Abstract: An automatic label inspection system that is relatively inexpensive, flexible and easy to set up. A digital watermark is embedded in a label prior to the printing process. As is conventional in digital watermark technology, the digital watermark is duplicated many times in multiple areas of the image. That is, the images is divided into area and a copy of the watermark is embedded into each area. Conventional digital watermarks often include both a grid and a payload signal. The present invention merely requires use of the watermark grid signal. A label is inspected by reading the watermark grid signal from each area of the image. The strength of the watermark grid signal is used as a measure of the quality of the label.