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, 2007

Commission File Number: 1-15729
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PARAGON TECHNOLOGIES, INC.
--------------------------------------------------------------------------------
(Exact Name Of Registrant As Specified In Its Charter)

Delaware 22-1643428
-------------------------------------- --------------------------
(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
--------------------------

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 6, 2007 was 2,769,192.

[PARAGON TECHNOLOGIES, INC. LOGO]

Paragon Technologies, Inc.
TABLE OF CONTENTS

Page
Number
--------

PART I -- FINANCIAL INFORMATION

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

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 17

Item 3. Quantitative and Qualitative Disclosures About Market Risk............ 27

Item 4. Controls and Procedures............................................... 27

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings..................................................... 28

Item 1A. Risk Factors.......................................................... 28

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........... 28

Item 3. Defaults Upon Senior Securities....................................... 29

Item 4. Submission of Matters to a Vote of Security Holders................... 29

Item 5. Other Information..................................................... 29

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

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

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

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

Item 1. Financial Statements
------- --------------------
Paragon Technologies, Inc.
Balance Sheets (Unaudited)
September 30, 2007 and December 31, 2006
(In Thousands, Except Share Data)

September 30, December 31,
2007 2006
------------------- ------------------

Assets
------

Current assets:
Cash and cash equivalents....................... $ 3,671 2,447
Short-term investments.......................... 6,780 9,625
------------------- ------------------
Total cash and cash equivalents and
short-term investments.................... 10,451 12,072
------------------- ------------------

Receivables:
Trade......................................... 4,098 2,557
Notes and other receivables................... 455 428
------------------- ------------------
Total receivables........................... 4,553 2,985
------------------- ------------------

Costs and estimated earnings in excess
of billings................................... 1,591 444

Inventories:
Raw materials................................. 127 100
Work-in-process............................... 46 29
Finished goods................................ 506 340
------------------- ------------------
Total inventories........................... 679 469
------------------- ------------------

Deferred income tax benefits.................... 338 288
Prepaid expenses and other current assets....... 184 112
------------------- ------------------
Total current assets........................ 17,796 16,370
------------------- ------------------

Property, plant and equipment, at cost:
Machinery and equipment......................... 1,291 1,195
Less: accumulated depreciation................. 990 919
------------------- ------------------
Net property, plant and equipment............. 301 276
------------------- ------------------

Deferred income tax benefits....................... 77 96
Other assets....................................... 6 10
------------------- ------------------
Total assets.................................... $ 18,180 16,752
=================== ==================

See accompanying notes to financial statements.

(Continued)

Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc.
Balance Sheets (Unaudited) (Continued)
September 30, 2007 and December 31, 2006
(In Thousands, Except Share Data)

September 30, December 31,
2007 2006
------------------- ------------------

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

Current liabilities:
Accounts payable................................ $ 3,514 1,177
Customers' deposits and billings
in excess of costs and
estimated earnings ........................... 992 1,394
Accrued salaries, wages, and
commissions................................... 230 132
Income taxes payable............................ - 541
Accrued product warranty........................ 240 192
Deferred gain on sale-leaseback................. 69 165
Unearned support contract revenue............... 220 270
Accrued other liabilities....................... 353 425
------------------- ------------------
Total current liabilities................... 5,618 4,296
------------------- ------------------

Long-term liabilities:
Income taxes payable............................ 257 -
Deferred gain on sale-leaseback................. - 28
------------------- ------------------
Total long-term liabilities................. 257 28
------------------- ------------------

Commitments and contingencies

Stockholders' equity:
Common stock, $1 par value; authorized
20,000,000 shares; issued and
outstanding 2,769,192 shares as
of September 30, 2007 and 2,873,891
shares as of December 31, 2006................ 2,769 2,874
Additional paid-in capital...................... 5,531 5,720
Retained earnings............................... 4,005 3,834
------------------- ------------------
Total stockholders' equity.................. 12,305 12,428
------------------- ------------------

Total liabilities and stockholders' equity.. $ 18,180 16,752
=================== ==================

See accompanying notes to financial statements.

Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc.
Statements of Operations (Unaudited)
For the Three and Nine Months Ended September 30, 2007 and 2006
(In Thousands, Except Share and Per Share Data)

Three Months Ended Nine Months Ended
------------------------------------ ---------------------------------
September 30, September 30, September 30, September 30,
2007 2006 2007 2006
--------------- --------------- --------------- ---------------

Net sales.................... $ 7,298 5,209 16,924 14,252
Cost of sales................ 5,559 3,808 12,780 10,056
--------------- --------------- --------------- ---------------
Gross profit on sales........ 1,739 1,401 4,144 4,196
--------------- --------------- --------------- ---------------

Selling, general and
administrative expenses... 1,382 1,299 4,322 4,100
Product development costs.... 27 4 95 220
Interest expense............. 1 - 1 1
Interest income.............. (108) (133) (337) (409)
Other income, net............ (2) (52) (21) (128)
--------------- --------------- --------------- ---------------
1,300 1,118 4,060 3,784
--------------- --------------- --------------- ---------------

Income before
income taxes.............. 439 283 84 412
Income tax expense
(benefit)................. (217) 44 (315) 1
--------------- --------------- --------------- ---------------
Net income................... $ 656 239 399 411
=============== =============== =============== ===============

Basic earnings
per share................. $ .24 .07 .14 .12
=============== =============== =============== ===============

Diluted earnings
per share................. $ .24 .07 .14 .12
=============== =============== =============== ===============

Weighted average
shares outstanding........ 2,769,192 3,193,746 2,798,772 3,403,160
Dilutive effect of
stock options............. - 2,809 - 5,685
--------------- --------------- --------------- ---------------
Weighted average
shares outstanding
assuming dilution......... 2,769,192 3,196,555 2,798,772 3,408,845
=============== =============== =============== ===============

See accompanying notes to financial statements.

Item 1. Financial Statements (Continued)
------- -------------------
Paragon Technologies, Inc.
Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2007 and 2006
(In Thousands, Except Share Data)

Nine Months Ended
----------------------------------------
September 30, September 30,
2007 2006
------------------- -------------------

Cash flows from operating activities:
Net income.......................................... $ 399 411

Adjustments to reconcile net income
to net cash used by operating activities:
Depreciation of plant and equipment............. 82 73
Loss on disposition of equipment................ - 2
Deferred tax expense............................ 36 55
Amortization of deferred gain on sale-
leaseback..................................... (124) (124)
Stock-based compensation........................ 8 28
Change in operating assets and liabilities:
Receivables................................. (1,568) 305
Costs and estimated earnings in
excess of billings....................... (1,147) (149)
Inventories................................. (210) (149)
Prepaid expenses and other
current assets........................... (72) 103
Other assets................................ 4 -
Accounts payable............................ 2,337 (380)
Customers' deposits and billings
in excess of costs and estimated
earnings................................. (402) (984)
Accrued salaries, wages, and
commissions.............................. 98 147
Income taxes payable........................ (314) (59)
Accrued product warranty.................... 48 92
Unearned support contract revenue........... (50) (32)
Accrued other liabilities................... (72) (116)
------------------- -------------------
Net cash used by operating activities............... (947) (777)
------------------- -------------------

Cash flows from investing activities:
Proceeds from sales of short-term
investments....................................... 3,345 5,995
Purchases of short-term investments................. (500) (500)
Purchases of property, plant and equipment.......... (107) (127)
------------------- -------------------
Net cash provided by investing
activities........................................ 2,738 5,368
------------------- -------------------

See accompanying notes to financial statements.

(Continued)

Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc.
Statements of Cash Flows (Unaudited) (Continued)
For the Nine Months Ended September 30, 2007 and 2006
(In Thousands, Except Share Data)

Nine Months Ended
----------------------------------------
September 30, September 30,
2007 2006
------------------- -------------------

Cash flows from financing activities:
Repurchase and retirement of
common stock...................................... (567) (3,809)
------------------- -------------------
Net cash used by
financing activities.......................... (567) (3,809)
------------------- -------------------

Increase in cash and
cash equivalents.................................. 1,224 782
Cash and cash equivalents,
beginning of period............................... 2,447 687
------------------- -------------------
Cash and cash equivalents,
end of period..................................... $ 3,671 1,469
=================== ===================

Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest expense.............................. $ 1 1
=================== ===================
Income taxes.................................. $ (36) (371)
=================== ===================

See accompanying notes to financial statements.

Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2007 and 2006

(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. 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 the Company's annual
report on Form 10-K for the year ended December 31, 2006 as filed with the
Securities and Exchange Commission on March 30, 2007. Refer to the
Company's annual report on Form 10-K for the year ended December 31, 2006
for more complete financial information.

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

(3) 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):

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

2007................... $ 192 127 (79) 240
2006................... $ 189 135 (43) 281

(4) Business Operations
-------------------

Company Overview
----------------
Paragon, based out of Easton, Pennsylvania, 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 is a Delaware corporation, originally
incorporated in 1958.

The Company (also 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 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.

The Company continues 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 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, 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. 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.

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

Item 1. Financial Statements (Continued)
------- -------------------
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2007 and 2006

(4) Business Operations (Continued)
-----------------------------------
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, 2007 and 2006 are as follows
(in thousands):

For the three months ended September 30, 2007 and 2006:

September 30, 2007 September 30, 2006
------------------------------ ------------------------------
% of Total % of Total
Sales Sales Sales Sales
-------------- ------------- -------------- --------------

Systems sales................. $ 6,352 87.0% $ 4,414 84.7%
Aftermarket sales............. 946 13.0% 795 15.3%
-------------- ------------- -------------- --------------
Total sales................ $ 7,298 100.0% $ 5,209 100.0%
============== ============= ============== ==============

For the nine months ended September 30, 2007 and 2006:

Systems sales................. $ 14,275 84.3% $ 11,845 83.1%
Aftermarket sales............. 2,649 15.7% 2,407 16.9%
-------------- ------------- -------------- --------------
Total sales................ $ 16,924 100.0% $ 14,252 100.0%
============== ============= ============== ==============

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, 2007 and 2006 are as follows (in thousands):

For the three months ended September 30, 2007 and 2006:

Domestic sales................ $ 4,793 65.7% $ 4,787 91.9%
International sales........... 2,505 34.3% 422 8.1%
-------------- ------------ -------------- --------------
Total sales................ $ 7,298 100.0% $ 5,209 100.0%
============== ============= ============== ==============

For the nine months ended September 30, 2007 and 2006:

Domestic sales................ $ 12,111 71.6% $ 13,688 96.0%
International sales........... 4,813 28.4% 564 4.0%
-------------- ------------- -------------- --------------
Total sales................ $ 16,924 100.0% $ 14,252 100.0%
============== ============= ============== ==============

(4) Business Operations (Continued)
------------------
Sales from external customers for each of the Company's products during the
three and nine months ended September 30, 2007 and 2006 are as follows (in
thousands):

For the three months ended September 30, 2007 and 2006:

LO-TOW(R) sales.............. $ 2,287 31.3% $ 1,968 37.8%
CARTRAC(R) sales.............. 64 .9% 1,012 19.4%
DISPEN-SI-MATIC(TM),
SINTHESIS(TM), and
related order fulfillment
sales...................... 4,001 54.8% 1,434 27.5%
Other sales................... - - - -
Aftermarket sales............. 946 13.0% 795 15.3%
-------------- ------------- -------------- --------------
Total sales................ $ 7,298 100.0% $ 5,209 100.0%
============== ============= ============== ==============

For the nine months ended September 30, 2007 and 2006:

LO-TOW(R) sales.............. $ 5,693 33.6% $ 4,539 31.8%
CARTRAC(R) sales.............. 119 .7% 1,924 13.5%
DISPEN-SI-MATIC(TM),
SINTHESIS(TM), and
related order fulfillment
sales...................... 8,428 49.8% 5,382 37.8%
Other sales................... 35 .2% - -
Aftermarket sales............. 2,649 15.7% 2,407 16.9%
-------------- ------------- -------------- --------------
Total sales................ $ 16,924 100.0% $ 14,252 100.0%
============== ============= ============== ==============

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, 2007 and September 30,
2006 were $7,172,000 and $4,879,000, 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.

(5) Recently Issued Accounting Pronouncements
-----------------------------------------
In June 2006, the Financial Accounting Standards Board issued
Interpretation No. 48 ("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 Company adopted the
provisions of FIN 48 on January 1, 2007 as described in Note 11 of the
Notes to Financial Statements.

In September 2006, the Financial Accounting Standards Board issued SFAS No.
157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157 defines fair
value, establishes a market-based framework or hierarchy for measuring fair
value, and expands disclosures about fair value measurements. SFAS No. 157
is applicable whenever another accounting pronouncement requires or permits
assets and liabilities to be measured at fair value. SFAS No. 157 does not
expand or require any new fair value measures. The provisions of SFAS No.
157 are to be applied prospectively and are effective for financial
statements issued for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the impact, if any, the adoption of SFAS
No. 157 will have on the Company's financial statements.

In February 2007, the Financial Accounting Standards Board issued SFAS No.
159, "The Fair Value Option for Financial Assets and Financial Liabilities
- Including an Amendment of FASB Statement No. 115" ("SFAS No. 159"). SFAS
No. 159 permits entities to elect to measure many financial instruments and
certain other items at fair value. Upon adoption of SFAS No. 159, an entity
may elect the fair value option for eligible items that exist at the
adoption date. Subsequent to the initial adoption, the election of the fair
value option should only be made at initial recognition of the asset or
liability or upon a remeasurement event that gives rise to new-basis
accounting. The decision about whether to elect the fair value option is
applied on an instrument-by-instrument basis, is irrevocable and is applied
only to an entire instrument and not only to specified risks, cash flows or
portion of that instrument. SFAS No. 159 does not affect any existing
accounting literature that requires certain assets and liabilities to be
carried at fair value nor does it eliminate disclosure requirements
included in other accounting standards. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. The Company is currently
evaluating the impact, if any, the adoption of SFAS No. 159 will have on
the Company's financial statements.

(6) 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 $19,345 (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.

Item 1. Financial Statements (Continued)
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2007 and 2006

(6) Sale-Leaseback (Continued)
--------------
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. The amortization of the
deferred profit will expire during the first quarter of 2008. During the
three months ended September 30, 2007 and 2006, $41,000 and $41,000,
respectively, of the deferred gain was recognized. During the nine months
ended September 30, 2007 and 2006, $124,000 and $124,000, respectively, of
the deferred gain was recognized.

(7) 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%. As of
September 30, 2007, the Company did not have any borrowings under the line
of credit facility; however, the leasing agreement associated with the
Company's principal office is secured with a $200,000 letter of credit.
Therefore, as of September 30, 2007, 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 of the Company's accounts receivables and inventory. The
Company was in compliance with all covenants as of September 30, 2007. The
line of credit facility expires effective June 30, 2008.

(8) 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.

On January 7, 2007, the Company's Board of Directors amended its existing
stock repurchase program by increasing the amount it has authorized
management to repurchase from up to $14,000,000 of the Company's common
stock to up to $15,000,000.

There were no repurchases during the three months ended September 30, 2007.
During the nine months ended September 30, 2007, the Company repurchased
99,699 shares of common stock at a weighted average cost, including
brokerage commissions, of $5.68 per share. Cash expenditures for the stock
repurchases during the nine months ended September 30, 2007 were $566,732.
Through September 30, 2007, the Company repurchased 1,637,718 shares of
common stock at a weighted average cost, including brokerage commissions,
of $8.62 per share. Cash expenditures for the stock repurchases since the
inception of the program were $14,116,143. As of September 30, 2007,
$883,857 remained available for repurchases under the stock repurchase
program.

(8) Stock Repurchase Program (Continued)
------------------------
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.

(9) Unearned Support Contract Revenue
---------------------------------
The Company offers its Order Fulfillment customers one-year support
contracts for an annual service fee. The support contracts cover a
customer's single distribution center or warehouse where the Company's
products are installed. As part of its support contracts, the Company
provides analysis, consultation, and technical information to the
customer's personnel on matters relating to the operation of its Order
Fulfillment System and related equipment and/or peripherals.

The Company records advance payments for unearned support contracts in the
balance sheet as a current liability. Revenue on individual support
contracts is deferred and recognized on a straight-line basis over the
one-year term of each individual support contract.

(10) Stock-Based Compensation
------------------------
Effective January 1, 2006, the Company adopted SFAS No. 123R and began
expensing the grant-date fair value of employee stock options over the
related requisite service period.

The Company adopted SFAS No. 123R using the modified prospective transition
method. Under this transition method, compensation cost associated with
employee stock options recognized after December 31, 2005 includes
attribution of the fair value related to the remaining unvested portion of
stock option awards granted prior to January 1, 2006, if any, 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 Statements of Cash Flows, stock-based compensation
expense is an adjustment to reconcile net income to net cash provided
(used) by operating activities. 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 nine months ended September 30, 2007 and for the year ended
December 31, 2006, no excess tax benefits were generated.

(10) Stock-Based Compensation (Continued)
------------------------

1997 Equity Compensation Plan
The Company's stock-based compensation program, the 1997 Equity
Compensation Plan ("ECP"), expired in July 2007. Prior to the expiration,
the ECP provided for grants of stock options, restricted and nonvested
stock, and stock appreciation rights to selected key employees, key
advisors who performed valuable services, and directors of the Company. In
addition, the ECP provided for grants of performance units to employees and
key advisors. Prior to the expiration, the ECP, as amended by stockholders
in August 2000 and June 2001, authorized up to 1,012,500 shares of common
stock for issuance pursuant to the terms of the plan. No further grants are
available under 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 vest in four equal annual installments beginning
on the first anniversary of the date of 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, 2007, 7,500 options are outstanding under the
plan, and all options have a term of seven years.

Stock-based compensation expense recognized during the three months ended
September 30, 2007 and 2006 for stock-based compensation programs was
$6,000 and $10,000, respectively. Stock-based compensation expense
recognized during the three months ended September 30, 2007 and 2006
consisted of expensing $1,000 and $2,000, respectively, for employee stock
options, and $0 and $0, respectively, for directors' stock options, and
$5,000 and $8,000, respectively, for nonvested stock.

Stock-based compensation expense recognized during the nine months ended
September 30, 2007 and 2006 for stock-based compensation programs was
$8,000 and $28,000, respectively. Stock-based compensation expense
recognized during the nine months ended September 30, 2007 and 2006
consisted of expensing $4,000 and $5,000, respectively, for employee stock
options, and $0 and $5,000, respectively, for directors' stock options, and
$4,000 and $18,000 respectively, for nonvested stock.

All of the stock-based compensation expense recognized was a component of
selling, general and administrative expenses. Income was recognized during
the three months ended March 31, 2007 as a result of the forfeiture of
5,000 shares of nonvested stock due to the resignation of Mr. Hoffner from
the Company effective March 1, 2007.

(10) Stock-Based Compensation (Continued)
------------------------

Stock Options
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, 2007........... 32,500 $ 8.89
Granted................................ - -
Exercised.............................. - -
Forfeited.............................. (25,000) 8.56
------------- ---------------
Outstanding at September 30, 2007........ 7,500 $ 10.01 5.4 $ 19,500
============= ===============

Exercisable at September 30, 2007........ 1,875 $ 10.01 5.4 $ 4,875

There were no stock options granted during the nine months ended September
30, 2007.

The compensation expense charged against income during the three months
ended September 30, 2007 and 2006 for stock options was $1,000 and $2,000,
respectively. The compensation expense charged against income during the
nine months ended September 30, 2007 and 2006 for stock options was $4,000
and $10,000, respectively. The total compensation expense of $23,000 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, 2007, there is unrecognized compensation cost of $12,000 on
the stock option awards which will be recognized over the next 2.4 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 was 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.

On March 1, 2007, Mr. Hoffner resigned from his positions as President and
CEO and as a director of the Company. Due to his resignation from the
Company, Mr. Hoffner forfeited his 5,000 shares of nonvested stock.

(10) Stock-Based Compensation (Continued)
------------------------

A summary of nonvested stock activity is presented below:

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

Nonvested at January 1, 2007.............................. 12,500 $ 10.01
Granted................................................ - -
Vested................................................. - -
Forfeited.............................................. (5,000) 10.01
-------------- --------------
Nonvested at September 30, 2007........................... 7,500 $ 10.01
============== ==============

The compensation expense recognized during the three months ended September
30, 2007 and 2006 for nonvested stock awards was $5,000 and $8,000,
respectively. The compensation expense recognized during the nine months
ended September 30, 2007 and 2006 for nonvested stock awards was $4,000 and
$18,000, respectively. The total compensation cost of $75,000 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,
2007, there is unrecognized compensation cost of $45,000 on the nonvested
stock awards which will be recognized over the next 2.4 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.

On January 1, 2007, the Company adopted the Financial Accounting Standards
Board Interpretation No. 48 ("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.

As a result of the implementation of FIN 48, the Company recognized a
decrease of $37,000 in the liability for unrecognized tax benefits, which
was accounted for as an increase to the January 1, 2007 balance of retained
earnings. As of the date of adoption and after the impact of recognizing
the decrease in liability noted above, the Company's unrecognized tax
benefits totaled $692,000, of which $590,000 would impact the effective tax
rate if recognized.

The Company recognizes interest and penalties to income tax matters in
income tax expense. In conjunction with the adoption of FIN 48, the Company
recognized approximately $117,000 ($80,000, net of federal benefit) for
potential interest and

(11) Income Taxes (Continued)
------------
penalties at January 1, 2007 which is included as a component of the
$692,000 unrecognized tax benefit noted above. To the extent interest and
penalties are not assessed with respect to uncertain tax positions, amounts
accrued will be reduced and reflected as a reduction of the overall income
tax provision.

During the three and nine months ended September 30, 2007, unrecognized tax
benefits decreased by approximately $315,000 due to the expiration of
statutes of limitations. As of September 30, 2007, the Company's
unrecognized tax benefits totaled $358,000, of which $275,000 would impact
the effective tax rate if recognized.

During the three and nine months ended September 30, 2007, the Company
recognized approximately $69,000 ($53,000, net of federal benefit) for
potential interest and penalties, which is a component of the $358,000
unrecognized tax benefit noted above.

The Company estimates that the total unrecognized tax benefits may decrease
by approximately $30,000 due to the expiration of statutes of limitations
prior to September 30, 2008.

With few exceptions, the Company is no longer subject to examination by
major taxing authorities and jurisdictions (including U.S. Federal) for
years prior to 2004.

The Company recognized an income tax benefit of $217,000 during the three
months ended September 30, 2007 compared to income tax expense of $44,000
during the three months ended September 30, 2006. The income tax benefit
for the three months ended September 30, 2007 was higher than statutory
federal and state tax rates primarily due to the reversal of accruals for
the expiration of tax return statutes, the effect of tax-exempt interest on
certain investments on the annualized effective rate, and an adjustment in
the effective income tax rate expected to apply based on the projected
profitability of the Company for 2007. Income tax expense for the three
months ended September 30, 2006 was lower than statutory federal and state
tax rates primarily due to the effect of tax-exempt interest on certain
investments on the annualized effective rate.

The Company recognized an income tax benefit of $315,000 during the nine
months ended September 30, 2007 compared to income tax expense of $1,000
during the nine months ended September 30, 2006. The income tax benefit for
the nine months ended September 30, 2007 was higher than statutory federal
and state tax rates primarily due to the reversal of accruals for the
expiration of tax return statutes, the effect of tax-exempt interest on
certain investments on the annualized effective rate, and an adjustment in
the effective income tax rate expected to apply based on the projected
profitability of the Company for 2007. Income tax expense for the nine
months ended September 30, 2006 was lower than statutory federal and state
tax rates primarily due to the reversal of accruals for the expiration of
tax return statutes and the effect of tax-exempt interest on certain
investments on the annualized effective rate.

(12) Legal Proceedings
-----------------

From time to time, 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 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
financial statements and related notes thereto included in this Quarterly Report
on Form 10-Q for the period ended September 30, 2007, 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, 2006. 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.

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

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 the 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, 2007, and for the years ended December 31, 2006,
2005, 2004, 2003, and 2002:

Nine Months
Ended Year Ended December 31,
September 30, -----------------------------------------------
(Dollars in Thousands) 2007 2006 2005 2004 2003 2002
------------------ -----------------------------------------------

Backlog of orders - Beginning............ $ 5,932 6,918 5,514 4,052 4,834 7,666
Add: orders........................... 18,164 16,802 18,080 13,164 11,301 12,074
Less: sales........................... 16,924 17,788 16,676 11,702 12,083 14,906
------------------ -----------------------------------------------
Backlog of orders - Ending............... $ 7,172 5,932 6,918 5,514 4,052 4,834
================== ===============================================

Capacity Utilization (1)................. 81.7% 81.7% 80.2% 78.1% 76.1% 74.8%

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

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, 2007
and as of December 31, 2006, 2005, 2004, 2003, and 2002:

As of December 31,
As of September 30, ---------------------------------------------------------------
(Dollars in Thousands) 2007 2006 2005 2004 2003 2002
------------------------ ---------- ---------- ----------- ---------- ----------

Current assets............... $ 17,796 16,370 22,134 14,249 14,720 15,444
------------------------ ---------- ---------- ----------- ---------- ----------
Current liabilities.......... $ 5,618 4,296 5,337 7,355 9,583 9,416

Current ratio................ 3.17 3.81 4.15 1.94 1.54 1.64

Debt to Equity Ratio
--------------------
With an emphasis on generating cash flows to eliminate the Company's senior
and subordinated debt, the Company eliminated its financial leverage in 2003 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, 2007 and as of
December 31, 2006, 2005, 2004, 2003, and 2002 and also includes the number of
shares outstanding at the end of each fiscal period:

Current installments of
long-term debt............. $ - - - - - 1,437
Long-term debt............... - - - - - 7,263
------------------------ ---------- ---------- ----------- ---------- ----------
Total debt................... - - - - - 8,700
------------------------ ---------- ---------- ----------- ---------- ----------
Total stockholders'
equity (1)................. $ 12,305 12,428 17,066 23,308 22,061 17,885
======================== ========== ========== =========== ========== ==========

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

Number of shares
outstanding at the
end of the fiscal
period..................... 2,769,192 2,873,891 3,539,019 4,265,310 4,277,595 4,256,098

(1) During the nine months ended September 30, 2007, the Company repurchased
99,699 shares of common stock at a weighted average cost, including
brokerage commissions, of $5.68 per share. Cash expenditures for the stock
repurchases during the nine months ended September 30, 2007 were $566,732.

During the year ended December 31, 2006, the Company repurchased 679,219
shares of common stock at a weighted average cost, including brokerage
commissions, of $7.57 per share. Cash expenditures for the stock
repurchases during the year ended December 31, 2006 were $5,142,898.

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.

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

Debt to Equity Ratio (Continued)
--------------------
During the year ended December 31, 2004, the Company repurchased 34,700
shares of common stock at a weighted average cost, including brokerage
commissions, of $9.38 per share. Cash expenditures for the stock
repurchases during the year ended December 31, 2004 were $325,631.

See Stock Repurchase Program in Note 8 of the Notes to Financial Statements
regarding the repurchase of shares of the Company's common stock.

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

Critical Accounting Policies and Estimates
------------------------------------------
The discussion and analysis of the Company's financial condition and
results of operations are based upon the Company's financial statements, which
have been prepared in accordance with U.S. generally accepted accounting
principles. The preparation of these financial statements requires the Company
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 the
Company's financial statements. Actual results may, under different assumptions
and conditions, differ significantly from the Company's estimates.

The Company believes that its accounting policies related to revenue
recognition on system sales, warranty, and inventories are its "critical
accounting policies." These policies have been reviewed with the Audit Committee
of the Board of Directors and are discussed in greater detail below.

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, 2007, 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 nine
months ended September 30, 2007.

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. 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 warranty
reserve as of September 30, 2007 was $240,000.

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

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.

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

(a) Results of Operations - Nine Months Ended September 30, 2007 Compared to the
----------------------------------------------------------------------------
Nine Months Ended September 30, 2006
------------------------------------

Earnings Summary
The Company had a net income of $399,000 (or $0.14 basic earnings per
share) for the nine months ended September 30, 2007, compared to net income of
$411,000 (or $0.12 basic earnings per share) for the nine months ended September
30, 2006. The decrease in net income was primarily due to:
o a decrease during the nine months of 2007 in gross profit of $52,000
as described below;
o an increase in selling, general and administrative expenses of $222,000
as described below;
o a decrease of $72,000 in interest income attributable to the lower level
of funds available for investment as the Company liquidated a portion
of its short-term investments to fund the Company's stock repurchase
activities; and
o a decrease of $107,000 in other income, net attributable to a decrease
in royalty income from a license agreement related to material handling
equipment sales.

Partially offsetting the above decrease in net income was:
o a decrease in product development costs of $125,000 as described below;
and
o an income tax benefit of $315,000, primarily due to the reversal of
accruals for the expiration of tax return statutes, the effect of
tax-exempt interest on certain investments on the annualized effective
rate, and an adjustment in the effective income tax rate expected to
apply based on the projected profitability of the Company for 2007.

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

2007 2006
----------------- ------------------

Net sales.............................................. $ 16,924,000 14,252,000
Cost of sales.......................................... 12,780,000 10,056,000
----------------- ------------------
Gross profit on sales.................................. $ 4,144,000 4,196,000
================= ==================

Gross profit as a percentage of sales.................. 24.5% 29.4%
================= ==================

The increase in sales was associated with a larger amount of orders
received during the first nine months of 2007 when compared to the amount of
orders received during the first nine months of 2006. Contributing to the
increase in sales was progress made on contracts received during the first nine
months of 2007 in accordance with contract completion requirements.

Gross profit, as a percentage of sales, for the nine months ended September
30, 2007, when compared to the nine months ended September 30, 2006, was
unfavorably impacted by 3.2% due to product mix, and by 1.7% due to the reduced
absorption of overhead costs.

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

Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses of $4,322,000 were higher by
$222,000 for the nine months ended September 30, 2007 than for the nine months
ended September 30, 2006. The increase was attributable to the addition of
resources aimed at expanding the customer base and costs associated with sales
efforts in response to quoting and sales activities totaling $144,000, and an
increase of $229,000 in commission expenses related to the Company's enhanced
revenue performance. Partially offsetting the aforementioned unfavorable
variance was a decrease of $153,000 in marketing expenses primarily associated
with product promotion and trade shows.

Product Development Costs
-------------------------
Product development costs, including patent expense, of $95,000 were lower
by $125,000 for the nine months ended September 30, 2007 than for the nine
months ended September 30, 2006. Development programs in the nine months ended
September 30, 2007 were primarily aimed at improvements to the Company's Order
Fulfillment systems technologies. Order Fulfillment development efforts during
the nine months ended September 30, 2007 included voice-directed replenishment
and DISPEN-SI-MATIC(R) software enhancements aimed at promoting workplace
efficiencies for the Company's customers.

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 $337,000 was lower by $72,000 for the nine months ended
September 30, 2007 than for the nine months ended September 30, 2006. The
decrease in interest income was attributable to the lower level of funds
available for investment, as the Company liquidated a portion of its short-term
investments to fund the Company's stock repurchase activities.

Other Income, Net
-----------------
The unfavorable variance of $107,000 in other income, net for the nine
months ended September 30, 2007 as compared to the nine months ended September
30, 2006 was primarily attributable to a decrease in royalty income from a
license agreement related to material handling equipment sales.

Income Tax Expense (Benefit)
----------------------------
The Company recognized an income tax benefit of $315,000 during the nine
months ended September 30, 2007 compared to income tax expense of $1,000 during
the nine months ended September 30, 2006. The income tax benefit for the nine
months ended September 30, 2007 was higher than statutory federal and state tax
rates primarily due to the reversal of accruals for the expiration of tax return
statutes, the effect of tax-exempt interest on certain investments on the
annualized effective rate, and an adjustment in the effective income tax rate
expected to apply based on the projected profitability of the Company for 2007.
Income tax expense for the nine months ended September 30, 2006 was lower than
statutory federal and state tax rates primarily due to the reversal of accruals
for the expiration of tax return statutes and the effect of tax-exempt interest
on certain investments on the annualized effective rate.

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

(b) Results of Operations - Three Months Ended September 30, 2007 Compared to
-------------------------------------------------------------------------
the Three Months Ended September 30, 2006
-----------------------------------------

Earnings Summary
----------------
The Company had net income of $656,000 (or $0.24 basic earnings per share)
for the three months ended September 30, 2007, compared to net income of
$239,000 (or $0.07 basic earnings per share) for the three months ended
September 30, 2006. The increase in net income was primarily due to:
o an increase in sales and gross profit of $2,089,000 and $338,000,
respectively, as described below; and
o an income tax benefit of $217,000, primarily due to the reversal of
accruals for the expiration of tax return statutes,
the effect of tax-exempt interest on certain investments on the
annualized effective rate, and an adjustment in the effective income
tax rate expected to apply based on the projected profitability of the
Company for 2007.

Partially offsetting the above increase in net income was:
o an increase in selling, general and administrative expenses of
$83,000 as described below;
o an increase in product development costs of $23,000 as described below;
o a decrease of $25,000 in interest income attributable to the lower
level of funds available for investment as the Company liquidated a
portion of its short-term investments to fund the Company's stock
repurchase activities; and
o a decrease of $50,000 in other income, net attributable to a decrease
in royalty income from a license agreement related to material handling
equipment sales.

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

2007 2006
----------------- ------------------

Net sales.............................................. $ 7,298,000 5,209,000
Cost of sales.......................................... 5,559,000 3,808,000
----------------- ------------------
Gross profit on sales.................................. $ 1,739,000 1,401,000
================= ==================

Gross profit as a percentage of sales.................. 23.8% 26.9%
================= ==================

Gross profit, as a percentage of sales, for the three months ended
September 30, 2007, when compared to the three months ended September 30, 2006,
was unfavorably impacted by 4.1% due to product mix and favorably impacted by
1.0% due to the increased absorption of overhead costs.

Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses of $1,382,000 were higher by
$83,000 for the three months ended September 30, 2007 than for the three months
ended September 30, 2006. The increase was attributable to the addition of
resources aimed at expanding the customer base and costs associated with sales
efforts in response to quoting and sales activities totaling $25,000, and an
increase of $92,000 in commission expenses related to the Company's enhanced
revenue performance. Partially offsetting the aforementioned unfavorable
variance was a decrease of $25,000 in marketing expenses primarily associated
with product promotion and trade shows.

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

Product Development Costs
-------------------------
Product development costs, including patent expense, of $27,000 were higher
by $23,000 for the three months ended September 30, 2007 than for the three
months ended September 30, 2006. Development programs in the three months ended
September 30, 2007 were primarily aimed at improvements to the Company's Order
Fulfillment systems technologies. Order Fulfillment development efforts during
the three months ended September 30, 2007 included DISPEN-SI-MATIC(R) software
enhancements aimed at promoting workplace efficiencies for the Company's
customers.

Development programs in the three months ended September 30, 2006 were
primarily aimed at improvements to the Company's Order Fulfillment systems
technologies. Development efforts during the three months ended September 30,
2006 included DISPEN-SI-MATIC(R) software enhancements aimed at promoting
workplace efficiencies for the Company's customers.

Interest Income
---------------
Interest income of $108,000 was lower by $25,000 for the three months ended
September 30, 2007 than for the three months ended September 30, 2006. The
decrease in interest income was attributable to the lower level of funds
available for investment, as the Company liquidated a portion of its short-term
investments to fund the Company's stock repurchase activities.

Other Income, Net
-----------------
The unfavorable variance of $50,000 in other income, net for the three
months ended September 30, 2007 as compared to the three months ended September
30, 2006 was primarily attributable to a decrease in royalty income from a
license agreement related to material handling equipment sales.

Income Tax Expense (Benefit)
----------------------------
The Company recognized an income tax benefit of $217,000 during the three
months ended September 30, 2007 compared to income tax expense of $44,000 during
the three months ended September 30, 2006. The income tax benefit for the three
months ended September 30, 2007 was higher than statutory federal and state tax
rates primarily due to the reversal of accruals for the expiration of tax return
statutes, the effect of tax-exempt interest on certain investments on the
annualized effective rate, and an adjustment in the effective income tax rate
expected to apply based on the projected profitability of the Company for 2007.
Income tax expense for the three months ended September 30, 2006 was lower than
statutory federal and state tax rates primarily due to the effect of tax-exempt
interest on certain investments on the annualized effective rate.

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

Liquidity and Capital Resources
-------------------------------
The Company's cash and cash equivalents and short-term investments at
September 30, 2007 were $10,451,000, representing 57.5% of total assets, down
from $12,072,000, or 72.1% of total assets, at December 31, 2006. The decrease
was primarily due to the repurchase and retirement of common stock totaling
$567,000, and cash used by operating activities totaling $947,000.

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.

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

Liquidity and Capital Resources (Continued)
-------------------------------

Cash used by operating activities totaling $947,000 during the nine months
ended September 30, 2007 was primarily due to the following factors:
o an increase in receivables in the amount of $1,568,000 in accordance
with contractual requirements;
o an increase in costs and estimated earnings in excess of billings in
the amount of $1,147,000 in accordance with contractual requirements;
o an increase in inventories in the amount of $210,000 relating to the
purchase of safety stock and long-lead time items; and
o a decrease in customers' deposits and billings in excess of costs
and estimated earnings in the amount of $402,000 in accordance with
contractual requirements.
Partially offset by an increase in accounts payable in the amount of
$2,337,000 associated with the purchase of goods and services rendered in
accordance with job completion requirements.

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; and
o an increase in costs and estimated earnings in excess of billings in
the amount of $149,000 in accordance with contractual requirements.
Partially offset by a decrease in receivables in the amount of $305,000
primarily associated with the collection of an income tax refund.

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%. As of September
30, 2007, the Company did not have any borrowings under the line of credit
facility; however, the leasing agreement associated with the Company's principal
office is secured with a $200,000 letter of credit. Therefore, as of September
30, 2007, 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 of the Company's accounts receivables and inventory. The Company
was in compliance with all covenants as of September 30, 2007. The line of
credit facility expires effective June 30, 2008.

The Company anticipates that its financial resources, consisting of cash
and cash equivalents and short-term investments, 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 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.

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

Contractual Obligations
-----------------------
The Company leases 25,000 square feet in Easton, Pennsylvania for use as
its principal office. The leasing agreement requires fixed monthly rentals of
$19,345 (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,
2007 as noted above are as follows:

Payments Due by Period
----------------------------------------------------------------------------------
Total 2007 2008 2009 2010 2011 After 2011
------------------- ------------- ------------ ------------ ----------- ------------ -------------

Contractual
obligations:
Operating leases...... $ 97,000 58,000 39,000 - - - -
Unrecognized
tax benefits....... 257,000 - 31,000 68,000 158,000 - -
------------------- -------------- ------------ ------------ ----------- ------------ ------------

Total................. $ 354,000 58,000 70,000 68,000 158,000 - -
=================== ============== ============ ============ =========== ============ ============

Amount of Commitment
Expiration Per Period
Total Amounts ----------------------------------------------------------------------------------
Committed 2007 2008 2009 2010 2011 After 2011
------------------- ------------- ------------ ------------ ----------- ------------ -------------

Other commercial
commitments:
Letters of credit..... $ 200,000 - 200,000 - - - -
=================== ============== ============ ============ =========== ============ ============

The Company has an Executive Officer Severance Policy (the "Severance
Policy") for executive officers without an employment agreement, which applies
in the event that an executive officer is terminated by the Company for reasons
other than "cause," as such term is defined in the Severance Policy. Under the
Severance Policy, executive officers will receive a portion of their regular
straight-time pay based on their position and length of service with the
Company, medical coverage, and executive outplacement services. For further
information, please refer to the Company's disclosure regarding the "Executive
Officer Severance Policy" in Item 11 of the Company's Annual Report on Form 10-K
for the year ended December 31, 2006.

Off-Balance Sheet Arrangements
------------------------------
As of September 30, 2007 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.

Related Party Transactions
--------------------------
From time to time, the Company enters into transactions with related
parties. For further information, please refer to the Company's disclosure
regarding "Commitments and Related Party Transactions" in Note 9 of the Notes to
Consolidated Financial Statements of the Company's Annual Report on Form 10-K
for the year ended December 31, 2006.

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

Recently Issued Accounting Pronouncements
-----------------------------------------
In June 2006, the Financial Accounting Standards Board issued
Interpretation No. 48 ("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
Company adopted the provisions of FIN 48 on January 1, 2007 as described in Note
11 of the Notes to Financial Statements.

In September 2006, the Financial Accounting Standards Board issued SFAS No.
157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157 defines fair value,
establishes a market-based framework or hierarchy for measuring fair value, and
expands disclosures about fair value measurements. SFAS No. 157 is applicable
whenever another accounting pronouncement requires or permits assets and
liabilities to be measured at fair value. SFAS No. 157 does not expand or
require any new fair value measures. The provisions of SFAS No. 157 are to be
applied prospectively and are effective for financial statements issued for
fiscal years beginning after November 15, 2007. The Company is currently
evaluating the impact, if any, the adoption of SFAS No. 157 will have on the
Company's financial statements.

In February 2007, the Financial Accounting Standards Board issued SFAS No.
159, "The Fair Value Option for Financial Assets and Financial Liabilities -
Including an Amendment of FASB Statement No. 115" ("SFAS No. 159"). SFAS No. 159
permits entities to elect to measure many financial instruments and certain
other items at fair value. Upon adoption of SFAS No. 159, an entity may elect
the fair value option for eligible items that exist at the adoption date.
Subsequent to the initial adoption, the election of the fair value option should
only be made at initial recognition of the asset or liability or upon a
remeasurement event that gives rise to new-basis accounting. The decision about
whether to elect the fair value option is applied on an instrument-by-instrument
basis, is irrevocable and is applied only to an entire instrument and not only
to specified risks, cash flows or portion of that instrument. SFAS No. 159 does
not affect any existing accounting literature that requires certain assets and
liabilities to be carried at fair value nor does it eliminate disclosure
requirements included in other accounting standards. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. The Company is currently
evaluating the impact, if any, the adoption of SFAS No. 159 will have on the
Company's financial statements.

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

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

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 and 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,
the forward-looking statements 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," "does not anticipate," "should help to," "believe," "estimate,"
"is positioned," "expects," "may," "will," "will likely," "is 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, 2007. 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 fiscal quarter ended September 30, 2007
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
------- -----------------

From time to time, 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 financial
position, results of operations, or liquidity.

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

Item 1A, "Risk Factors," of our 2006 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
ended December 31, 2006.

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, 2007:

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

7/01/07 - 7/31/07 - $ - - $ - $ 883,857
8/01/07 - 8/31/07 - $ - - $ - $ 883,857
9/01/07 - 9/30/07 - $ - - $ - $ 883,857
---------------------------------------------------------------------
- $ - - $ -
--------------------------------------------------------------------------------------------------------------------

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.

On January 7, 2007, the Company's Board of Directors amended its existing
stock repurchase program by increasing the amount it has authorized management
to repurchase from up to $14,000,000 of the Company's common stock to up to
$15,000,000.

There were no repurchases during the three months ended September 30, 2007.
During the nine months ended September 30, 2007, the Company repurchased 99,699
shares of common stock at a weighted average cost, including brokerage
commissions, of $5.68 per share. Cash expenditures for the stock repurchases
during the nine months ended September 30, 2007 were $566,732. Through September
30, 2007, the Company repurchased 1,637,718 shares of common stock at a weighted
average cost, including brokerage commissions, of $8.62 per share. Cash
expenditures for the stock repurchases since the inception of the program were
$14,116,143. As of September 30, 2007, $883,857 remained available for
repurchases under the stock repurchase program.

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

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, 2007
with the following items being submitted to a vote of stockholders:

1. The election of five directors to the Board of Directors.
2. The approval of the proposed 2007 Equity Incentive Plan.

Details of the proposals noted above were provided to stockholders in the
form of a Notice of Annual Meeting and Proxy Statement dated and mailed on June
26, 2007, 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.

Proposal Number 2 for the approval of the proposed 2007 Equity Incentive
Plan was not approved by the stockholders.

The voting results on the two matters noted above are set forth as follows:

1. Election of Directors:

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

Robert J. Blyskal 2,504,588 73,471 191,133
Theodore W. Myers 2,449,088 128,971 191,133
Anthony W. Schweiger 2,147,908 430,151 191,133
Samuel L. Torrence 2,449,088 128,971 191,133
Leonard S. Yurkovic 2,504,288 73,771 191,133

2. Approval of the proposed 2007 Equity Incentive Plan:

Votes For Votes Against Abstentions Non-Voting
--------- ------------- ----------- ----------

596,860 791,537 2,010 1,378,785

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

Not applicable.

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

Exhibit No. Description
----------- -----------

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 Leonard S.
Yurkovic, Acting 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 Leonard S. Yurkovic, Acting 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/ Leonard S. Yurkovic
--------------------------------------------------------
Leonard S. Yurkovic
Acting CEO

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

Dated: November 13, 2007
------------------------

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

Exhibit No. Description
----------- -----------

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
Leonard S. Yurkovic, Acting 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 Leonard S. Yurkovic, Acting 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).