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



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

                                    FORM 10-Q

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



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


                  For The Quarterly Period Ended September 30, 2006


                         Commission File Number: 1-15729



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



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

     600 Kuebler Road, Easton, Pennsylvania                        18040
--------------------------------------------------         ---------------------
    (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 7, 2006 was 2,996,991.



<PAGE>





                                 [PARAGON LOGO]

                           Paragon Technologies, Inc.
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                             Page
                                                                                            Number
                                                                                          -----------
<S>               <C>                                                                         <C>
PART I -- FINANCIAL INFORMATION

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

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

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

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



PART II -- OTHER INFORMATION

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

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

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

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

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

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

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



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



EXHIBIT INDEX...........................................................................       32
</TABLE>



<PAGE>



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


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


<TABLE>
<CAPTION>
                                                               (UNAUDITED)
                                                              September 30,          December 31,
                                                                   2006                  2005
                                                            -------------------    ------------------

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

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

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

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

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

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

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


          See accompanying notes to consolidated financial statements.

                                       1
<PAGE>



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


<TABLE>
<CAPTION>
                                                               (UNAUDITED)
                                                              September 30,          December 31,
                                                                   2006                  2005
                                                            -------------------    ------------------
<S>                                                             <C>                      <C>
Liabilities and Stockholders' Equity
------------------------------------

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

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

Commitments and contingencies

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

       Total liabilities and stockholders' equity..             $  17,770                22,596
                                                            ===================    ==================
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       2
<PAGE>



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


<TABLE>
<CAPTION>
                                              Three Months Ended                    Nine Months Ended
                                      ------------------------------------ ------------------------------------
                                        September 30,     September 30,      September 30,     September 30,
                                            2006               2005              2006              2005
                                      ------------------ ----------------- ------------------ -----------------
<S>                                      <C>                 <C>               <C>               <C>
Net sales...........................     $     5,209             4,101            14,252            11,696
Cost of sales.......................           3,808             2,974            10,056             8,587
                                      ------------------ ----------------- ------------------ -----------------
Gross profit on sales...............           1,401             1,127             4,196             3,109
                                      ------------------ ----------------- ------------------ -----------------

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

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

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

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

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

          See accompanying notes to consolidated financial statements.


                                       3
<PAGE>



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


<TABLE>
<CAPTION>
                                                                     Nine Months Ended
                                                          ----------------------------------------
                                                             September 30,        September, 30,
                                                                 2006                  2005
                                                          -------------------  -------------------
<S>                                                             <C>                   <C>
Cash flows from operating activities:
   Net income..........................................         $   411                1,044
   Less:  Income from discontinued operations..........               -                1,029
                                                          -------------------  -------------------
   Income from continuing operations...................             411                   15

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

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

          See accompanying notes to consolidated financial statements.

                                       4
<PAGE>



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


<TABLE>
<CAPTION>
                                                                     Nine Months Ended
                                                          ----------------------------------------
                                                             September 30,        September 30,
                                                                 2006                 2005
                                                          -------------------  -------------------
<S>                                                              <C>                  <C>
Cash flows from financing activities:
   Sale of common shares in connection with
     employee incentive stock option plan.............                -                  519
   Repurchase and retirement of
     common stock.....................................           (3,809)              (3,995)
                                                          -------------------  -------------------
       Net cash used by
         financing activities.........................           (3,809)              (3,476)
                                                          -------------------  -------------------

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

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

          See accompanying notes to consolidated financial statements.


                                       5
<PAGE>



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


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

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

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



                                       6
<PAGE>



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


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

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

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

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

<TABLE>
<CAPTION>
                                                            Three Months                Nine Months
                                                                Ended                      Ended
                                                       ------------------------   -------------------------
                                                         September 30, 2005          September 30, 2005
                                                       ------------------------   -------------------------
<S>                                                             <C>                        <C>
Net sales...........................................            $ 6,732                    28,132
                                                       ========================   =========================

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

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

Income from discontinued operations.................            $    80                     1,029
                                                       ========================   =========================
</TABLE>



                                       7
<PAGE>



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


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


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

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

<TABLE>
<CAPTION>
                                                Additions
                                               (Reductions)
                             Beginning          Charged to                              Ending
                              Balance           Costs and                               Balance
                             January 1           Expenses           Deductions       September 30
                           --------------    -----------------   ---------------  --------------------
<S>                           <C>                  <C>                  <C>                <C>
2006...................       $  189                135                 (43)               281
2005...................       $  490               (252)                (57)               181
</TABLE>


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

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

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

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


                                       8
<PAGE>



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


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

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

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


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


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

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

<TABLE>
<CAPTION>
                                         September 30, 2006              September 30, 2005
                                   ------------------------------  ------------------------------
                                                     % of Total                     % of Total
                                        Sales           Sales          Sales           Sales
                                   --------------   -------------  --------------  --------------
     <S>                              <C>                <C>          <C>               <C>
     Systems sales.................   $  4,414            84.7%       $  3,285           80.1%
     Aftermarket sales.............        795            15.3%            816           19.9%
                                   --------------   -------------  --------------  --------------
        Total sales................   $  5,209           100.0%       $  4,101          100.0%
                                   ==============   =============  ==============  ==============
</TABLE>


                                       9
<PAGE>



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


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

<TABLE>
<CAPTION>
                                         September 30, 2006              September 30, 2005
                                   ------------------------------  ------------------------------
                                                     % of Total                     % of Total
                                        Sales           Sales          Sales           Sales
                                   --------------   -------------  --------------  --------------
     <S>                              <C>                <C>          <C>               <C>
     Systems sales.................   $ 11,845            83.1%       $  9,301           79.5%
     Aftermarket sales.............      2,407            16.9%          2,395           20.5%
                                   --------------   -------------  --------------  --------------
        Total sales................   $ 14,252           100.0%       $ 11,696          100.0%
                                   ==============   =============  ==============  ==============
</TABLE>

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

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

<TABLE>
<CAPTION>
                                         September 30, 2006              September 30, 2005
                                   ------------------------------  ------------------------------
                                                     % of Total                     % of Total
                                        Sales           Sales          Sales           Sales
                                   --------------   -------------  --------------  --------------
     <S>                              <C>                <C>          <C>               <C>

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

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

<TABLE>
<CAPTION>
                                         September 30, 2006              September 30, 2005
                                   ------------------------------  ------------------------------
                                                     % of Total                     % of Total
                                        Sales           Sales          Sales           Sales
                                   --------------   -------------  --------------  --------------
     <S>                              <C>                <C>          <C>               <C>

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

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

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

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


                                       10
<PAGE>



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


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

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

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

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

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


                                       11
<PAGE>



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


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

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


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


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


                                       12
<PAGE>



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


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


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

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


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

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


                                       13
<PAGE>



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


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

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

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

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

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

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

<TABLE>
<CAPTION>
                                                                   Three Months                 Nine Months
                                                                      Ended                        Ended
                                                                September 30, 2005          September 30, 2005
                                                             -------------------------    ------------------------
<S>                                                                  <C>                           <C>
Net income, as reported................................              $  141                        1,044
Deduct:  total stock-based employee
   compensation expense determined
   under fair value based method, net of
   related tax effects.................................                  (5)                         (27)
                                                             -------------------------    ------------------------
Pro forma net income...................................              $  136                        1,017
                                                             =========================    ========================

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

Diluted earnings per share:
   As reported.........................................              $  .03                          .24
   Pro forma...........................................              $  .03                          .24
</TABLE>



                                       14
<PAGE>



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


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

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

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

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


                                       15
<PAGE>



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


<TABLE>
    ------------------------------------------------------------------------------------------
    <S>                                                                          <C>
    Expected volatility.............................................             18.0%
    Expected dividend yield.........................................              0.0%
    Expected life (in years)........................................              4.75
    Risk-free interest rate.........................................              4.75%
    ------------------------------------------------------------------------------------------
</TABLE>

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

     A summary of stock option activity is presented below:

<TABLE>
<CAPTION>
                                                                                      Weighted
                                                                                       Average
                                                                   Weighted           Remaining
                                                                   Average           Contractual          Aggregate
                                                                   Exercise              Term             Intrinsic
                                                  Options           Price             (In Years)            Value
                                               -------------    ---------------    ----------------    ---------------
<S>                                                <C>             <C>                    <C>              <C>

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

Exercisable at September 30, 2006........          20,000          $    8.20               .6              $ 49,300
</TABLE>

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

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

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

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


                                       16
<PAGE>



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


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

     A summary of nonvested stock activity is presented below:

<TABLE>
<CAPTION>
                                                                   Nonvested          Grant Date
                                                                    Shares            Fair Value
                                                                 --------------    ------------------
<S>                                                                  <C>              <C>
Nonvested at January 1, 2006..............................                -           $    -
   Granted................................................           12,500               10.01
   Vested.................................................                -                -
   Forfeited..............................................                -                -
                                                                 --------------    ------------------
Nonvested at September 30, 2006...........................           12,500           $   10.01
                                                                 ==============    ==================
</TABLE>

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


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

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


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

                                       17
<PAGE>



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


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

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


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

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









                                       18
<PAGE>



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


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

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

<TABLE>
<CAPTION>


                                                Nine Months
                                                   Ended                     Year Ended December 31,
                                                September 30,   -----------------------------------------------
(Dollars in Thousands)                             2006             2005     2004     2003      2002     2001
                                             ------------------ -----------------------------------------------
<S>                                             <C>                <C>      <C>      <C>       <C>      <C>
Backlog of orders - Beginning............       $   6,918           5,514    4,052    4,834     7,666   16,353
   Add: orders...........................          12,213          18,080   13,164   11,301    12,074   10,321
   Less: sales...........................          14,252          16,676   11,702   12,083    14,906   19,008
                                             ------------------ -----------------------------------------------
Backlog of orders - Ending...............       $   4,879           6,918    5,514    4,052     4,834    7,666
                                             ================== ===============================================

Capacity Utilization(1)..................           81.8%           80.0%    78.6%    75.7%     75.1%    76.3%
</TABLE>

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

<TABLE>
<CAPTION>
                                         As of                                  As of December 31,
                                      September 30,     ---------------------------------------------------------------
(Dollars in Thousands)                   2006              2005          2004         2003         2002         2001
                                  -------------------   ----------   -----------  -----------   ----------   ----------
<S>                                    <C>                 <C>          <C>          <C>           <C>          <C>
Current assets...............          $   17,338          22,134       14,249       14,720        15,444       19,200
                                  -------------------   ----------   -----------  -----------   ----------   ----------
Current liabilities..........          $    4,005           5,337        7,355        9,583         9,416       13,357

Current ratio................                4.33            4.15         1.94         1.54          1.64         1.44
</TABLE>





                                       19
<PAGE>



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


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


<TABLE>
<CAPTION>
                                        As of                              As of December 31,
                                    September 30,   ----------------------------------------------------------------
(Dollars in Thousands)                  2006            2005          2004         2003         2002         2001
                                 ------------------ ------------ ------------ ------------ ------------ ------------
<S>                                   <C>            <C>          <C>          <C>          <C>          <C>
Current installments of
  long-term debt.............         $                     -             -            -        1,437        2,305
Long-term debt...............                -              -             -            -        7,263        9,900
                                 ------------------ ------------ ------------ ------------ ------------ ------------
Total debt...................                -              -             -            -        8,700       12,205
                                 ------------------ ------------ ------------ ------------ ------------ ------------
Total stockholders'
  equity (1).................         $ 13,696         17,066        23,308       22,061       17,885       16,912
                                 ================== ============ ============ ============ ============ ============

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

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

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


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


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


                                       20
<PAGE>



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


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

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

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


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










                                       21
<PAGE>



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


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

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

<TABLE>
<CAPTION>
                                                                2006                2005
                                                          ------------------  ------------------
<S>                                                          <C>                   <C>
Net sales............................................        $ 14,252,000          11,696,000
Cost of sales........................................          10,056,000           8,587,000
                                                          ------------------  ------------------
Gross profit on sales................................        $  4,196,000           3,109,000
                                                          ==================  ==================

Gross profit as a percentage of sales................               29.4%               26.6%
                                                          ==================  ==================
</TABLE>

     The increase in sales was associated with a larger backlog of orders
entering fiscal 2006 when compared to the backlog of orders entering fiscal
2005. Contributing to the increase in sales was progress made on contracts
received during the first nine months of 2006 in accordance with contract
completion requirements associated with certain customers.
     Gross profit, as a percentage of sales, for the nine months ended September
30, 2006, when compared to the nine months ended September 30, 2005, was
favorably impacted primarily as a result of a reduction in overhead costs as a
percentage of sales due to the higher sales volume to cover fixed overhead costs
during the nine months ended September 30, 2006.

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

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

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





                                       22
<PAGE>



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


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

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


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

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

<TABLE>
<CAPTION>
                                                                2006                2005
                                                          ------------------  ------------------
<S>                                                          <C>                   <C>
Net sales............................................        $ 5,209,000           4,101,000
Cost of sales........................................          3,808,000           2,974,000
                                                          ------------------  ------------------
Gross profit on sales................................        $ 1,401,000           1,127,000
                                                          ==================  ==================

Gross profit as a percentage of sales................              26.9%               27.5%
                                                          ==================  ==================
</TABLE>

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

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




                                       23
<PAGE>



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


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

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

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

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

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


                                       24
<PAGE>



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


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


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




                                       25
<PAGE>



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


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

 <TABLE>
<CAPTION>
                                                                          Payments Due by Period
                                                      -----------------------------------------------------------------
                                       Total              2006         2007          2008          2009         2010
                                  ---------------     -----------  -----------  -------------  -----------   ----------
<S>                                   <C>                <C>          <C>           <C>             <C>           <C>

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

  Total......................         $ 321,000          56,000       231,000       34,000          -             -
                                  ===============     ===========  ===========  =============  ===========   ==========
</TABLE>


<TABLE>
<CAPTION>
                                                                           Amount of Commitment
                                                                          Expiration Per Period
                               Total Amounts      ----------------------------------------------------------------------
                                 Committed            2006           2007          2008           2009         2010
                            -------------------   ------------   ------------  ------------   ------------ -------------
<S>                             <C>                       <C>        <C>               <C>          <C>           <C>
Other commercial
commitments:

  Letters of credit.....        $  200,000                -          200,000            -            -             -
                                   =======           =======         =======       =======      =======       =======
</TABLE>

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

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



                                       26
<PAGE>



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


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



                                       27
<PAGE>



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


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

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


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

(a)  Evaluation of Disclosure Controls and Procedures

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

(b)  Change in Internal Control Over Financial Reporting

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








                                    28
<PAGE>



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


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

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


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

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


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

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

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
                            Issuer Purchases of Equity Securities
-------------------------------------------------------------------------------------------------------
                                                       Total Number                      Approximate
                                         Average         of Shares      Approximate     Dollar Value
                                       Price Paid       Repurchased     Dollar Value      of Shares
                         Total          Per Share      as Part of a      of Shares      That May Yet
                         Number        (Including        Publicly        Purchased      Be Purchased
       Fiscal          of Shares        Brokerage        Announced       Under the        Under the
       Period         Repurchased     Commissions)        Program         Program          Program
-------------------------------------------------------------------------------------------------------
<S>                     <C>              <C>            <C>             <C>              <C>
7/1/06 - 7/31/06        139,200          $ 8.74         139,200         $ 1,216,397      $ 2,515,619
8/1/06 - 8/31/06         89,300          $ 8.18          89,300         $   730,877      $ 1,784,742
9/1/06 - 9/30/06              -          $    -               -         $         -      $ 1,784,742
                        --------------------------------------------------------------
                        228,500          $ 8.52         228,500         $ 1,947,274
-------------------------------------------------------------------------------------------------------
</TABLE>

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

                                       29
<PAGE>



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

     Not applicable.


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

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

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

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

     1. Election of Directors:

<TABLE>
<CAPTION>
         Name of Nominee               Votes For         Votes Withheld          Non-Voting
         ---------------               ---------         --------------          ----------
         <S>                            <C>                  <C>                  <C>
         L. Jack Bradt                  2,466,722            710,347              300,031
         Joel L. Hoffner                2,840,414            336,655              300,031
         Theodore W. Myers              2,859,389            317,680              300,031
         Anthony W. Schweiger           2,734,564            442,505              300,031
         Leonard S. Yurkovic            2,710,689            466,380              300,031
</TABLE>


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

     Not applicable.


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

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

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

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

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




                                       30
<PAGE>



                                   SIGNATURES
                                   ----------


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

                                PARAGON TECHNOLOGIES, INC.



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



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





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















                                       31
<PAGE>



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


Exhibits
--------

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

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

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

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










                                       32