Verstand Systems AG. The corporate organizations of which these competitors are a part are far larger than we are and have much greater financial and marketing resources than we have. We also compete with some smaller companies, usually when projects involve the sale of individual machines rather than systems. Our inability to successfully compete in the post press equipment market would harm our business.

CONSOLIDATION IN THE NEWSPAPER INDUSTRY COULD HAVE A SIGNIFICANT NEGATIVE IMPACT ON OUR BUSINESS IF A NEWSPAPER GROUP DETERMINES TO TERMINATE THE RELATIONSHIP OF ITS NEWSPAPERS WITH US.

In the past several years, there has been a good deal of consolidation in the newspaper industry. While decision making with regard to capital equipment traditionally has been made at the individual newspaper level, we are experiencing a greater degree of centralized control from media groups in connection with larger post press system orders. Therefore, if a newspaper chain were to determine to curtail the business relationship between us and its newspapers, our business would be harmed.

WE HAVE INCREASINGLY BEEN SUBJECT TO ORDER VOLATILITY, WHICH HAS CAUSED OUR OPERATING RESULTS TO BE LESS STABLE.

Our order flow in recent years has become increasingly volatile, and we have experienced periods where a healthy order flow in one quarter has been followed by a relatively low level of orders in the next quarter. Among the causes for the irregular order flow are decisions of media groups that own a variety of communications outlets other than newspapers to divert capital resources elsewhere (for example, to online media) or decisions of newspaper chains or media groups simply to reduce or defer capital spending for newspapers. Another factor is the effect on total order flow of larger system installations. An order involving a large system can result in a spike in our order flow that is typically followed by an order flow decline because we have not received such orders on a consistent basis. The variability in our order flow has, at times, impaired our ability to absorb fixed overhead costs and fully utilize our engineering and other resources. For example, as a result of slow incoming orders during the third quarter of 2004, our overhead absorption was negatively affected by a one-week plant shutdown and shortened work-weeks for production personnel. As a result, our operating results may fluctuate markedly from quarter to quarter.

IF WE ARE UNABLE TO SUCCESSFULLY IDENTIFY ACQUISITION CANDIDATES OR INTEGRATE ACQUIRED BUSINESSES, OUR BUSINESS AND GROWTH PROSPECTS WILL BE ADVERSELY AFFECTED.

We previously have announced our acquisition program designed to expand our product portfolio and increase our market share in the post-press market, as well as facilitate expansion into complementary markets. The acquisition of Newstec was a major step in our pursuit of this program.

Fundamental to the success of our acquisition program is our ability to identify companies that, if acquired, will contribute to our profitable growth. In connection with our acquisition of Newstec, we engaged in a detailed review process, with the assistance of investment bankers and accounting consultants, before determining to proceed with the acquisition. We anticipate that similar efforts will be utilized in connection with meaningful future acquisitions. Nevertheless, Newstec, or any other acquisition we may engage in, may not contribute to our operations and financial results as anticipated. Moreover, we may be unable to identify additional suitable candidates for acquisition. Either of these events could adversely affect our prospects for growth. In addition, the success of the Newstec acquisition, and any subsequent acquisitions we may complete, will be dependent largely on our ability to successfully integrate the acquired business. Successful integration will require conversion of some or all the acquired entity's information technology and other systems. Moreover, in the case of acquisitions such as Newstec, integration requires successful maintenance of manufacturing and marketing capabilities during the course of consolidation of operations. We confront the risk that integration difficulties may delay or prevent the realization of contemplated benefits of the transition. Moreover, inefficiencies associated with integration could result in higher costs than anticipated. These developments could adversely affect our business and growth prospects.

IF WE ARE UNABLE TO ACHIEVE CONTINUED ENHANCEMENT OF OUR SOFTWARE DEVELOPMENT CAPABILITIES OUR ABILITY TO COMPETE EFFECTIVELY WILL BE IMPAIRED.

Our manufacturing and marketing efforts are increasingly focused on our being a systems supplier rather than a supplier of discrete post-press components. The manufacture of post-press systems requires the development of sophisticated control software that facilitates the efficient assembly, stacking, bundling and movement of newspapers for shipment. We have focused on improving our software capabilities internally and through the use of third party consultants. In addition, our acquisition of Newstec enabled us to acquire additional software development capabilities. Nevertheless, our ability to compete effectively, especially with regard to the sale of inserters and post-press systems, will be dependent, to a considerable degree, on our ability to continue to upgrade our control software. We have, in the past, relied on third party software consultants when our internal capabilities were not sufficient to handle development requirements. While we anticipate that third party consulting assistance will be available to augment our internal development capabilities when necessary, we must be able to correctly gauge the need for such assistance sufficiently in advance to be able to supply upgrades on a timely basis. If we are unable to effectively upgrade software to meet customer requirements, our business will suffer.

TRADING IN OUR COMMON STOCK HAS BEEN SPORADIC, AND OUR STOCK PRICE COULD POTENTIALLY BE SUBJECT TO SUBSTANTIAL FLUCTUATIONS.

Our common stock is listed on the Nasdaq National Market, but generally is not actively traded. Our stock price could be affected substantially by a relatively modest volume of transactions.

ITEM 1B - UNRESOLVED STAFF COMMENTS

NOT APPLICABLE.