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, 2007


                         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 6, 2007 was 2,769,192.


<PAGE>





                       [PARAGON TECHNOLOGIES, INC. LOGO]





                           Paragon Technologies, Inc.
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                               Page
                                                                                              Number
                                                                                             --------
<S>               <C>                                                                           <C>

PART I -- FINANCIAL INFORMATION

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

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

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

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



PART II -- OTHER INFORMATION

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

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

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

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

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

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

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



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



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



<PAGE>



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


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


<TABLE>
<CAPTION>
                                                               September 30,         December 31,
                                                                   2007                  2006
                                                            -------------------    ------------------
<S>                                                             <C>                       <C>
Assets
------

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

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

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

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

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

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

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


                 See accompanying notes to financial statements.



                                                                     (Continued)

                                       1
<PAGE>



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


<TABLE>
<CAPTION>
                                                               September 30,         December 31,
                                                                   2007                  2006
                                                            -------------------    ------------------
<S>                                                             <C>                       <C>

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

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

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

Commitments and contingencies

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

       Total liabilities and stockholders' equity..             $  18,180                 16,752
                                                            ===================    ==================
</TABLE>


                 See accompanying notes to financial statements.


                                       2
<PAGE>



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


<TABLE>
<CAPTION>
                                              Three Months Ended                      Nine Months Ended
                                      ------------------------------------    ---------------------------------
                                       September 30,      September 30,        September 30,     September 30,
                                           2007               2006                  2007             2006
                                      ---------------    ---------------      ---------------   ---------------
<S>                                     <C>                 <C>                  <C>               <C>
Net sales....................           $    7,298              5,209               16,924            14,252
Cost of sales................                5,559              3,808               12,780            10,056
                                      ---------------    ---------------      ---------------   ---------------
Gross profit on sales........                1,739              1,401                4,144             4,196
                                      ---------------    ---------------      ---------------   ---------------

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

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

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

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

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

                 See accompanying notes to financial statements.


                                       3
<PAGE>



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


<TABLE>
<CAPTION>
                                                                     Nine Months Ended
                                                          ----------------------------------------
                                                             September 30,        September 30,
                                                                 2007                 2006
                                                          -------------------  -------------------
<S>                                                           <C>                      <C>
Cash flows from operating activities:
   Net income..........................................       $     399                  411

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

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

                 See accompanying notes to financial statements.


                                                                     (Continued)

                                       4
<PAGE>



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


<TABLE>
<CAPTION>
                                                                     Nine Months Ended
                                                          ----------------------------------------
                                                             September 30,        September 30,
                                                                 2007                 2006
                                                          -------------------  -------------------
<S>                                                           <C>                      <C>

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

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

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

                 See accompanying notes to financial statements.


                                       5
<PAGE>



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


(1)  Basis of Financial Statement Presentation
     -----------------------------------------
     The accompanying unaudited financial statements have been prepared in
     accordance with the requirements for Form 10-Q and Article 10 of Regulation
     S-X and, accordingly, certain information and footnote disclosures have
     been condensed or omitted. In the opinion of the management of Paragon
     Technologies, Inc. ("Paragon" or the "Company"), the unaudited interim
     financial statements furnished reflect all adjustments and accruals that
     are necessary to present a fair statement of results for the interim
     periods. Certain prior year amounts have been reclassified to conform to
     the current year's presentation. Results for interim periods are not
     necessarily indicative of results expected for the full fiscal year.

     This quarterly report should be read in conjunction with, and is qualified
     in its entirety by reference to, the Consolidated Financial Statements of
     the Company and the related Notes thereto appearing in the Company's annual
     report on Form 10-K for the year ended December 31, 2006 as filed with the
     Securities and Exchange Commission on March 30, 2007. Refer to the
     Company's annual report on Form 10-K for the year ended December 31, 2006
     for more complete financial information.

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


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


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

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

<TABLE>
<CAPTION>
                             Beginning       Additions (Reductions)                            Ending
                              Balance              Charged to                                  Balance
                             January 1         Costs and Expenses          Deductions       September 30
                           --------------  ----------------------------  --------------  ------------------
<S>                           <C>                     <C>                     <C>                <C>
2007...................       $  192                  127                     (79)               240
2006...................       $  189                  135                     (43)               281
</TABLE>


                                       6
<PAGE>



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


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

     Company Overview
     ----------------
     Paragon, based out of Easton, Pennsylvania, provides a variety of material
     handling solutions, including systems, technologies, products, and services
     for material flow applications. The Company's capabilities include
     horizontal transportation, rapid dispensing, order fulfillment, computer
     software, sortation, integrating conveyors and conveyor systems, and
     aftermarket services. The Company is a Delaware corporation, originally
     incorporated in 1958.

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

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

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

     The Company continues to review opportunities with the goal of maximizing
     resources, increasing stockholder value, and considering strategies and
     transactions intended to provide liquidity. At this time, the Company
     believes that an increase in stockholder value will be best obtained
     through increases in the Company's internal technology base, strengthening
     the Company's sales and marketing capabilities, growth of the Company's
     continuing operations and other higher growth markets, by the enhancement
     of the Company's products with advanced proprietary software capabilities
     through research and development efforts and/or possible acquisitions,
     mergers, and joint ventures. Although the Company enters into preliminary
     discussions and non-disclosure agreements from time to time, the Company
     does not have any material definitive agreements in place. There is no
     assurance that the Company will be able to consummate any such acquisition.

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

                                       7

<PAGE>



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


(4) Business Operations (Continued)
    -----------------------------------
     The Company's systems vary in configuration and capacity. Historically,
     system prices across the Company's product lines have ranged from $100,000
     to several million dollars per system. Systems and aftermarket sales during
     the three and nine months ended September 30, 2007 and 2006 are as follows
     (in thousands):

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

<TABLE>
<CAPTION>
                                            September 30, 2007                 September 30, 2006
                                      ------------------------------     ------------------------------
                                                        % of Total                         % of Total
                                           Sales           Sales             Sales            Sales
                                      --------------   -------------     --------------  --------------
     <S>                                 <C>                <C>             <C>               <C>
     Systems sales.................      $  6,352            87.0%          $  4,414           84.7%
     Aftermarket sales.............           946            13.0%               795           15.3%
                                      --------------   -------------     --------------  --------------
        Total sales................      $  7,298           100.0%          $  5,209          100.0%
                                      ==============   =============     ==============  ==============
</TABLE>

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

<TABLE>
<CAPTION>
                                            September 30, 2007                 September 30, 2006
                                      ------------------------------     ------------------------------
                                                         % of Total                         % of Total
                                           Sales           Sales             Sales            Sales
                                      --------------   -------------     --------------  --------------
     <S>                                 <C>                <C>             <C>               <C>
     Systems sales.................      $ 14,275            84.3%          $ 11,845           83.1%
     Aftermarket sales.............         2,649            15.7%             2,407           16.9%
                                      --------------   -------------     --------------  --------------
        Total sales................      $ 16,924           100.0%          $ 14,252          100.0%
                                      ==============   =============     ==============  ==============
</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, 2007 and 2006 are as follows (in thousands):

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

<TABLE>
<CAPTION>
                                            September 30, 2007                 September 30, 2006
                                      ------------------------------     ------------------------------
                                                        % of Total                         % of Total
                                           Sales           Sales             Sales            Sales
                                      --------------   -------------     --------------  --------------
     <S>                                 <C>                <C>             <C>               <C>
     Domestic sales................      $  4,793            65.7%          $  4,787           91.9%
     International sales...........         2,505            34.3%               422            8.1%
                                      --------------   ------------      --------------  --------------
        Total sales................      $  7,298           100.0%          $  5,209          100.0%
                                      ==============   =============     ==============  ==============
</TABLE>
     For the nine months ended September 30, 2007 and 2006:

<TABLE>
<CAPTION>
                                            September 30, 2007                 September 30, 2006
                                      ------------------------------     ------------------------------
                                                        % of Total                         % of Total
                                           Sales           Sales             Sales            Sales
                                      --------------   -------------     --------------  --------------
     <S>                                 <C>                <C>             <C>               <C>
     Domestic sales................      $ 12,111            71.6%          $ 13,688           96.0%
     International sales...........         4,813            28.4%               564            4.0%
                                      --------------   -------------     --------------  --------------
        Total sales................      $ 16,924           100.0%          $ 14,252          100.0%
                                      ==============   =============     ==============  ==============
</TABLE>


                                        8
<PAGE>



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


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

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

<TABLE>
<CAPTION>
                                                September 30, 2007             September 30, 2006
                                         ------------------------------  ------------------------------
                                                            % of Total                     % of Total
                                              Sales           Sales           Sales           Sales
                                         --------------   -------------  --------------  --------------
     <S>                                    <C>                <C>          <C>               <C>
     LO-TOW(R)  sales..............         $  2,287            31.3%       $  1,968           37.8%
     CARTRAC(R) sales..............               64              .9%          1,012           19.4%
     DISPEN-SI-MATIC(TM),
        SINTHESIS(TM), and
        related order fulfillment
        sales......................            4,001            54.8%          1,434           27.5%
     Other sales...................               -             -                 -            -
     Aftermarket sales.............              946            13.0%            795           15.3%
                                         --------------   -------------  --------------  --------------
        Total sales................         $  7,298           100.0%       $  5,209          100.0%
                                         ==============   =============  ==============  ==============
</TABLE>

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

<TABLE>
<CAPTION>
                                                 September 30, 2007            September 30, 2006
                                         ------------------------------  ------------------------------
                                                            % of Total                     % of Total
                                              Sales           Sales           Sales           Sales
                                         --------------   -------------  --------------  --------------
     <S>                                    <C>                <C>          <C>               <C>
     LO-TOW(R)  sales..............         $  5,693            33.6%       $  4,539           31.8%
     CARTRAC(R) sales..............              119              .7%          1,924           13.5%
     DISPEN-SI-MATIC(TM),
        SINTHESIS(TM), and
        related order fulfillment
        sales......................            8,428            49.8%          5,382           37.8%
     Other sales...................               35              .2%              -            -
     Aftermarket sales.............            2,649            15.7%          2,407           16.9%
                                         --------------   -------------  --------------  --------------
        Total sales................         $ 16,924           100.0%       $ 14,252          100.0%
                                         ==============   =============  ==============  ==============
</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, 2007 and September 30,
     2006 were $7,172,000 and $4,879,000, respectively.

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


                                       9
<PAGE>



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


(5)  Recently Issued Accounting Pronouncements
     -----------------------------------------
     In June 2006, the Financial Accounting Standards Board issued
     Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income
     Taxes--an interpretation of FASB Statement No. 109, Accounting for Income
     Taxes, which clarifies the accounting for uncertainty in income taxes. FIN
     48 prescribes a recognition threshold and measurement attribute for the
     financial statement recognition and measurement of a tax position taken or
     expected to be taken in a tax return. The Interpretation requires that the
     Company recognize in the financial statements, the impact of a tax
     position, if that position is more likely than not of being sustained on
     audit, based on the technical merits of the position. FIN 48 also provides
     guidance on derecognition, classification, interest and penalties,
     accounting in interim periods and disclosure. The Company adopted the
     provisions of FIN 48 on January 1, 2007 as described in Note 11 of the
     Notes to Financial Statements.

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

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


(6)  Sale-Leaseback
     --------------
     The Company's principal office is located in a 173,000 square foot,
     concrete, brick, and steel facility in Easton, Pennsylvania. In connection
     with the February 2003 sale of the Company's Easton, Pennsylvania facility,
     the Company entered into a leaseback arrangement for 25,000 square feet of
     office space for five years. The leasing agreement requires fixed monthly
     rentals of $19,345 (with annual increases of 3%). The terms of the lease
     also require the payment of a proportionate share of the facility's
     operating expenses. The leasing agreement is secured with a $200,000 letter
     of credit. The lease expires on February 21, 2008.


                                       10
<PAGE>



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


(6) Sale-Leaseback (Continued)
    --------------
     In accordance with SFAS No. 13 and SFAS No. 28, the leaseback does not meet
     the criteria for classification as a capital lease; hence, it is classified
     as an operating lease. The sale-leaseback resulted in a total gain of
     $2,189,000, of which $1,363,000 was recorded as a gain in 2003. The
     seller-lessee (Company) retained more than a minor part (25,000 square
     feet) but less than substantially all of the use of the property (173,000
     square feet) through the leaseback and realized a profit on the sale in
     excess of the present value of the minimum lease payments over the lease
     term. The present value of the stream of lease payments utilizing the
     Company's incremental borrowing rate of 10.0% was $826,000. The $826,000 of
     deferred profit is amortized in equal amounts as a reduction in rent
     expense over the five-year term of the lease. The amortization of the
     deferred profit will expire during the first quarter of 2008. During the
     three months ended September 30, 2007 and 2006, $41,000 and $41,000,
     respectively, of the deferred gain was recognized. During the nine months
     ended September 30, 2007 and 2006, $124,000 and $124,000, respectively, of
     the deferred gain was recognized.


(7)  Line of Credit
     --------------
     The Company has a line of credit facility which may not exceed $5,000,000
     and is to be used primarily for working capital purposes. Interest on the
     line of credit facility is at the LIBOR Market Index Rate plus 1.4%. As of
     September 30, 2007, the Company did not have any borrowings under the line
     of credit facility; however, the leasing agreement associated with the
     Company's principal office is secured with a $200,000 letter of credit.
     Therefore, as of September 30, 2007, the amount of available line of credit
     was $4,800,000.

     The line of credit facility contains various non-financial covenants and is
     secured by all of the Company's accounts receivables and inventory. The
     Company was in compliance with all covenants as of September 30, 2007. The
     line of credit facility expires effective June 30, 2008.


(8)  Stock Repurchase Program
     ------------------------
     On August 12, 2004, the Company's Board of Directors approved a program to
     repurchase up to $1,000,000 of its outstanding common stock. The Company's
     Board of Directors amended its existing stock repurchase program on several
     occasions during 2005 and 2006 by increasing the amount it has authorized
     management to repurchase from up to $1,000,000 of the Company's common
     stock to up to $14,000,000.

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

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


                                       11
<PAGE>



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


(8) Stock Repurchase Program (Continued)
    ------------------------
     Based on market conditions and other factors, additional repurchases may be
     made from time to time, in compliance with SEC regulations, in the open
     market or through privately negotiated transactions at the discretion of
     the Company. There is no expiration date with regards to the stock
     repurchase program. The purchase price for the shares of the Company's
     common stock repurchased was reflected as a reduction to stockholders'
     equity. The Company allocates the purchase price of the repurchased shares
     as a reduction to common stock for the par value of the shares repurchased,
     with the excess of the purchase price over par value being allocated
     between additional paid-in capital and retained earnings. All shares of
     common stock that were repurchased by the Company since the inception of
     the program were subsequently retired.


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

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


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

     The Company adopted SFAS No. 123R using the modified prospective transition
     method. Under this transition method, compensation cost associated with
     employee stock options recognized after December 31, 2005 includes
     attribution of the fair value related to the remaining unvested portion of
     stock option awards granted prior to January 1, 2006, if any, and
     attribution related to new awards granted after January 1, 2006.

     The expense associated with stock-based compensation arrangements is a
     non-cash charge. In the Statements of Cash Flows, stock-based compensation
     expense is an adjustment to reconcile net income to net cash provided
     (used) by operating activities. SFAS No. 123R requires that certain cash
     flows resulting from tax deductions in excess of compensation cost
     recognized in the financial statements be classified as financing cash
     flows. For the nine months ended September 30, 2007 and for the year ended
     December 31, 2006, no excess tax benefits were generated.


                                       12
<PAGE>



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


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

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

     Under the Company's ECP, officers, directors, and key employees have been
     granted options to purchase shares of common stock at the market price at
     the date of grant. Options vest in four equal annual installments beginning
     on the first anniversary of the date of grant; thus, at the end of four
     years, the options are fully exercisable. Vested stock option awards may be
     exercised through payment of cash, exchange of mature shares, or through a
     broker. As of September 30, 2007, 7,500 options are outstanding under the
     plan, and all options have a term of seven years.

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

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

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


                                       13
<PAGE>



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


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

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

Exercisable at September 30, 2007........           1,875           $  10.01              5.4              $   4,875
</TABLE>

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

     The compensation expense charged against income during the three months
     ended September 30, 2007 and 2006 for stock options was $1,000 and $2,000,
     respectively. The compensation expense charged against income during the
     nine months ended September 30, 2007 and 2006 for stock options was $4,000
     and $10,000, respectively. The total compensation expense of $23,000 is
     expected to be recognized on the straight-line basis over the stated
     vesting period consistent with the terms of the arrangement. As of
     September 30, 2007, there is unrecognized compensation cost of $12,000 on
     the stock option awards which will be recognized over the next 2.4 years.

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

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

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

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


                                       14
<PAGE>



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


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

     A summary of nonvested stock activity is presented below:

<TABLE>
<CAPTION>
                                                                    Nonvested          Grant Date
                                                                     Shares            Fair Value
                                                                 --------------    ------------------
<S>                                                                  <C>               <C>
Nonvested at January 1, 2007..............................           12,500             $  10.01
   Granted................................................                -                 -
   Vested.................................................                -                 -
   Forfeited..............................................           (5,000)               10.01
                                                                 --------------      --------------
Nonvested at September 30, 2007...........................            7,500             $  10.01
                                                                 ==============      ==============
</TABLE>

     The compensation expense recognized during the three months ended September
     30, 2007 and 2006 for nonvested stock awards was $5,000 and $8,000,
     respectively. The compensation expense recognized during the nine months
     ended September 30, 2007 and 2006 for nonvested stock awards was $4,000 and
     $18,000, respectively. The total compensation cost of $75,000 is expected
     to be recognized on the straight-line basis over the four-year vesting
     period consistent with the terms of the arrangement. As of September 30,
     2007, there is unrecognized compensation cost of $45,000 on the nonvested
     stock awards which will be recognized over the next 2.4 years.


(11) Income Taxes
     ------------

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

     On January 1, 2007, the Company adopted the Financial Accounting Standards
     Board Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in
     Income Taxes - an interpretation of FASB Statement No. 109, Accounting for
     Income Taxes, which clarifies the accounting for uncertainty in income
     taxes. FIN 48 prescribes a recognition threshold and measurement attribute
     for the financial statement recognition and measurement of a tax position
     taken or expected to be taken in a tax return. The Interpretation requires
     that the Company recognize in the financial statements, the impact of a tax
     position, if that position is more likely than not of being sustained on
     audit, based on the technical merits of the position. FIN 48 also provides
     guidance on derecognition, classification, interest and penalties,
     accounting in interim periods and disclosure.

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

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


                                       15
<PAGE>



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


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

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

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

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

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

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

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


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

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

                                       16
<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
financial statements and related notes thereto included in this Quarterly Report
on Form 10-Q for the period ended September 30, 2007, and the cautionary
statements and consolidated financial statements and related notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2006. The discussion and analysis contains "forward-looking statements"
based on management's current expectations, assumptions, estimates, and
projections. These forward-looking statements involve risks and uncertainties.
The Company's actual results could differ materially from those included in
these "forward-looking statements" as a result of risks and uncertainties
identified in connection with those forward-looking statements, including those
factors identified herein, and in the Company's other publicly filed reports.

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


Business Overview
-----------------
     Paragon Technologies, Inc. provides a variety of material handling
solutions, including systems, technologies, products, and services for material
flow applications. Founded in 1958, the Company's material handling solutions
are based on core technologies in horizontal transportation and order
fulfillment and are aimed at improving productivity for manufacturing, assembly,
and distribution center operations.

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


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

     Capacity Utilization
     --------------------
     Capacity Utilization, as documented in the Federal Reserve Statistical
Release(1), is a key economic indicator that the Company follows as a barometer
that may lead to capital spending for material handling systems. Capacity
Utilization attempts to measure what percent of available capacity is actually
being utilized. Management believes that when Capacity Utilization rises and
falls, the Company may see a corresponding change in the rate of new orders, and
therefore, a corresponding change in backlog and sales may also occur. The
backlog of orders represents the uncompleted portion of systems contracts along
with the value of parts and services from customer purchase orders related to
goods that have not been shipped or services that have not been rendered.
Backlog is generally indicative of customer demand for the Company's products.
As the demand for the Company's products increases, the backlog of orders, the
rate of new orders, and sales also typically increases. The following table
depicts the Company's backlog, orders, sales, and Capacity Utilization for the
nine months ended September 30, 2007, and for the years ended December 31, 2006,
2005, 2004, 2003, and 2002:


<TABLE>
<CAPTION>
                                               Nine Months
                                                  Ended                    Year Ended December 31,
                                              September 30,    -----------------------------------------------
(Dollars in Thousands)                            2007            2006     2005     2004      2003     2002
                                            ------------------ -----------------------------------------------
<S>                                              <C>              <C>      <C>      <C>       <C>      <C>
Backlog of orders - Beginning............        $  5,932          6,918    5,514    4,052     4,834    7,666
   Add: orders...........................          18,164         16,802   18,080   13,164    11,301   12,074
   Less: sales...........................          16,924         17,788   16,676   11,702    12,083   14,906
                                            ------------------ -----------------------------------------------
Backlog of orders - Ending...............        $  7,172          5,932    6,918    5,514     4,052    4,834
                                            ================== ===============================================

Capacity Utilization (1).................           81.7%          81.7%    80.2%    78.1%     76.1%    74.8%
</TABLE>


                                       17
<PAGE>



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


     Current Ratio
     -------------
     Management of the Company monitors the current ratio as a measure of
determining liquidity and believes the current ratio illustrates that the
Company's financial resources are adequate to satisfy its future cash
requirements through the next year. The following table depicts the Company's
current assets, current liabilities, and current ratio as of September 30, 2007
and as of December 31, 2006, 2005, 2004, 2003, and 2002:


<TABLE>
<CAPTION>
                                                                                As of December 31,
                                     As of September 30,   ---------------------------------------------------------------
(Dollars in Thousands)                      2007              2006         2005          2004         2003         2002
                                 ------------------------  ----------   ----------   -----------   ----------   ----------
<S>                                    <C>                    <C>          <C>          <C>           <C>          <C>
Current assets...............          $  17,796              16,370       22,134       14,249        14,720       15,444
                                 ------------------------  ----------   ----------   -----------   ----------   ----------
Current liabilities..........          $   5,618               4,296        5,337        7,355         9,583        9,416

Current ratio................               3.17                3.81         4.15         1.94          1.54         1.64
</TABLE>

     Debt to Equity Ratio
     --------------------
     With an emphasis on generating cash flows to eliminate the Company's senior
and subordinated debt, the Company eliminated its financial leverage in 2003 as
evidenced by its debt to equity ratio, which is the ratio of total debt to
stockholders' equity. Management believes the absence of debt provides greater
protection for its stockholders and enhances the Company's ability to obtain
additional financing, if required. The following table illustrates the
calculation of the debt to equity ratio as of September 30, 2007 and as of
December 31, 2006, 2005, 2004, 2003, and 2002 and also includes the number of
shares outstanding at the end of each fiscal period:

<TABLE>
                                                                              As of December 31,
                                    As of September 30,    ---------------------------------------------------------------
(Dollars in Thousands)                     2007               2006         2005          2004         2003         2002
                                 ------------------------  ----------   ----------   -----------   ----------   ----------
<S>                                    <C>                    <C>          <C>          <C>           <C>          <C>
Current installments of
  long-term debt.............          $       -                   -            -            -             -        1,437
Long-term debt...............                  -                   -            -            -             -        7,263
                                 ------------------------  ----------   ----------   -----------   ----------   ----------
Total debt...................                  -                   -            -            -             -        8,700
                                 ------------------------  ----------   ----------   -----------   ----------   ----------
Total stockholders'
  equity (1).................          $  12,305              12,428       17,066       23,308        22,061       17,885
                                 ========================  ==========   ==========   ===========   ==========   ==========

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

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

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

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

     During the year ended December 31, 2005, the Company repurchased 824,100
     shares of common stock at a weighted average cost, including brokerage
     commissions, of $9.81 per share. Cash expenditures for the stock
     repurchases during the year ended December 31, 2005 were $8,080,882.


                                       18
<PAGE>



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


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

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

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

Critical Accounting Policies and Estimates
------------------------------------------
     The discussion and analysis of the Company's financial condition and
results of operations are based upon the Company's financial statements, which
have been prepared in accordance with U.S. generally accepted accounting
principles. The preparation of these financial statements requires the Company
to make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and other financial information, including
the related disclosure of commitments and contingencies at the date of the
Company's financial statements. Actual results may, under different assumptions
and conditions, differ significantly from the Company's estimates.

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

     Revenue Recognition on Systems Sales
     ------------------------------------
     Revenues on systems contracts, accounted for in accordance with SOP 81-1 of
the American Institute of Certified Public Accountants, are recorded on the
basis of the Company's estimates of the percentage of completion of individual
contracts. Gross margin is recognized on the basis of the ratio of aggregate
costs incurred to date to the most recent estimate of total costs. As contracts
may extend over one or more years, revisions in cost and profit estimates during
the course of the work are reflected in the accounting periods in which the
facts requiring revisions become known. At the time a loss on a contract becomes
known, the entire amount of the estimated ultimate loss is accrued. As of
September 30, 2007, there are no contracts that are anticipated to result in a
loss.

     The Company believes that it has the ability to reasonably estimate the
total costs and applicable gross profit margins at the inception of the contract
for all of its systems contracts. However, where cost estimates change, there
could be a significant impact on the amount of revenue recognized. The Company's
failure to estimate accurately can result in cost overruns which will result in
the loss of profits if the Company determines that it has significantly
underestimated the costs involved in completing contracts. The Company has not
had any significant cost overruns resulting in loss of profits during the nine
months ended September 30, 2007.

     Accrued Product Warranty
     ------------------------
     The Company's products are warranted against defects in materials and
workmanship for varying periods of time depending on customer requirements and
the type of system sold, with a typical warranty period of one year. The Company
provides an accrual for estimated future warranty costs and potential product
liability claims based upon a percentage of cost of sales, typically two percent
of the cost of the system being sold, and a detailed review of products still in
the warranty period. Historically, the level of warranty reserve has been
appropriate based on management's assessment of estimated future warranty
claims. However, if unanticipated warranty issues arise in the future, there
could be a significant impact on the recorded warranty reserve. The warranty
reserve as of September 30, 2007 was $240,000.


                                       19
<PAGE>



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


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

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


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

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

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

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

<TABLE>
<CAPTION>
                                                                   2007               2006
                                                            -----------------  ------------------
<S>                                                             <C>                 <C>
Net sales..............................................         $ 16,924,000         14,252,000
Cost of sales..........................................           12,780,000         10,056,000
                                                            -----------------  ------------------
Gross profit on sales..................................         $  4,144,000          4,196,000
                                                            =================  ==================

Gross profit as a percentage of sales..................                24.5%              29.4%
                                                            =================  ==================
</TABLE>

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

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


                                       20
<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, 2007 Compared to the
    ----------------------------------------------------------------------------
    Nine Months Ended September 30, 2006 (Continued)
    ------------------------------------

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

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

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

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

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

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



                                       21
<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, 2007 Compared to
    -------------------------------------------------------------------------
    the Three Months Ended September 30, 2006
    -----------------------------------------

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

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


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

<TABLE>
<CAPTION>
                                                                   2007               2006
                                                            -----------------  ------------------
<S>                                                            <C>                  <C>
Net sales..............................................        $ 7,298,000          5,209,000
Cost of sales..........................................          5,559,000          3,808,000
                                                            -----------------  ------------------
Gross profit on sales..................................        $ 1,739,000          1,401,000
                                                            =================  ==================

Gross profit as a percentage of sales..................              23.8%              26.9%
                                                            =================  ==================
</TABLE>

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

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

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


                                       22
<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, 2007 Compared to
    -------------------------------------------------------------------------
    the Three Months Ended September 30, 2006 (Continued)
    -----------------------------------------

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

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

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

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

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

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

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

     The Company's cash and cash equivalents and short-term investments at
September 30, 2006 were $12,684,000, representing 71.4% of total assets, down
from $17,397,000, or 77.0% of total assets, at December 31, 2005. The decrease
was primarily due to the repurchase and retirement of common stock of
$3,809,000, and cash used by operating activities totaling $777,000.


                                       23
<PAGE>



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


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

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

     Cash used by operating activities totaling $777,000 during the nine months
ended September 30, 2006 was primarily due to the following factors:
     o  a decrease in customers' deposits and billings in excess of costs
        and estimated earnings in the amount of $984,000 in accordance with
        contractual requirements; and
     o  an increase in costs and estimated earnings in excess of billings in
        the amount of $149,000 in accordance with contractual requirements.
     Partially offset by a decrease in receivables in the amount of $305,000
primarily associated with the collection of an income tax refund.

     The Company has a line of credit facility which may not exceed $5,000,000
and is to be used primarily for working capital purposes. Interest on the line
of credit facility is at the LIBOR Market Index Rate plus 1.4%. As of September
30, 2007, the Company did not have any borrowings under the line of credit
facility; however, the leasing agreement associated with the Company's principal
office is secured with a $200,000 letter of credit. Therefore, as of September
30, 2007, the amount of available line of credit was $4,800,000.

     The line of credit facility contains various non-financial covenants and is
secured by all of the Company's accounts receivables and inventory. The Company
was in compliance with all covenants as of September 30, 2007. The line of
credit facility expires effective June 30, 2008.

     The Company anticipates that its financial resources, consisting of cash
and cash equivalents and short-term investments, and its line of credit, will be
adequate to satisfy its future cash requirements through the next year. Sales
volume, as well as cash liquidity, may experience fluctuations due to the
unpredictability of future contract sales and the dependence upon a limited
number of large contracts with a limited number of customers.

     The Company is currently exploring various business strategies designed to
enhance the value of the Company's assets for its stockholders. The Company is
continuing to evaluate and actively explore a range of possible options,
including transactions intended to provide liquidity and maximize stockholder
value, and consideration of the acquisition of complementary assets and/or
businesses. The Company may not be able to effect any of these strategic
options.



                                       24
<PAGE>



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


Contractual Obligations
-----------------------
     The Company leases 25,000 square feet in Easton, Pennsylvania for use as
its principal office. The leasing agreement requires fixed monthly rentals of
$19,345 (with annual increases of 3%). The terms of the lease also require the
payment of a proportionate share of the facility's operating expenses. The
leasing agreement is secured with a $200,000 letter of credit. The lease expires
on February 21, 2008.

     Future contractual obligations and commercial commitments at September 30,
2007 as noted above are as follows:

<TABLE>
<CAPTION>
                                                                              Payments Due by Period
                                                 ----------------------------------------------------------------------------------
                                  Total              2007            2008          2009         2010        2011       After 2011
                           -------------------   -------------   ------------  ------------ ----------- ------------  -------------
<S>                             <C>                  <C>             <C>           <C>        <C>               <C>           <C>
Contractual
obligations:
  Operating leases......        $   97,000           58,000          39,000             -           -           -             -
  Unrecognized
     tax benefits.......           257,000                -          31,000        68,000     158,000           -             -
                           -------------------   --------------   ------------  ------------ ----------- ------------  ------------

  Total.................        $  354,000           58,000          70,000        68,000     158,000           -             -
                           ===================   ==============   ============  ============ =========== ============  ============
</TABLE>

<TABLE>
<CAPTION>
                                                                               Amount of Commitment
                                                                              Expiration Per Period
                               Total Amounts     ----------------------------------------------------------------------------------
                                 Committed           2007            2008          2009         2010        2011       After 2011
                           -------------------   -------------   ------------  ------------ ----------- ------------  -------------
<S>                             <C>                       <C>       <C>                 <C>         <C>         <C>           <C>
Other commercial
commitments:
  Letters of credit.....        $  200,000                -         200,000             -           -           -             -
                           ===================   ==============   ============  ============ =========== ============  ============
</TABLE>

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

Off-Balance Sheet Arrangements
------------------------------
     As of September 30, 2007 the Company had no off-balance sheet arrangements
in the nature of guarantee contracts, retained or contingent interests in assets
transferred to unconsolidated entities (or similar arrangements serving as
credit, liquidity, or market risk support to unconsolidated entities for any
such assets), obligations (including contingent obligations) under a contract
that would be accounted for as a derivative instrument, or obligations
(including contingent obligations) arising out of variable interests in
unconsolidated entities providing financing, liquidity, market risk, or credit
risk support to the Company, or that engage in leasing, hedging, or research and
development services with the Company.

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


                                       25
<PAGE>



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


Recently Issued Accounting Pronouncements
-----------------------------------------
     In June 2006, the Financial Accounting Standards Board issued
Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes --
an interpretation of FASB Statement No. 109, Accounting for Income Taxes, which
clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The Interpretation requires that the Company recognize in the
financial statements, the impact of a tax position, if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods and disclosure. The
Company adopted the provisions of FIN 48 on January 1, 2007 as described in Note
11 of the Notes to Financial Statements.

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

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

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











                                       26
<PAGE>



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


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


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

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


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

(a)  Evaluation of Disclosure Controls and Procedures

     An evaluation was performed under the supervision and with the
     participation of the Company's management, including its Chief Executive
     Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness
     of the Company's disclosure controls and procedures, as such term is
     defined under Rule 13a-15(e) promulgated under the Securities Exchange Act
     of 1934, as amended (the "Exchange Act") as of September 30, 2007. Based on
     that evaluation, the Company's management, including the CEO and CFO,
     concluded that the Company's disclosure controls and procedures are
     effective to ensure that information required to be disclosed by the
     Company in reports that it files or submits under the Exchange Act, is
     accumulated and communicated to the Company's management, including the
     Company's CEO and CFO, to allow timely decisions regarding required
     disclosure, and is recorded, processed, summarized and reported as
     specified in Securities and Exchange Commission rules and forms.

(b)  Change in Internal Control Over Financial Reporting

     There were no changes in the Company's internal control over financial
     reporting identified in connection with the evaluation of such controls
     that occurred during the Company's fiscal quarter ended September 30, 2007
     that has materially affected, or is reasonably likely to materially affect
     the Company's internal control over financial reporting.



                                       27
<PAGE>



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


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

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


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

     Item 1A, "Risk Factors," of our 2006 Form 10-K includes a detailed
discussion of our risk factors. There have been no material changes in our Risk
Factors from those disclosed in our annual report on Form 10-K for the year
ended December 31, 2006.


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

     The following table represents the periodic repurchases of equity
securities made by the Company during the three months ended September 30, 2007:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                       Issuer Purchases of Equity Securities
--------------------------------------------------------------------------------------------------------------------
                                          Average           Total Number       Approximate         Approximate
                                         Price Paid          of Shares         Dollar Value       Dollar Value
                          Total          Per Share          Repurchased         of Shares           of Shares
                          Number         (Including         as Part of a        Purchased         That May Yet
       Fiscal           of Shares        Brokerage       Publicly Announced     Under the         Be Purchased
       Period          Repurchased      Commissions)          Program            Program        Under the Program
--------------------------------------------------------------------------------------------------------------------
<S>                             <C>        <C>                   <C>              <C>               <C>
7/01/07 - 7/31/07               -          $    -                -                $  -              $ 883,857
8/01/07 - 8/31/07               -          $    -                -                $  -              $ 883,857
9/01/07 - 9/30/07               -          $    -                -                $  -              $ 883,857
                       ---------------------------------------------------------------------
                                -          $    -                -                $  -
--------------------------------------------------------------------------------------------------------------------
</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.

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

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


                                       28
<PAGE>



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


     Based on market conditions and other factors, additional repurchases may be
made from time to time, in compliance with SEC regulations, in the open market
or through privately negotiated transactions at the discretion of the Company.
There is no expiration date with regards to the stock repurchase program. The
purchase price for the shares of the Company's common stock repurchased was
reflected as a reduction to stockholders' equity. The Company allocates the
purchase price of the repurchased shares as a reduction to common stock for the
par value of the shares repurchased, with the excess of the purchase price over
par value being allocated between additional paid-in capital and retained
earnings. All shares of common stock that were repurchased by the Company since
the inception of the program were subsequently retired.


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

     Not applicable.


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

     The Company's Annual Meeting of Stockholders was held on August 1, 2007
with the following items being submitted to a vote of stockholders:

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

     Details of the proposals noted above were provided to stockholders in the
form of a Notice of Annual Meeting and Proxy Statement dated and mailed on June
26, 2007, with such solicitation being in accordance with Section 14 of the
Securities and Exchange Act of 1934, as amended, and the regulations promulgated
thereunder.

     There was no solicitation in opposition to the management's nominees listed
in the Proxy Statement, and all the management's nominees were elected.

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

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

     1. Election of Directors:

<TABLE>
<CAPTION>
        Name of Nominee               Votes For         Votes Withheld          Non-Voting
         ---------------              ---------         --------------          ----------
        <S>                           <C>                  <C>                   <C>
        Robert J. Blyskal             2,504,588             73,471               191,133
        Theodore W. Myers             2,449,088            128,971               191,133
        Anthony W. Schweiger          2,147,908            430,151               191,133
        Samuel L. Torrence            2,449,088            128,971               191,133
        Leonard S. Yurkovic           2,504,288             73,771               191,133
</TABLE>

     2. Approval of the proposed 2007 Equity Incentive Plan:
<TABLE>
<CAPTION>
             Votes For           Votes Against             Abstentions           Non-Voting
             ---------           -------------             -----------           ----------
              <S>                   <C>                       <C>                 <C>
              596,860               791,537                   2,010               1,378,785
</TABLE>



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

     Not applicable.


                                       29
<PAGE>



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

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

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

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

         32.1         Certification  pursuant to 18 U.S.C.  Section 1350, as
                      adopted pursuant to Section 906 of the  Sarbanes-Oxley Act
                      of 2002 signed by Leonard S. Yurkovic, Acting CEO (filed
                      herewith).

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
















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



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





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























                                       31
<PAGE>



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


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

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

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

       32.1           Certification pursuant to 18 U.S.C. Section 1350, as
                         adopted pursuant to Section 906 of the Sarbanes-Oxley
                         Act of 2002 signed by Leonard S. Yurkovic, Acting CEO
                         (filed herewith).

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

















                                       32