Edgar Filing: PARAGON TECHNOLOGIES INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

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

For The Quarterly Period Ended September 30, 2006

Commission File Number: 1-15729

PARAGON TECHNOLOGIES, INC.
--------------------------------------------------------------------------------
(Exact Name Of Registrant As Specified In Its Charter)

Delaware 22-1643428
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

600 Kuebler Road, Easton, Pennsylvania 18040
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(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: 610-252-3205
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Indicate by checkmark 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 |X| No |_|

Indicate by checkmark 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. (Check
one):
Large Accelerated Filer |_| Accelerated Filer |_| Non-Accelerated Filer |X|

Indicate by checkmark whether the Registrant is a shell company
as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|

The number of shares of the Registrant's Common Stock, $1.00 par value,
outstanding as of November 7, 2006 was 2,996,991.

[PARAGON LOGO]

Paragon Technologies, Inc.
TABLE OF CONTENTS

Page
Number
-----------

PART I -- FINANCIAL INFORMATION

Item 1. Financial Statements:
Consolidated Balance Sheets (Unaudited)............................ 1
Consolidated Statements of Operations (Unaudited).................. 3
Consolidated Statements of Cash Flows (Unaudited).................. 4
Notes to Consolidated Financial Statements (Unaudited)............. 6

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 18

Item 3. Quantitative and Qualitative Disclosures About Market Risk............ 28

Item 4. Controls and Procedures............................................... 28

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings..................................................... 29

Item 1A. Risk Factors.......................................................... 29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........... 29

Item 3. Defaults Upon Senior Securities....................................... 30

Item 4. Submission of Matters to a Vote of Security Holders................... 30

Item 5. Other Information..................................................... 30

Item 6. Exhibits.............................................................. 30

SIGNATURES.............................................................................. 31

EXHIBIT INDEX........................................................................... 32

PART I - FINANCIAL INFORMATION
------------------------------

Item 1. Financial Statements
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
September 30, 2006 and December 31, 2005
(In Thousands, Except Share Data)

(UNAUDITED)
September 30, December 31,
2006 2005
------------------- ------------------

Assets
------

Current assets:
Cash and cash equivalents....................... $ 1,469 687
Short-term investments.......................... 11,215 16,710
------------------- ------------------
Total cash and cash equivalents and
short-term investments.................... 12,684 17,397
------------------- ------------------

Receivables:
Trade......................................... 2,139 2,029
Notes and other receivables................... 651 1,066
------------------- ------------------
Total receivables........................... 2,790 3,095
------------------- ------------------

Costs and estimated earnings in excess
of billings................................... 765 616

Inventories:
Raw materials................................. 71 108
Work-in-process............................... 36 26
Finished goods................................ 386 210
------------------- ------------------
Total inventories........................... 493 344
------------------- ------------------

Deferred income tax benefits.................... 380 353
Prepaid expenses and other current assets....... 226 329
------------------- ------------------
Total current assets........................ 17,338 22,134
------------------- ------------------

Property, plant and equipment, at cost:
Machinery and equipment......................... 1,201 1,160
Less: accumulated depreciation................. 900 911
------------------- ------------------
Net property, plant and equipment............. 301 249
------------------- ------------------

Deferred income tax benefits....................... 121 203
Other assets....................................... 10 10
------------------- ------------------
Total assets....................................... $ 17,770 22,596
=================== ==================

See accompanying notes to consolidated financial statements.

Item 1. Financial Statements (Continued)
------- --------------------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
September 30, 2006 and December 31, 2005
(In Thousands, Except Share Data)

(UNAUDITED)
September 30, December 31,
2006 2005
------------------- ------------------

Liabilities and Stockholders' Equity
------------------------------------

Current liabilities:
Accounts payable................................ $ 1,011 1,391
Customers' deposits and billings
in excess of costs and
estimated earnings ........................... 1,060 2,044
Accrued salaries, wages, and
commissions................................... 249 102
Income taxes payable............................ 591 650
Accrued product warranty........................ 281 189
Deferred gain on sale-leaseback................. 165 165
Accrued other liabilities....................... 648 796
------------------- ------------------
Total current liabilities................... 4,005 5,337
------------------- ------------------

Long-term liabilities:
Deferred gain on sale-leaseback................. 69 193
------------------- ------------------
Total long-term liabilities................. 69 193
------------------- ------------------

Commitments and contingencies

Stockholders' equity:
Common stock, $1 par value; authorized
20,000,000 shares; issued and
outstanding 3,115,091 shares as
of September 30, 2006 and 3,539,019
shares as of December 31, 2005.............. 3,115 3,539
Additional paid-in capital.................... 6,198 7,004
Retained earnings............................. 4,383 6,523
------------------- ------------------
Total stockholders' equity.................. 13,696 17,066
------------------- ------------------

Total liabilities and stockholders' equity.. $ 17,770 22,596
=================== ==================

See accompanying notes to consolidated financial statements.

Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Operations (Unaudited)
For the Three and Nine Months Ended September 30, 2006 and 2005
(In Thousands, Except Share and Per Share Data)

Three Months Ended Nine Months Ended
------------------------------------ ------------------------------------
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
------------------ ----------------- ------------------ -----------------

Net sales........................... $ 5,209 4,101 14,252 11,696
Cost of sales....................... 3,808 2,974 10,056 8,587
------------------ ----------------- ------------------ -----------------
Gross profit on sales............... 1,401 1,127 4,196 3,109
------------------ ----------------- ------------------ -----------------

Selling, general and
administrative expenses.......... 1,299 1,179 4,100 3,363
Product development costs........... 4 6 220 29
Interest expense.................... - - 1 1
Interest income..................... (133) (101) (409) (175)
Other income, net................... (52) (57) (128) (133)
------------------ ----------------- ------------------ -----------------
1,118 1,027 3,784 3,085
------------------ ----------------- ------------------ -----------------

Income from
continuing operations before
income taxes..................... 283 100 412 24
Income tax expense.................. 44 39 1 9
------------------ ----------------- ------------------ -----------------
Income from
continuing operations............ 239 61 411 15
Income from discontinued
operations, net of
income taxes..................... - 80 - 1,029
------------------ ----------------- ------------------ -----------------
Net income.......................... $ 239 141 411 1,044
================== ================= ================== =================

Basic earnings
per share:
Income from
continuing operations.......... $ .07 .01 .12 -
Income from
discontinued operations........ - .02 - .25
------------------ ----------------- ------------------ -----------------
Net income....................... $ .07 .03 .12 .25
================== ================= ================== =================

Diluted earnings
per share:
Income from
continuing operations.......... $ .07 .01 .12 -
Income from
discontinued operations........ - .02 - .24
------------------ ----------------- ------------------ -----------------
Net income....................... $ .07 .03 .12 .24
================== ================= ================== =================

Weighted average
shares outstanding............... 3,193,746 4,122,715 3,403,160 4,209,117
Dilutive effect of
stock options.................... 2,809 58,636 5,685 55,682
------------------ ----------------- ------------------ -----------------
Weighted average
shares outstanding
assuming dilution................ 3,196,555 4,181,351 3,408,845 4,264,799
================== ================= ================== =================

See accompanying notes to consolidated financial statements.

Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2006 and 2005
(In Thousands, Except Share Data)

Nine Months Ended
----------------------------------------
September 30, September, 30,
2006 2005
------------------- -------------------

Cash flows from operating activities:
Net income.......................................... $ 411 1,044
Less: Income from discontinued operations.......... - 1,029
------------------- -------------------
Income from continuing operations................... 411 15

Adjustments to reconcile net income
to net cash provided (used) by operating
activities:
Depreciation of plant and equipment............. 73 66
Loss on disposition of equipment................ 2 -
Deferred tax expenses........................... 55 297
Amortization of deferred gain on sale-
leaseback..................................... (124) (124)
Stock-based compensation........................ 28 13
Change in operating assets and liabilities:
Receivables................................. 305 (1,981)
Costs and estimated earnings in
excess of billings....................... (149) (313)
Inventories................................. (149) (89)
Prepaid expenses and other
current assets........................... 103 (191)
Accounts payable............................ (380) 363
Customers' deposits and billings
in excess of costs and estimated
earnings................................. (984) 1,033
Accrued salaries, wages, and
commissions.............................. 147 99
Income taxes payable........................ (59) 1,967
Accrued product warranty.................... 92 (309)
Accrued other liabilities................... (148) 578
Net cash provided by operating activities
of discontinued operations.................... - 126
------------------- -------------------
Net cash provided (used) by
operating activities.............................. (777) 1,550
------------------- -------------------

Cash flows from investing activities:
Proceeds from sale of Ermanco,
net of transaction costs.......................... - 22,022
Proceeds from sales of short-term
investments....................................... 5,995 4,570
Purchases of short-term investments................. (500) (25,685)
Purchases of property, plant and equipment.......... (127) (88)
Net cash used by investing activities
of discontinued operations........................ - (254)
------------------- -------------------
Net cash provided by investing
activities........................................ 5,368 565
------------------- -------------------

See accompanying notes to consolidated financial statements.

Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited) (Continued)
For the Nine Months Ended September 30, 2006 and 2005
(In Thousands, Except Share Data)

Nine Months Ended
----------------------------------------
September 30, September 30,
2006 2005
------------------- -------------------

Cash flows from financing activities:
Sale of common shares in connection with
employee incentive stock option plan............. - 519
Repurchase and retirement of
common stock..................................... (3,809) (3,995)
------------------- -------------------
Net cash used by
financing activities......................... (3,809) (3,476)
------------------- -------------------

Increase (decrease) in cash and
cash equivalents................................. 782 (1,361)
Cash and cash equivalents,
beginning of period.............................. 687 1,702
------------------- -------------------
Cash and cash equivalents,
end of period.................................... $ 1,469 341
=================== ===================

Supplemental disclosures of cash flow
information:
Cash paid (received) during the period for:
Interest..................................... $ 1 1
=================== ===================
Income taxes................................. $ (371) 480
=================== ===================

See accompanying notes to consolidated financial statements.

Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2006 and 2005

(1) Basis of Financial Statement Presentation
-----------------------------------------
The accompanying unaudited financial statements have been prepared in
accordance with the requirements for Form 10-Q and Article 10 of Regulation
S-X and, accordingly, certain information and footnote disclosures have
been condensed or omitted. In the opinion of the management of Paragon
Technologies, Inc. ("Paragon" or the "Company"), the unaudited interim
financial statements furnished reflect all adjustments and accruals that
are necessary to present a fair statement of results for the interim
periods. The comparative financial information for the period ended
September 30, 2005 includes the accounts of the Company and the
discontinued operations of Ermanco Incorporated ("Ermanco"), a wholly owned
subsidiary company that was sold on August 5, 2005, after elimination of
intercompany balances and transactions. Certain prior year amounts have
been reclassified to conform to the current year's presentation. Results
for interim periods are not necessarily indicative of results expected for
the full fiscal year. This quarterly report should be read in conjunction
with, and is qualified in its entirety by reference to, the Consolidated
Financial Statements of the Company and the related Notes thereto appearing
in our annual report on Form 10-K for the year ended December 31, 2005 as
filed with the Securities and Exchange Commission on March 30, 2006. Refer
to the Company's annual report on Form 10-K for the year ended December 31,
2005 for more complete financial information. See Discontinued Operations -
Sale of Ermanco in Note 2 of the Notes to Consolidated Financial Statements
for further information regarding the sale of substantially all of the
assets and liabilities of Ermanco.

Use of Estimates
----------------
The preparation of the financial statements, in conformity with
U.S. generally accepted accounting principles, requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. The judgments made in assessing the
appropriateness of the estimates and assumptions utilized by management in
the preparation of the financial statements are based on historical and
empirical data and other factors germane to the nature of the risk being
analyzed. Materially different results may occur if different assumptions
or conditions were to prevail. Estimates and assumptions are mainly
utilized to establish the appropriateness of the inventory valuation,
warranty reserve, and revenue recognition.

(2) Discontinued Operations -- Sale of Ermanco
------------------------------------------
On May 20, 2005, the Company and Ermanco entered into an Asset Purchase
Agreement (the "Asset Purchase Agreement") with TGW Transportgerate GmbH,
an Austrian corporation ("Buyer Parent"), and Malibu Acquisition, Inc., a
Michigan corporation and wholly owned subsidiary of Buyer Parent ("Buyer"),
pursuant to which Paragon agreed to sell to Buyer substantially all of the
assets and liabilities of Ermanco, Paragon's conveyor and sortation
subsidiary located in Spring Lake, Michigan. The terms of the Asset
Purchase Agreement provided that Buyer pay cash in the amount of $23
million (subject to a working capital adjustment and an accounts receivable
adjustment) and assume certain liabilities of Ermanco, as more fully
described in the Asset Purchase Agreement, a copy of which was filed as an
attachment to the Company's definitive proxy statement with the Securities
and Exchange Commission on July 1, 2005. At a Special Meeting of
Stockholders held on August 3, 2005, the Company received approval from its
stockholders to sell substantially all of the assets and liabilities of
Ermanco.

On August 5, 2005, the Company completed the sale of substantially all of
the assets and liabilities of Ermanco, and received cash consideration of
$23,055,000 (subject to a working capital adjustment and an accounts
receivable adjustment). Transaction costs associated with the sale of the
assets and liabilities of Ermanco were approximately $1,038,000. During the
fourth quarter of 2005, the Company paid approximately $448,000 to the
Buyer in connection with the working capital adjustment and $61,000 in
connection with the accounts receivable adjustment. Therefore, the Company
received cash consideration of $21,508,000, net of transactions costs and
the working capital and accounts receivable adjustments in connection with
the sale of the assets and liabilities of Ermanco, thereby resulting in a
pre-tax loss on the sale of approximately $964,000.

Ermanco and Paragon indemnified the Buyer and Buyer Parent for, among other
things, a breach of any representation, warranty, covenant, or agreement
set forth under the terms of the Asset Purchase Agreement. Paragon and
Ermanco will have no liability to Buyer or Buyer Parent with respect to
claims for breaches of representations and/or warranties until the
aggregate amount of loss relating to such breaches exceeds $230,000, and
then only for such amount that exceeds $230,000. The overall aggregate
indemnification liability of Paragon and Ermanco shall not exceed
$5,750,000. At the closing of the asset sale, Paragon delivered to the
Buyer an irrevocable letter of credit in the amount of $2 million as
security for its indemnification obligations. The letter of credit remained
in place through August 4, 2006, the one-year anniversary of the closing of
the asset sale. There was no claim under the letter of credit during its
existence.

Ermanco and Paragon agreed that for a period of 3 years following the
closing of the transaction, each will not solicit any employee, customer,
or supplier of Buyer to leave Buyer's employment or alter its business
dealings with the Buyer.

The results of operations for Ermanco's business activities are reported as
a discontinued operation. The following are the condensed results of
operations for Ermanco for the three and nine months ended September 30,
2005 (in thousands):

Three Months Nine Months
Ended Ended
------------------------ -------------------------
September 30, 2005 September 30, 2005
------------------------ -------------------------

Net sales........................................... $ 6,732 28,132
======================== =========================

Income from operations before
income taxes..................................... $ 575 2,584
Income tax expense.................................. 207 929
------------------------ -------------------------
Income from operations after
income taxes..................................... 368 1,655
------------------------ -------------------------

Loss on sale before income taxes.................... (451) (978)
Income tax benefit.................................. (163) (352)
------------------------ -------------------------
Loss on sale after income tax benefit............... (288) (626)
------------------------ -------------------------

Income from discontinued operations................. $ 80 1,029
======================== =========================

(3) Short-Term Investments
----------------------
The Company's short-term investments are comprised of a certificate of
deposit and debt securities, all classified as trading, that are carried at
cost, which approximates fair value of the investments at period end. The
debt securities include state and municipal bonds, are on deposit with a
major financial institution, and are supported by letters of credit.

(4) Accrued Product Warranty
------------------------
The Company's products are warranted against defects in materials and
workmanship for varying periods of time depending on customer requirements
and the type of system sold, with a typical warranty period of one year.
The Company provides an accrual for estimated future warranty costs and
potential product liability claims based upon a percentage of cost of
sales, typically two percent of the cost of the system being sold, and a
detailed review of products still in the warranty period is performed each
quarter.

A roll-forward of warranty activities is as follows (in thousands):

Additions
(Reductions)
Beginning Charged to Ending
Balance Costs and Balance
January 1 Expenses Deductions September 30
-------------- ----------------- --------------- --------------------

2006................... $ 189 135 (43) 281
2005................... $ 490 (252) (57) 181

(5) Business Operations
-------------------

Company Overview
----------------
Paragon provides a variety of material handling solutions, including
systems, technologies, products, and services for material flow
applications. The Company's capabilities include horizontal transportation,
rapid dispensing, order fulfillment, computer software, sortation,
integrating conveyors and conveyor systems, and aftermarket services.

The Company's Easton, Pennsylvania operation (hereafter referred
to as "SI Systems") is a specialized systems integrator supplying SI
Systems' branded automated material handling systems to manufacturing,
assembly, order fulfillment, and distribution operations customers located
primarily in North America, including the U.S. government. SI Systems is
brought to market as two individual brands, SI Systems' Order Fulfillment
Systems (hereafter referred to as "SI Systems OFS") and SI Systems'
Production & Assembly Systems (hereafter referred to as "SI Systems PAS").
Each brand has its own focused sales force, utilizing the products and
services currently available or under development within the Company.

The SI Systems OFS sales force focuses on providing order fulfillment
systems to order processing and distribution operations, which may
incorporate the Company's proprietary DISPEN-SI-MATIC(R) and automated
order fulfillment solutions and specialized software from the SINTHESIS(TM)
Software Suite. SINTHESIS(TM) is comprised of eight proprietary software
groups, with 26 extendible software modules that continually assess
real-time needs and deploy solutions to accurately facilitate and optimize
planning, warehousing, inventory, routing, and order fulfillment within the
distribution process. The SI Systems PAS sales force focuses on providing

automated material handling systems to manufacturing and assembly
operations and the U.S. government, which may incorporate the
Company's proprietary LO-TOW(R) and CARTRAC(R) horizontal
transportation technologies.

The Company's automated material handling systems are marketed, designed,
sold, installed, and serviced by its own staff or subcontractors as
labor-saving devices to improve productivity, quality, and reduce costs.
The Company's integrated material handling solutions involve both standard
and specially designed components and include integration of
non-proprietary automated handling technologies so as to provide turnkey
solutions for its customers' unique material handling needs. The Company's
engineering staff develops and designs computer control programs required
for the efficient operation of the systems and for optimizing
manufacturing, assembly, and fulfillment operations.

Following the sale of Ermanco, the Company has continued to review
opportunities with the goal of maximizing resources, increasing stockholder
value, and considering strategies and transactions intended to provide
liquidity. At this time, the Company believes that an increase in
stockholder value will be best obtained through a redeployment of assets
from Ermanco to the Company's remaining business, through increases in the
Company's internal technology base, strengthening the Company's sales and
marketing capabilities, growth of the Company's continuing operations and
other higher growth markets, in particular, by the enhancement of the
Company's products with advanced proprietary software capabilities through
research and development efforts and/or possible acquisitions, mergers, and
joint ventures. The Company has retained Penn Valley Management Group, LLC
to provide management advisory services, including, but not limited to
business planning, mergers and acquisitions, and funding. Although the
Company enters into preliminary discussions and non-disclosure agreements
from time to time, the Company does not have any material definitive
agreements in place. There is no assurance that the Company will be able to
consummate any such acquisition at all or an acquisition on terms that the
Company would consider reasonable.

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

The Company's systems vary in configuration and capacity. Historically,
system prices across the Company's product lines have ranged from $100,000
to several million dollars per system. Systems and aftermarket sales during
the three and nine months ended September 30, 2006 and 2005 are as follows
(in thousands):

For the three months ended September 30, 2006 and 2005:

September 30, 2006 September 30, 2005
------------------------------ ------------------------------
% of Total % of Total
Sales Sales Sales Sales
-------------- ------------- -------------- --------------

Systems sales................. $ 4,414 84.7% $ 3,285 80.1%
Aftermarket sales............. 795 15.3% 816 19.9%
-------------- ------------- -------------- --------------
Total sales................ $ 5,209 100.0% $ 4,101 100.0%
============== ============= ============== ==============

For the nine months ended September 30, 2006 and 2005:

Systems sales................. $ 11,845 83.1% $ 9,301 79.5%
Aftermarket sales............. 2,407 16.9% 2,395 20.5%
-------------- ------------- -------------- --------------
Total sales................ $ 14,252 100.0% $ 11,696 100.0%
============== ============= ============== ==============

The Company's products are sold worldwide through its own sales personnel.
Domestic and international sales during the three and nine months ended
September 30, 2006 and 2005 are as follows (in thousands):

For the three months ended September 30, 2006 and 2005:

Domestic sales................ $ 4,787 91.9% $ 4,055 98.9%
International sales........... 422 8.1% 46 1.1%
-------------- ------------- -------------- --------------
Total sales................ $ 5,209 100.0% $ 4,101 100.0%
============== ============= ============== ==============

For the nine months ended September 30, 2006 and 2005:

Domestic sales................ $ 13,688 96.0% $ 11,107 95.0%
International sales........... 564 4.0% 589 5.0%
-------------- ------------- -------------- --------------
Total sales................ $ 14,252 100.0% $ 11,696 100.0%
============== ============= ============== ==============

All of the Company's sales originate in the United States, and there are
no long-lived assets existing outside the United States.

The Company's backlog of orders at September 30, 2006 and September 30,
2005 were $4,879,000 and $9,666,000, respectively.

The Company's business is largely dependent upon a limited number of large
contracts with a limited number of customers. This dependence can cause
unexpected fluctuations in sales volume. Various external factors affect
the customers' decision-making process on expanding or upgrading their
current production or distribution sites. The customers' timing and
placement of new orders is often affected by factors such as the current
economy, current interest rates, and future expectations. The Company
believes that its business is not subject to seasonality, although the rate
of new orders can vary substantially from month to month. Since the Company
recognizes sales on a percentage of completion basis for its systems
contracts, fluctuations in the Company's sales and earnings occur with
increases or decreases in major installations.

(6) Recently Issued Accounting Pronouncements
-----------------------------------------
In November 2004, the Financial Accounting Standards Board issued
SFAS No. 151, "Inventory Costs an Amendment of ARB No. 43, Chapter 4"
("SFAS No. 151"). SFAS No. 151 provides for certain fixed production
overhead cost to be reflected as a period cost and not capitalized as
inventory. The Company adopted SFAS No.151 on January 1, 2006. The
adoption of SFAS No. 151 did not have a material impact on the Company's
financial statements.

In December 2004, the Financial Accounting Standards Board issued SFAS No.
123 (revised) "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R
addresses all forms of share-based payment awards, including shares issued
under employee stock purchase plans, stock options, restricted and
nonvested stock, and stock appreciation rights. It requires companies to
recognize in the statement of operations the grant-date fair value of stock
options and other equity-based compensation issued to employees. The
statement eliminates the intrinsic value-based method prescribed by APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations, that the Company used prior to January 1, 2006. The
Company adopted SFAS No. 123R on January 1, 2006.

In May 2005, the Financial Accounting Standards Board issued SFAS No. 154,
"Accounting Changes and Error Corrections - A Replacement of APB Opinion
No. 20 and FASB Statement No. 3" ("SFAS No. 154"). SFAS No. 154 requires
retrospective application to prior periods' financial statements for
changes in accounting principle, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change.
This statement also requires that retrospective application of a change in
accounting principle be limited to the direct effects of the change.
Indirect effects of a change in accounting principle, such as a change in
non-discretionary profit-sharing payments resulting from an accounting
change, should be recognized in the period of the accounting change. SFAS
No. 154 also requires that a change in depreciation, amortization, or
depletion method for long-lived non-financial assets be accounted for as a
change in accounting estimate effected by a change in accounting principle.
This statement is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The Company
adopted the provisions of this statement, as applicable, on January 1,
2006, and there was no impact of the adoption.

In November 2005, the Financial Accounting Standards Board issued FSP No.
FAS 123(R)-3, "Transition Election Related to Accounting for the Tax
Effects of Share-Based Payment Awards." This FSP provides an elective
alternative transition method for calculating the pool of excess tax
benefits available to absorb tax deficiencies recognized subsequent to the
adoption of SFAS No. 123R. Companies may take up to one year from the
effective date of the FSP to evaluate the available transition alternatives
and make a one-time election as to which method to adopt. The Company is
currently in the process of evaluating the alternative methods.

In June 2006, the Financial Accounting Standards Board issued FIN 48,
Accounting for Uncertainty in Income Taxes--an interpretation of FASB
Statement No. 109, Accounting for Income Taxes, which clarifies the
accounting for uncertainty in income taxes. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax
return. The Interpretation requires that the Company recognize in the
financial statements, the impact of a tax position, if that position is
more likely than not of being sustained on audit, based on the technical
merits of the position. FIN 48 also provides guidance on derecognition,
classification, interest and penalties,

accounting in interim periods and disclosure. The provisions of FIN 48 are
effective beginning January 1, 2007 with the cumulative effect of the
change in accounting principle recorded as an adjustment to opening
retained earnings. The Company is currently evaluating the impact of
adopting FIN 48 on the financial statements.

In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB No. 108") to provide guidance on the consideration of the
effects of prior year misstatements in quantifying current year
misstatements for the purpose of a materiality assessment. Under SAB No.
108, companies should evaluate a misstatement based on its impact on the
current year income statement, as well as the cumulative effect of
correcting such misstatements that existed in prior years existing in the
current year's ending balance sheet. SAB No. 108 will become effective for
the Company in its fiscal year ending December 31, 2007. The Company is
currently evaluating the impact of the provisions of SAB No. 108 on its
financial statements.

(7) Sale-Leaseback
--------------
The Company's principal office is located in a 173,000 square foot,
concrete, brick, and steel facility in Easton, Pennsylvania.
In connection with the February 2003 sale of the Company's Easton,
Pennsylvania facility, the Company entered into a leaseback
arrangement for 25,000 square feet of office space for five years. The
leasing agreement requires fixed monthly rentals of $18,781 (with annual
increases of 3%). The terms of the lease also require the payment of a
proportionate share of the facility's operating expenses. The leasing
agreement is secured with a $200,000 letter of credit. The lease expires on
February 21, 2008. In accordance with SFAS No. 13 and SFAS No. 28, the
leaseback does not meet the criteria for classification as a capital lease;
hence, it is classified as an operating lease. The sale-leaseback resulted
in a total gain of $2,189,000, of which $1,363,000 was recorded as a gain
in 2003. The seller-lessee (Company) retained more than a minor part
(25,000 square feet) but less than substantially all of the use of the
property (173,000 square feet) through the leaseback and realized a profit
on the sale in excess of the present value of the minimum lease payments
over the lease term. The present value of the stream of lease payments
utilizing the Company's incremental borrowing rate of 10.0% was $826,000.
The $826,000 of deferred profit is amortized in equal amounts as a
reduction in rent expense over the five-year term of the lease. During the
three months ended September 30, 2006 and 2005, $41,000 and $41,000,
respectively, of the deferred gain was recognized. During the nine months
ended September 30, 2006 and 2005, $124,000 and $124,000, respectively, of
the deferred gain was recognized.

(8) Line of Credit
--------------
The Company has a line of credit facility which may not exceed $5,000,000
and is to be used primarily for working capital purposes. Interest on the
line of credit facility is at the LIBOR Market Index Rate plus 1.4%.
Effective August 5, 2005 the Company issued a $2,000,000 letter of credit
in connection with the sale of substantially all of the assets and
liabilities of Ermanco, thereby reducing the amount of available line of
credit to $2,800,000. The letter of credit remained in place through August
4, 2006, the one-year anniversary of the closing of the asset sale. There
was no claim under the letter of credit during its existence. As of
September 30, 2006, the amount of available line of credit was $4,800,000.
As of September 30, 2006, the Company did not have any borrowings under the
line of credit facility, and the line of credit facility expires effective
June 30, 2007.

The line of credit facility contains various non-financial covenants and is
secured by all accounts receivables and inventory. The Company was in
compliance with all covenants as of September 30, 2006.

(9) Stock Repurchase Program
------------------------
On August 12, 2004, the Company's Board of Directors approved a program to
repurchase up to $1,000,000 of its outstanding common stock. The Company's
Board of Directors amended its existing stock repurchase program on several
occasions during 2005 and 2006 by increasing the amount it has authorized
management to repurchase from up to $1,000,000 of the Company's common
stock to up to $14,000,000. During the three months ended September 30,
2006, the Company repurchased 228,500 shares of common stock at a weighted
average cost, including brokerage commissions, of $8.52 per share. During
the nine months ended September 30, 2006, the Company repurchased 438,019
shares of common stock at a weighted average cost, including brokerage
commissions, of $8.70 per share.

Cash expenditures for the stock repurchases during the three and nine
months ended September 30, 2006 were $1,947,274 and $3,808,744,
respectively. Through September 30, 2006, the Company repurchased 1,296,819
shares of common stock at a weighted average cost, including brokerage
commissions, of $9.42 per share. Cash expenditures for the stock
repurchases since the inception of the program were $12,215,258. As of
September 30, 2006, $1,784,742 remained available for repurchases under the
stock repurchase program. Based on market conditions and other factors,
additional repurchases may be made from time to time, in compliance with
SEC regulations, in the open market or through privately negotiated
transactions at the discretion of the Company. There is no expiration date
with regards to the stock repurchase program. The purchase price for the
shares of the Company's common stock repurchased was reflected as a
reduction to stockholders' equity. The Company allocates the purchase price
of the repurchased shares as a reduction to common stock for the par value
of the shares repurchased, with the excess of the purchase price over par
value being allocated between additional paid-in capital and retained
earnings. All shares of common stock that were repurchased by the Company
since the inception of the program were subsequently retired.

(10) Stock-Based Compensation
------------------------
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123 (revised) "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R
addresses all forms of share-based payment awards, including shares issued
under employee stock purchase plans, stock options, restricted and
nonvested stock, and stock appreciation rights. It requires companies to
recognize in the statement of operations the grant-date fair value of stock
options and other equity-based compensation issued to employees. The
statement eliminates the intrinsic value-based method prescribed by APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations, that the Company used prior to January 1, 2006.

Effective January 1, 2006, the Company adopted SFAS No. 123R and related
interpretations and began expensing the grant-date fair value of employee
stock options over the related requisite service period. Prior to
January 1, 2006, the Company applied Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation expense was recognized in net income for employee stock
options, as options granted had an exercise price equal to the market
value of the underlying common stock on the date of grant. The Company
recognized compensation expense on options granted to non-employee
directors. The estimated impact of adopting SFAS No. 123R in 2006 is
approximately $7,000 and is not expected to have a significant impact on
basic and diluted earnings per

share for the year. The pro forma impact of expensing employee stock
options in 2005 would have been $27,000 or a reduction of basic and diluted
earnings per share by approximately $.01 for the year based on the
disclosures required by SFAS No. 123.

The Company adopted SFAS No. 123R using the modified prospective transition
method and therefore has not restated prior periods. Under this transition
method, compensation cost associated with employee stock options recognized
in 2006 includes attribution of the fair value related to the remaining
unvested portion of stock option awards granted prior to January 1, 2006,
and attribution related to new awards granted after January 1, 2006.

The expense associated with stock-based compensation arrangements is a
non-cash charge. In the Consolidated Statements of Cash Flows, stock-based
compensation expense is an adjustment to reconcile net income to cash
provided (used) by operating activities.

Prior to the adoption of SFAS No. 123R, the Company presented tax benefits,
if any, resulting from stock-based compensation as operating cash flows in
the Consolidated Statements of Cash Flows. SFAS No. 123R requires that
certain cash flows resulting from tax deductions in excess of compensation
cost recognized in the financial statements be classified as financing cash
flows. For the first nine months of 2006, no excess tax benefits were
generated.

SFAS No. 123R modified the disclosure requirements related to stock-based
compensation. Accordingly, the disclosures prescribed by SFAS No. 123R are
included below.

For stock options granted prior to the adoption of SFAS No. 123R, the
effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," to its stock option plan would have been as
follows:

Three Months Nine Months
Ended Ended
September 30, 2005 September 30, 2005
------------------------- ------------------------

Net income, as reported................................ $ 141 1,044
Deduct: total stock-based employee
compensation expense determined
under fair value based method, net of
related tax effects................................. (5) (27)
------------------------- ------------------------
Pro forma net income................................... $ 136 1,017
========================= ========================

Basic earnings per share:
As reported......................................... $ .03 .25
Pro forma........................................... $ .03 .24

Diluted earnings per share:
As reported......................................... $ .03 .24
Pro forma........................................... $ .03 .24

In November 2005, the FASB issued FSP No. FAS 123(R)-3, "Transition
Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards." This FSP provides an elective alternative transition method for
calculating the pool of excess tax benefits available to absorb tax
deficiencies recognized subsequent to the adoption of SFAS No. 123R.
Companies may take up to one year from the effective date of the FSP to
evaluate the available transition alternatives and make a one-time election
as to which method to adopt. The Company is currently in the process of
evaluating the alternative methods.

1997 Equity Compensation Plan
The Company has a stock-based compensation program, the 1997 Equity
Compensation Plan ("ECP"), which will expire in July 2007. The ECP provides
for grants of stock options, restricted and nonvested stock, and stock
appreciation rights to selected key employees, key advisors who perform
valuable services, and directors of the Company. In addition, the ECP
provides for grants of performance units to employees and key advisors. The
ECP, as amended by stockholders in August 2000 and June 2001, authorizes up
to 1,012,500 shares of common stock for issuance pursuant to the terms of
the plan. Under the Company's ECP, officers, directors, and key employees
have been granted options to purchase shares of common stock at the market
price at the date of grant. Options become exercisable in increments of 25%
on the anniversary date of the grant; thus, at the end of four years, the
options are fully exercisable. Vested stock option awards may be exercised
through payment of cash, exchange of mature shares, or through a broker. As
of September 30, 2006, 32,500 options are outstanding under the plan, and
all options have a term of five or seven years.

The compensation cost charged against income during the three and nine
months ended September 30, 2006 for stock-based compensation programs was
$10,000 and $28,000, respectively. Stock-based compensation costs during
the three and nine months ended September 30, 2006 consisted of expensing
$2,000 and $5,000, respectively, for employee stock options, and $0 and
$5,000, respectively, for directors' stock options, and $8,000 and $18,000,
respectively, for nonvested stock. All of the compensation cost recognized
was a component of selling, general and administrative expenses.

Stock Options
On March 8, 2006, the Board of Directors of the Company granted 12,500
stock options to its executive officers. The fair value of options granted
was estimated using the Black Scholes option valuation model that used the
assumptions noted in the table below. Expected volatility and expected
dividend yield are based on actual historical experience of the Company's
stock and dividends over the historical period equal to the option term.
The dividend yield on the Company's common stock is assumed to be zero
since the Company has not paid any cash dividends since 1999 and has no
present intention to declare cash dividends. The expected life represents
the period of time that options granted are expected to be outstanding and
was calculated using the simplified method. The assumptions given below
results from certain groups of employees exhibiting different behavior. The
Company does not expect to have any forfeitures of its recent stock option
awards based on the historical experience of the group of employees that
received the stock option awards. The risk-free rate is based on the U. S.
Treasury Securities with terms equal to the expected time of exercise as of
the grant date.

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

Expected volatility............................................. 18.0%
Expected dividend yield......................................... 0.0%
Expected life (in years)........................................ 4.75
Risk-free interest rate......................................... 4.75%
------------------------------------------------------------------------------------------

The grant-date fair value of options granted during the first quarter of
2006 was $2.60 per option.

A summary of stock option activity is presented below:

Weighted
Average
Weighted Remaining
Average Contractual Aggregate
Exercise Term Intrinsic
Options Price (In Years) Value
------------- --------------- ---------------- ---------------

Outstanding at January 1, 2006........... 38,535 $ 7.86
Granted................................ 12,500 10.01
Exercised.............................. (12,535) 7.50
Forfeited.............................. (6,000) 7.50
------------- ---------------
Outstanding at September 30, 2006........ 32,500 $ 8.89 2.9 $ 81,800
============= ===============

Exercisable at September 30, 2006........ 20,000 $ 8.20 .6 $ 49,300

During the three and nine months ended September 30, 2006, the Company
received 10,944 shares of its common stock as payment for the exercise of
12,535 stock options in accordance with the Company's 1997 Equity
Compensation Plan ("ECP"). The total intrinsic value of stock options
exercised during the three and nine months ended September 30, 2006 was
$13,663. Upon the exercise of stock options under the 1997 ECP, the Company
issues new common stock from its authorized shares.

The compensation cost charged against income during the three and nine
months ended September 30, 2006 for stock options was $2,000 and $10,000,
respectively. The total compensation cost of $33,000 is expected to be
recognized on the straight-line basis over the stated vesting period
consistent with the terms of the arrangement. As of September 30, 2006,
there is unrecognized compensation cost of $28,000 on the stock option
awards which will be recognized over the next 3 1/2 years.

As of December 31, 2005, there were no unvested employee stock options.
Therefore, no compensation cost related to stock options granted to
employees prior to January 1, 2006 will be recognized.

Nonvested Stock
The grant-date fair value of nonvested stock is determined on the date of
grant based on the market price of the stock, and compensation cost is
generally amortized to expense on a straight-line basis over the vesting
period during which employees perform related services.

On March 8, 2006, the Company issued 12,500 shares of nonvested stock to
its executive officers. Participants are entitled to cash dividends and to
vote their respective shares. The shares are subject to forfeiture if
employment is terminated prior to March 8, 2010.

A summary of nonvested stock activity is presented below:

Nonvested Grant Date
Shares Fair Value
-------------- ------------------

Nonvested at January 1, 2006.............................. - $ -
Granted................................................ 12,500 10.01
Vested................................................. - -
Forfeited.............................................. - -
-------------- ------------------
Nonvested at September 30, 2006........................... 12,500 $ 10.01
============== ==================

The compensation cost charged against income during the three and nine
months ended September 30, 2006 for nonvested stock awards was $8,000 and
$18,000, respectively. The total compensation cost of $125,000 is expected
to be recognized on the straight-line basis over the four-year vesting
period consistent with the terms of the arrangement. As of September 30,
2006, there is unrecognized compensation cost of $107,000 on the nonvested
stock awards which will be recognized over the next 3 1/2 years.

(11) Income Taxes
------------
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.

The Company recognized income tax expense of $44,000 and $1,000,
respectively, during the three and nine months ended September 30, 2006
compared to income tax expense of $39,000 and $9,000, respectively, during
the three and nine months ended September 30, 2005. Income tax expense for
the three months ended September 30, 2006 was lower than the statutory
federal and state tax rates due primarily to tax-exempt interest on certain
investments, while income tax expense for the nine months ended September
30, 2006 was lower than statutory federal and state tax rates due primarily
to the reversal of accruals for the expiration of tax return statutes and
tax-exempt interest on certain investments. Income tax expense for the
three and nine months ended September 30, 2005 was generally recorded at
statutory federal and state tax rates.

(12) Legal Proceedings
-----------------
The Company is involved in various claims and legal actions arising in the
ordinary course of business. Although the amount of any liability that
could arise with respect to currently pending actions cannot be accurately
predicted, in the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Company's
consolidated financial position, results of operations, or liquidity.

Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations
---------------------

The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the unaudited
consolidated financial statements for the period ended September 30, 2006, and
the cautionary statements and consolidated financial statements and related
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2005. The discussion and analysis contains "forward-looking
statements" based on management's current expectations, assumptions, estimates,
and projections. These forward-looking statements involve risks and
uncertainties. The Company's actual results could differ materially from those
included in these "forward-looking statements" as a result of risks and
uncertainties, identified in connection with those forward-looking statements,
including those factors identified herein, and in the Company's other publicly
filed reports.

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

Business Overview
-----------------
Paragon Technologies, Inc. provides a variety of material handling
solutions, including systems, technologies, products, and services for material
flow applications. Founded in 1958, the Company's material handling solutions
are based on core technologies in horizontal transportation and order
fulfillment and are aimed at improving productivity for manufacturing, assembly,
and distribution center operations.
On August 5, 2005, the Company completed the sale of substantially all of
the assets and liabilities of Ermanco, and received cash consideration of
$23,055,000 (subject to a working capital adjustment and an accounts receivable
adjustment). Transaction costs associated with the sale of the assets and
liabilities of Ermanco were approximately $1,038,000. During the fourth quarter
of 2005, the Company paid $448,000 to the Buyer in connection with the working
capital adjustment and $61,000 in connection with the accounts receivable
adjustment. Therefore, the Company received cash consideration of $21,508,000,
net of transaction costs and the working capital and accounts receivable
adjustments in connection with the sale of the assets and liabilities of
Ermanco, thereby resulting in a pre-tax loss of approximately $964,000. See Note
2 of the Notes to Consolidated Financial Statements for further information
regarding the sale of substantially all of the assets and liabilities of
Ermanco. The discussion that follows reflects the operations of the Company
following the sale of substantially all of the assets and liabilities of
Ermanco.

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

Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (Continued)
---------------------

Key Performance Metrics Relevant to the Company
-----------------------------------------------

Capacity Utilization
--------------------
Capacity Utilization, as documented in the Federal Reserve Statistical
Release(1), is a key economic indicator that the Company follows as a barometer
that may lead to capital spending for material handling systems. Capacity
Utilization attempts to measure what percent of available capacity is actually
being utilized. Management believes that when Capacity Utilization rises and
falls, the Company may see a corresponding change in rate of new orders, and
therefore, a corresponding change in backlog and sales may also occur. The
backlog of orders represents the uncompleted portion of systems contracts along
with the value of parts and services from customer purchase orders related to
goods that have not been shipped or services that have not been rendered.
Backlog is generally indicative of customer demand for the Company's products.
As the demand for the Company's products increases, the backlog of orders, the
rate of new orders, and sales also typically increases. The following table
depicts the Company's backlog, orders, sales, and Capacity Utilization for the
nine months ended September 30, 2006, and for the years ended December 31, 2005,
2004, 2003, 2002, and 2001:

Nine Months
Ended Year Ended December 31,
September 30, -----------------------------------------------
(Dollars in Thousands) 2006 2005 2004 2003 2002 2001
------------------ -----------------------------------------------

Backlog of orders - Beginning............ $ 6,918 5,514 4,052 4,834 7,666 16,353
Add: orders........................... 12,213 18,080 13,164 11,301 12,074 10,321
Less: sales........................... 14,252 16,676 11,702 12,083 14,906 19,008
------------------ -----------------------------------------------
Backlog of orders - Ending............... $ 4,879 6,918 5,514 4,052 4,834 7,666
================== ===============================================

Capacity Utilization(1).................. 81.8% 80.0% 78.6% 75.7% 75.1% 76.3%

Current Ratio
-------------
Management of the Company monitors the current ratio as a measure of
determining liquidity and believes the current ratio illustrates that the
Company's financial resources are adequate to satisfy its future cash
requirements through the next year. The following table depicts the Company's
current assets, current liabilities, and current ratio as of September 30, 2006
and as of December 31, 2005, 2004, 2003, 2002, and 2001:

As of As of December 31,
September 30, ---------------------------------------------------------------
(Dollars in Thousands) 2006 2005 2004 2003 2002 2001
------------------- ---------- ----------- ----------- ---------- ----------

Current assets............... $ 17,338 22,134 14,249 14,720 15,444 19,200
------------------- ---------- ----------- ----------- ---------- ----------
Current liabilities.......... $ 4,005 5,337 7,355 9,583 9,416 13,357

Current ratio................ 4.33 4.15 1.94 1.54 1.64 1.44

Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (Continued)
---------------------

Debt to Equity Ratio
--------------------
With an emphasis over the past several years on generating cash flows to
eliminate the Company's senior and subordinated debt, the Company has eliminated
its financial leverage as evidenced by its debt to equity ratio, which is the
ratio of total debt to stockholders' equity. Management believes the absence of
debt provides greater protection for its stockholders and enhances the Company's
ability to obtain additional financing, if required. The following table
illustrates the calculation of the debt to equity ratio as of September 30, 2006
and as of December 31, 2005, 2004, 2003, 2002, and 2001 and also includes the
number of shares outstanding at the end of each fiscal period:

As of As of December 31,
September 30, ----------------------------------------------------------------
(Dollars in Thousands) 2006 2005 2004 2003 2002 2001
------------------ ------------ ------------ ------------ ------------ ------------

Current installments of
long-term debt............. $ - - - 1,437 2,305
Long-term debt............... - - - - 7,263 9,900
------------------ ------------ ------------ ------------ ------------ ------------
Total debt................... - - - - 8,700 12,205
------------------ ------------ ------------ ------------ ------------ ------------
Total stockholders'
equity (1)................. $ 13,696 17,066 23,308 22,061 17,885 16,912
================== ============ ============ ============ ============ ============

Debt to equity ratio......... - - - - .49 .72

Number of shares
outstanding at the
end of the fiscal
period..................... 3,115,091 3,539,019 4,265,310 4,277,595 4,256,098 4,221,635

(1) During the year ended December 31, 2005, the Company repurchased 824,100
shares of common stock at a weighted average cost, including brokerage
commissions, of $9.81 per share. Cash expenditures for the stock
repurchases during the year ended December 31, 2005 were $8,080,882. During
the nine months ended September 30, 2006, the Company repurchased 438,019
shares of common stock at a weighted average cost, including brokerage
commissions, of $8.70 per share. Cash expenditures for the stock
repurchases during the nine months ended September 30, 2006 were
$3,808,744. See Stock Repurchase Program in Note 9 of the Notes to
Consolidated Financial Statements regarding the Company's Stock Repurchase
Program.

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

Critical Accounting Policies and Estimates
------------------------------------------
The 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 U.S. generally accepted
accounting principles. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and other financial information, including
the related disclosure of commitments and contingencies at the date of our
financial statements. Actual results may, under different assumptions and
conditions, differ significantly from our estimates.
We believe that our accounting policies related to revenue recognition on
system sales, warranty, and inventories are our "critical accounting policies."
These policies have been reviewed with the Audit Committee of the Board of
Directors and are discussed in greater detail below.

Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (Continued)
---------------------

Revenue Recognition on Systems Sales
------------------------------------
Revenues on systems contracts, accounted for in accordance with SOP 81-1 of
the American Institute of Certified Public Accountants, are recorded on the
basis of the Company's estimates of the percentage of completion of individual
contracts. Gross margin is recognized on the basis of the ratio of aggregate
costs incurred to date to the most recent estimate of total costs. As contracts
may extend over one or more years, revisions in cost and profit estimates during
the course of the work are reflected in the accounting periods in which the
facts requiring revisions become known. At the time a loss on a contract becomes
known, the entire amount of the estimated ultimate loss is accrued. As of
September 30, 2006, there are no contracts that are anticipated to result in a
loss.
The Company believes that it has the ability to reasonably estimate the
total costs and applicable gross profit margins at the inception of the contract
for all of its systems contracts. However, where cost estimates change, there
could be a significant impact on the amount of revenue recognized. The Company's
failure to estimate accurately can result in cost overruns which will result in
the loss of profits if the Company determines that it has significantly
underestimated the costs involved in completing contracts. The Company has not
had any significant cost overruns resulting in loss of profits during the three
and nine months ended September 30, 2006.

Accrued Product Warranty
------------------------
The Company's products are warranted against defects in materials and
workmanship for varying periods of time depending on customer requirements and
the type of system sold, with a typical warranty period of one year. The Company
provides an accrual for estimated future warranty costs and potential product
liability claims based upon a percentage of cost of sales, typically two percent
of the cost of the system being sold, and a detailed review of products still in
the warranty period is performed each quarter. Historically, the level of
warranty reserve has been appropriate based on management's assessment of
estimated future warranty claims. However, if unanticipated warranty issues
arise in the future, there could be a significant impact on the recorded
warranty reserve. The recorded warranty reserve as of September 30, 2006 was
$281,000.

Inventories
-----------
Inventories are valued at the lower of average cost or market. The Company
provides an inventory reserve determined by a specific identification of
individual slow moving items and other inventory items based on historical
experience. The reserve is considered to be a write-down of inventory to a new
cost basis. Upon disposal of inventory, the new cost basis is removed from the
accounts.

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

Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (Continued)
---------------------

(a) Results of Operations - Nine Months Ended September 30, 2006 Compared
---------------------------------------------------------------------
to the Nine Months Ended September 30, 2005
-------------------------------------------

Net Sales and Gross Profit on Sales
-----------------------------------

2006 2005
------------------ ------------------

Net sales............................................ $ 14,252,000 11,696,000
Cost of sales........................................ 10,056,000 8,587,000
------------------ ------------------
Gross profit on sales................................ $ 4,196,000 3,109,000
================== ==================

Gross profit as a percentage of sales................ 29.4% 26.6%
================== ==================

Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses of $4,100,000 were higher by
$737,000 for the nine months ended September 30, 2006 than for the nine months
ended September 30, 2005. The increase was attributable to the addition of
resources aimed at expanding the customer base and an increase in salaries and
fringe benefits totaling $288,000, an increase of $230,000 in marketing expenses
primarily associated with product promotion, marketing research, and
participation in trade shows, and an increase of $158,000 in professional fees
and shareholder relations expenditures.

Product Development Costs
-------------------------
Product development costs, including patent expense, of $220,000 were
higher by $191,000 for the nine months ended September 30, 2006 than for the
nine months ended September 30, 2005. Development programs in the nine months
ended September 30, 2006 were primarily aimed at improvements to the Company's
Order Fulfillment and Production & Assembly systems technologies. Development
efforts during the nine months ended September 30, 2006 included
DISPEN-SI-MATIC(R) hardware and software enhancements aimed at promoting
workplace efficiencies for the Company's customers and LO-TOW(R) product
enhancements.

Interest Income
---------------
Interest income of $409,000 was higher by $234,000 for the nine months
ended September 30, 2006 than for the nine months ended September 30, 2005. The
increase in interest income was attributable to the higher level of funds
available for investment as a result of the cash proceeds from the sale of
substantially all of the assets and liabilities of Ermanco and the increased
level of interest rates on funds available for investment.

Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (Continued)
---------------------

(a) Results of Operations - Nine Months Ended September 30, 2006 Compared to
------------------------------------------------------------------------
the Nine Months Ended September 30, 2005 (Continued)
----------------------------------------

Income Tax Expense
------------------
The Company recognized income tax expense of $1,000 during the nine months
ended September 30, 2006 compared to income tax expense of $9,000 during the
nine months ended September 30, 2005. Income tax expense for the nine months
ended September 30, 2006 was lower than the statutory federal and state tax
rates primarily due to the reversal of accruals for the expiration of tax return
statutes and tax-exempt interest on certain investments. Income tax expense for
the nine months ended September 30, 2005 was generally recorded at statutory
federal and state tax rates.

(b) Results of Operations - Three Months Ended September 30, 2006
-------------------------------------------------------------
Compared to the Three Months Ended September 30, 2005
-----------------------------------------------------

Net Sales and Gross Profit on Sales
-----------------------------------

2006 2005
------------------ ------------------

Net sales............................................ $ 5,209,000 4,101,000
Cost of sales........................................ 3,808,000 2,974,000
------------------ ------------------
Gross profit on sales................................ $ 1,401,000 1,127,000
================== ==================

Gross profit as a percentage of sales................ 26.9% 27.5%
================== ==================

The increase in sales was associated with a larger backlog of orders
entering fiscal 2006 when compared to the backlog of orders entering fiscal
2005. Contributing to the increase in sales was progress made on contracts
received during the first nine months of 2006 in accordance with contract
completion requirements associated with certain customers.
Gross profit, as a percentage of sales, for the three months ended
September 30, 2006, when compared to the three months ended September 30, 2005,
was unfavorably impacted by approximately 1.8% due to competitive pricing
pressure and product mix, along with the impact of the favorable performance on
the Company's contracts that were completed or nearing completion in the three
months ended September 30, 2005 as compared to the three months ended September
30, 2006. Partially offsetting the aforementioned unfavorable variance was a
1.2% reduction in overhead costs as a percentage of sales due to the higher
sales volume to cover fixed overhead costs in the three months ended September
30, 2006.

Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses of $1,299,000 were higher by
$120,000 for the three months ended September 30, 2006 than for the three months
ended September 30, 2005. The increase was attributable to the addition of
resources aimed at expanding the customer base and an increase in salaries and
fringe benefits totaling $30,000, an increase of $31,000 in marketing expenses
primarily associated with product promotion, marketing research, and
participation in trade shows, and an increase of $56,000 in professional fees
and shareholder relations expenditures.

Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (Continued)
---------------------

(b) Results of Operations - Three Months Ended September 30, 2006
-------------------------------------------------------------
Compared to the Three Months Ended September 30, 2005 (Continued)
-----------------------------------------------------

Interest Income
---------------
Interest income of $133,000 was higher by $32,000 for the three months
ended September 30, 2006 than for the three months ended September 30, 2005. The
increase in interest income was primarily attributable to the increased level of
interest rates on funds available for investment.

Income Tax Expense
------------------
The Company recognized income tax expense of $44,000 during the three
months ended September 30, 2006 compared to income tax expense of $39,000 during
the three months ended September 30, 2005. Income tax expense for the three
months ended September 30, 2006 was lower than the statutory federal and state
tax rates primarily due to tax-exempt interest on certain investments. Income
tax expense for the three months ended September 30, 2005 was generally recorded
at statutory federal and state tax rates.

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

Liquidity and Capital Resources
-------------------------------
The Company's cash and cash equivalents and short-term investments at
September 30, 2006 were $12,684,000, representing 71.4% of total assets, down
from $17,397,000, or 77.0% of total assets, at December 31, 2005. The decrease
was primarily due to the repurchase and retirement of common stock of $3,809,000
and cash used by operating activities totaling $777,000.
Cash used by operating activities totaling $777,000 during the nine months
ended September 30, 2006 was primarily due to the following factors:
o a decrease in customers' deposits and billings in excess of costs and
estimated earnings in the amount of $984,000 in accordance with
contractual requirements associated with customers in the entertainment
and vehicle assembly marketplace; and
o an increase in costs and estimated earnings in excess of billings in
the amount of $149,000 in accordance with contractual
requirements associated with customers' assembly applications.
Partially offset by:
o a decrease in receivables in the amount of $305,000 primarily
associated with the collection of an income tax refund.
The Company's cash and cash equivalents and short-term investments at
September 30, 2005 rose to $23,356,000 from $3,602,000 at December 31, 2004. The
increase was primarily due to cash proceeds of $22,022,000 from the sale of
Ermanco, net of transaction costs, and cash provided by operating activities
totaling $1,550,000, partially offset by the repurchase and retirement of common
stock of $3,995,000.
Cash provided by operating activities totaling $1,550,000 during the nine
months ended September 30, 2005 was primarily due to the following factors:
o an increase in net cash provided by operating activities of
discontinued operations of $126,000;
o an increase in accounts payable in the amount of $363,000 associated
with purchases of goods and services rendered in accordance with job
completion requirements;
o an increase in customers' deposits and billings in excess of costs and
estimated earnings in the amount of $1,033,000 in accordance with
contractual requirements associated with customers in the vehicle
assembly and entertainment marketplace;
o an increase in accrued other liabilities in the amount of $578,000, of
which $467,000 was associated with the working capital adjustment in
connection with the sale of Ermanco; and

Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (Continued)
---------------------

Liquidity and Capital Resources (Continued)
-------------------------------
o an increase in income taxes payable in the amount of $1,967,000
primarily associated with the gain on the sale of Ermanco
for income tax purposes.
Partially offset by the following factors:
o an increase in receivables in the amount of $1,981,000 in accordance
with contractual requirements associated with customers in the vehicle
assembly, entertainment, and health and beauty aids marketplace;
o an increase in costs and estimated earnings in excess of billings in
the amount of $313,000 in accordance with contractual requirements
associated with customers in the healthcare marketplace; and
o a decrease in accrued product warranty in the amount of $309,000
primarily associated with the reversal of unused, expired accrued
product warranties for contracts that were no longer in the warranty
period.
The Company's line of credit facility may not exceed $5,000,000 and is to
be used primarily for working capital purposes. Effective August 5, 2005, the
Company issued a $2,000,000 letter of credit in connection with the sale of
substantially all of the assets and liabilities of Ermanco, thereby reducing the
amount of available line of credit to $2,800,000. The letter of credit remained
in place through August 4, 2006, the one-year anniversary of the closing of the
asset sale. There was no claim under the letter of credit during its existence.
As of September 30, 2006, the amount of available line of credit was $4,800,000.
The line of credit facility contains various non-financial covenants and is
secured by all accounts receivables and inventory. As of September 30, 2006, the
Company did not have any borrowings under the line of credit facility, and the
line of credit facility expires effective June 30, 2007.
The Company anticipates that its financial resources, consisting of cash
generated from the sale of Ermanco and its line of credit will be adequate to
satisfy its future cash requirements through the next year. Sales volume, as
well as cash liquidity, may experience fluctuations due to the unpredictability
of future contract sales and the dependence upon a limited number of large
contracts with a limited number of customers.
The Company is currently exploring various business strategies designed to
enhance the value of the Company's assets for its stockholders. The Company has
retained Penn Valley Management Group, LLC to provide management advisory
services, including, but not limited to business planning, mergers and
acquisitions, and funding. The Company is continuing to evaluate and actively
explore a range of possible options, including transactions intended to provide
liquidity and maximize stockholder value, and consideration of the acquisition
of complementary assets and/or businesses. The Company may not be able to effect
any of these strategic options on favorable terms or at all.

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

Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (Continued)
---------------------

Contractual Obligations
-----------------------
The Company's leases 25,000 square feet in Easton,
Pennsylvania for use as its principal office. The leasing agreement
requires fixed monthly rentals of $18,781 (with annual increases of 3%). The
terms of the lease also require the payment of a proportionate share of the
facility's operating expenses. The leasing agreement is secured with a $200,000
letter of credit. The lease expires on February 21, 2008.
Future contractual obligations and commercial commitments at September 30,
2006 as noted above are as follows:

Payments Due by Period
-----------------------------------------------------------------
Total 2006 2007 2008 2009 2010
--------------- ----------- ----------- ------------- ----------- ----------

Contractual obligations:
Operating leases........... $ 321,000 56,000 231,000 34,000 - -
--------------- ----------- ----------- ------------- ----------- ----------

Total...................... $ 321,000 56,000 231,000 34,000 - -
=============== =========== =========== ============= =========== ==========

Amount of Commitment
Expiration Per Period
Total Amounts ----------------------------------------------------------------------
Committed 2006 2007 2008 2009 2010
------------------- ------------ ------------ ------------ ------------ -------------

Other commercial
commitments:

Letters of credit..... $ 200,000 - 200,000 - - -
======= ======= ======= ======= ======= =======

Off-Balance Sheet Arrangements
------------------------------
As of September 30, 2006 the Company had no off-balance sheet arrangements
in the nature of guarantee contracts, retained or contingent interests in assets
transferred to unconsolidated entities (or similar arrangements serving as
credit, liquidity, or market risk support to unconsolidated entities for any
such assets), obligations (including contingent obligations) under a contract
that would be accounted for as a derivative instrument, or obligations
(including contingent obligations) arising out of variable interests in
unconsolidated entities providing financing, liquidity, market risk, or credit
risk support to the Company, or that engage in leasing, hedging, or research and
development services with the Company.

Recently Issued Accounting Pronouncements
-----------------------------------------
In November 2004, the Financial Accounting Standards Board issued SFAS No.
151, "Inventory Costs an Amendment of ARB No. 43, Chapter 4" ("SFAS No. 151").
SFAS No. 151 provides for certain fixed production overhead cost to be
reflected as a period cost and not capitalized as inventory. The Company
adopted SFAS No. 151 on January 1, 2006. The adoption of SFAS No. 151 did not
have a material impact on the Company's financial statements.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123 (revised) "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R addresses
all forms of share-based payment awards, including shares issued under employee
stock purchase plans, stock options, restricted and nonvested stock, and stock
appreciation rights. It requires companies to recognize in the statement of
operations the grant-date fair value of stock options and other equity-based
compensation issued to employees. The statement eliminates the intrinsic
value-based method prescribed by APB Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations, that the Company used prior to
January 1, 2006. The Company adopted SFAS No. 123R on January 1, 2006.

Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (Continued)
---------------------

Recently Issued Accounting Pronouncements (Continued)
-----------------------------------------
In May 2005, the Financial Accounting Standards Board issued SFAS No. 154,
"Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20
and FASB Statement No. 3" ("SFAS No. 154"). SFAS No. 154 requires retrospective
application to prior periods' financial statements for changes in accounting
principle, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. This statement also requires
that retrospective application of a change in accounting principle be limited to
the direct effects of the change. Indirect effects of a change in accounting
principle, such as a change in non-discretionary profit-sharing payments
resulting from an accounting change, should be recognized in the period of the
accounting change. SFAS No. 154 also requires that a change in depreciation,
amortization, or depletion method for long-lived non-financial assets be
accounted for as a change in accounting estimate effected by a change in
accounting principle. This statement is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The Company adopted the provisions of this statement, as applicable, on January
1, 2006, and there was no impact of the adoption.
In November 2005, the Financial Accounting Standards Board issued FSP No.
FAS 123(R)-3, "Transition Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards." This FSP provides an elective alternative
transition method for calculating the pool of excess tax benefits available to
absorb tax deficiencies recognized subsequent to the adoption of SFAS No. 123R.
Companies may take up to one year from the effective date of the FSP to evaluate
the available transition alternatives and make a one-time election as to which
method to adopt. The Company is currently in the process of evaluating the
alternative methods.
In June 2006, the Financial Accounting Standards Board issued FIN 48,
Accounting for Uncertainty in Income Taxes--an interpretation of FASB Statement
No. 109, Accounting for Income Taxes, which clarifies the accounting for
uncertainty in income taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The Interpretation
requires that the Company recognize in the financial statements, the impact of a
tax position, if that position is more likely than not of being sustained on
audit, based on the technical merits of the position. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods and disclosure. The provisions of FIN 48 are effective beginning
January 1, 2007 with the cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings. The Company is currently
evaluating the impact of adopting FIN 48 on the financial statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB No. 108") to provide guidance on the consideration of the
effects of prior year misstatements in quantifying current year misstatements
for the purpose of a materiality assessment. Under SAB No. 108, companies should
evaluate a misstatement based on its impact on the current year income
statement, as well as the cumulative effect of correcting such misstatements
that existed in prior years existing in the current year's ending balance sheet.
SAB No. 108 will become effective for the Company in its fiscal year ending
December 31, 2007. The Company is currently evaluating the impact of the
provisions of SAB No. 108 on its financial statements.

Cautionary Statement
--------------------
Certain statements contained herein are not based on historical fact and
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 or by the Securities and Exchange Commission
rules, regulations, and releases. The Company intends that such forward-looking
statements be subject to the safe harbors created thereby. Among other things,
they regard the Company's earnings, liquidity, financial condition, review of
strategic alternatives, and other matters. Words or phrases denoting the
anticipated results of future events, such as "anticipate," "believe,"
"estimate," "expect," "may," "will," "will likely," "are expected to," "will
continue," "should," "project," and similar expressions that denote uncertainty,
are intended to identify such forward-looking statements. The Company's actual
results, performance, or achievements could differ materially from the results
expressed in, or implied by, such "forward-looking statements": (1) as a result
of risks and uncertainties identified in connection with those forward-looking
statements, including those factors identified herein, and in the Company's
other publicly filed reports; (2) as a result of factors over which the Company
has no control, including the strength of domestic and foreign economies, sales
growth, competition, and certain costs increases; or (3) if the factors on which
the Company's conclusions are based do not conform to the Company's
expectations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
------- ----------------------------------------------------------

The Company does not believe that its exposures to interest rate risk or
foreign currency exchange risk, risks from commodity prices, equity prices and
other market changes that affect market risk sensitive instruments are material
to its results of operations.

Item 4. Controls and Procedures
------- -----------------------

(a) Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the
participation of the Company's management, including its Chief Executive
Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness
of the Company's disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) promulgated under the Securities Exchange Act
of 1934, as amended (the "Exchange Act") as of September 30, 2006. Based on
that evaluation, the Company's management, including the CEO and CFO,
concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act, is
accumulated and communicated to the Company's management, including the
Company's CEO and CFO, to allow timely decisions regarding required
disclosure, and is recorded, processed, summarized and reported as
specified in Securities and Exchange Commission rules and forms.

(b) Change in Internal Control Over Financial Reporting

There were no changes in the Company's internal control over financial
reporting identified in connection with the evaluation of such controls
that occurred during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect the
Company's internal control over financial reporting.

PART II -- OTHER INFORMATION
----------------------------

Item 1. Legal Proceedings
------- -----------------

The Company is involved in various claims and legal actions arising in the
ordinary course of business. Although the amount of any liability that could
arise with respect to currently pending actions cannot be accurately predicted,
in the opinion of management, the ultimate disposition of these matters will not
have a material adverse effect on the Company's consolidated financial position,
results of operations, or liquidity.

Item 1A. Risk Factors
-------- ------------

Item 1A, "Risk Factors," of our 2005 Form 10-K includes a detailed
discussion of our risk factors. There have been no material changes in our Risk
Factors from those disclosed in our annual report on Form 10-K for the year and
December 31, 2005.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
------- -----------------------------------------------------------

The following table represents the periodic repurchases of equity
securities made by the Company during the three months ended September 30, 2006:

-------------------------------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
-------------------------------------------------------------------------------------------------------
Total Number Approximate
Average of Shares Approximate Dollar Value
Price Paid Repurchased Dollar Value of Shares
Total Per Share as Part of a of Shares That May Yet
Number (Including Publicly Purchased Be Purchased
Fiscal of Shares Brokerage Announced Under the Under the
Period Repurchased Commissions) Program Program Program
-------------------------------------------------------------------------------------------------------

7/1/06 - 7/31/06 139,200 $ 8.74 139,200 $ 1,216,397 $ 2,515,619
8/1/06 - 8/31/06 89,300 $ 8.18 89,300 $ 730,877 $ 1,784,742
9/1/06 - 9/30/06 - $ - - $ - $ 1,784,742
--------------------------------------------------------------
228,500 $ 8.52 228,500 $ 1,947,274
-------------------------------------------------------------------------------------------------------

On August 12, 2004, the Company's Board of Directors approved a program to
repurchase up to $1,000,000 of its outstanding common stock. The Company's Board
of Directors amended its existing stock repurchase program on several occasions
during 2005 and 2006 by increasing the amount it has authorized management to
repurchase from up to $1,000,000 of the Company's common stock to up to
$14,000,000. During the three months ended September 30, 2006, the Company
repurchased 228,500 shares of common stock at a weighted average cost, including
brokerage commissions, of $8.52 per share. During the nine months ended
September 30, 2006, the Company repurchased 438,019 shares of common stock at a
weighted average cost, including brokerage commissions, of $8.70 per share. Cash
expenditures for the stock repurchases during the three and nine months ended
September 30, 2006 were $1,947,274 and $3,808,744, respectively. Through
September 30, 2006, the Company repurchased 1,296,819 shares of common stock at
a weighted average cost, including brokerage commissions, of $9.42 per share.
Cash expenditures for the stock repurchases since the inception of the program
were $12,215,258. As of September 30, 2006, $1,784,742 remained available for
repurchases under the stock repurchase program. Based on market conditions and
other factors, additional repurchases may be made from time to time, in
compliance with SEC regulations, in the open market or through privately
negotiated transactions at the discretion of the Company. There is no expiration
date with regards to the stock repurchase program. The purchase price for the
shares of the Company's common stock repurchased was reflected as a reduction to
stockholders' equity. The Company allocates the purchase price of the
repurchased shares as a reduction to common stock for the par value of the
shares repurchased, with the excess of the purchase price over par value being
allocated between additional paid-in capital and retained earnings. All shares
of common stock that were repurchased by the Company since the inception of the
program were subsequently retired.

Item 3. Defaults Upon Senior Securities
------- -------------------------------

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------

The Company's Annual Meeting of Stockholders was held on August 1, 2006
with the following item being submitted to a vote of stockholders:

1. The election of five directors to the Board of Directors.

Details of the proposal noted above were provided to stockholders in the
form of a Notice of Annual Meeting and Proxy Statement dated and mailed on June
26, 2006, with such solicitation being in accordance with Section 14 of the
Securities and Exchange Act of 1934, as amended, and the regulations promulgated
thereunder.
There was no solicitation in opposition to the management's nominees listed
in the Proxy Statement, and all the management's nominees were elected.
The voting results on the election of directors are set forth as follows:

1. Election of Directors:

Name of Nominee Votes For Votes Withheld Non-Voting
--------------- --------- -------------- ----------

L. Jack Bradt 2,466,722 710,347 300,031
Joel L. Hoffner 2,840,414 336,655 300,031
Theodore W. Myers 2,859,389 317,680 300,031
Anthony W. Schweiger 2,734,564 442,505 300,031
Leonard S. Yurkovic 2,710,689 466,380 300,031

Item 5. Other Information
------- -----------------

Not applicable.

Item 6. Exhibits
------- --------

31.1 Certification by Chief Executive Officer pursuant to
Rule 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 signed by
Joel L. Hoffner, President and CEO (filed herewith).

31.2 Certification by Chief Financial Officer pursuant to
Rule 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 signed by
Ronald J. Semanick, Chief Financial Officer and Vice
President - Finance and Treasurer (filed herewith).

32.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 signed by Joel L. Hoffner, President and
CEO (filed herewith).

32.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 signed by Ronald J. Semanick, Chief
Financial Officer and Vice President - Finance and
Treasurer (filed herewith).

SIGNATURES
----------

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

PARAGON TECHNOLOGIES, INC.

/s/ Joel L. Hoffner
-----------------------------------------------
Joel L. Hoffner
President & CEO

/s/ Ronald J. Semanick
-----------------------------------------------
Ronald J. Semanick
Chief Financial Officer

Dated: November 13, 2006
---------------------

EXHIBIT INDEX
-------------

Exhibits
--------

31.1 Certification by Chief Executive Officer pursuant to Rule
13a-14(a) and 15d-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 signed by Joel L.
Hoffner, President and CEO (filed herewith).

31.2 Certification by Chief Financial Officer pursuant to Rule
13a-14(a) and 15d-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 signed by Ronald J.
Semanick, Chief Financial Officer and Vice President -
Finance and Treasurer (filed herewith).

32.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 signed by Joel L. Hoffner, President and CEO
(filed herewith).

32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 signed by Ronald J. Semanick, Chief Financial Officer
and Vice President - Finance and Treasurer (filed
herewith).