UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549



                                    FORM 10-Q



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


                  For The Quarterly Period Ended March 31, 2004


                           Commission File No. 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, PA                              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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).                   Yes |_|    No |X|

Number of shares of common stock, par value $1.00 per share, outstanding as of
May 7, 2004:  4,277,595.
              ---------


<PAGE>

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


Item 1.    Financial Statements
-------    --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
March 31, 2004 and December 31, 2003
     (In Thousands, Except Share Data)


<TABLE>
<CAPTION>
                                                               (UNAUDITED)
                                                                 March 31,            December 31,
                                                                   2004                  2003
                                                            -------------------    ------------------
<S>                                                              <C>                    <C>
Assets
------

Current assets:
   Cash and cash equivalents......................               $  5,371                5,591

   Receivables:
     Trade (net of allowance for doubtful
       accounts of $230 as of March 31,
       2004 and $265 as of December
       31, 2003)...................................                 4,753                5,277
     Notes and other receivables...................                   183                   38
                                                                   ------               ------
       Total receivables...........................                 4,936                5,315
                                                                   ------               ------

   Costs and estimated earnings in excess
     of billings...................................                   436                  521

   Inventories:
     Raw materials.................................                 1,066                  926
     Work-in-process...............................                   229                  106
     Finished goods................................                   194                  159
                                                                   ------               ------
       Total inventories...........................                 1,489                1,191
                                                                   ------               ------

   Deferred income tax benefits....................                   928                1,444
   Prepaid expenses and other current assets.......                   616                  629
                                                                   ------               ------
       Total current assets........................                13,776               14,691
                                                                   ------               ------

Property, plant and equipment, at cost:
   Leasehold improvements..........................                   228                  228
   Machinery and equipment.........................                 3,709                3,643
                                                                   ------               ------
                                                                    3,937                3,871
   Less:  accumulated depreciation.................                 2,565                2,455
                                                                   ------               ------
     Net property, plant and equipment.............                 1,372                1,416
                                                                   ------               ------

Goodwill...........................................                17,657               17,657
Other assets.......................................                    10                   10
                                                                   ------               ------
Total assets.......................................              $ 32,815               33,774
                                                                   ======               ======
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       2
<PAGE>

Item 1.    Financial Statements (Continued)
-------    --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
March 31, 2004 and December 31, 2003
     (In Thousands, Except Share Data)


<TABLE>
<CAPTION>
                                                               (UNAUDITED)
                                                                 March 31,            December 31,
                                                                   2004                   2003
                                                            -------------------    ------------------
<S>                                                              <C>                    <C>
Liabilities and Stockholders' Equity
------------------------------------

Current liabilities:
   Accounts payable................................              $  4,088                2,671
   Customers' deposits and billings
     in excess of costs and
     estimated earnings ...........................                 1,301                2,180
   Accrued salaries, wages, and
     commissions...................................                   513                  304
   Income taxes payable............................                    31                  894
   Accrued product warranty........................                   857                  925
   Deferred gain on sale-leaseback.................                   165                  165
   Accrued other liabilities.......................                 1,301                2,507
                                                                   ------               ------
       Total current liabilities...................                 8,256                9,646
                                                                   ------               ------

Long-term liabilities:
   Deferred gain on sale-leaseback.................                   482                  523
   Deferred income taxes payable...................                 1,721                1,594
   Deferred compensation...........................                    46                   42
                                                                   ------               ------
     Total long-term liabilities...................                 2,249                2,159
                                                                   ------               ------

Commitments and contingencies

   Stockholders' equity:
     Common stock, $1 par value; authorized
       20,000,000 shares; issued and
       outstanding 4,277,595 shares as
       of March 31, 2004 and 4,277,595
       shares as of December 31, 2003..............                 4,278                4,278
     Additional paid-in capital....................                 7,586                7,586
     Retained earnings.............................                10,446               10,105
                                                                   ------               ------
       Total stockholders' equity..................                22,310               21,969
                                                                   ------               ------

       Total liabilities and stockholders' equity..              $ 32,815               33,774
                                                                   ======               ======
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       3
<PAGE>

Item 1.    Financial Statements (Continued)
-------    --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended March 31, 2004 and 2003
     (In Thousands, Except Share And Per Share Data)


<TABLE>
<CAPTION>
                                                                       Three Months Ended
                                                               ------------------------------------
                                                                   March 31,           March 31,
                                                                     2004                2003
                                                               ----------------    ----------------
<S>                                                                <C>                <C>
Net sales...................................................       $   10,576             8,564
Cost of sales...............................................            7,946             6,360
                                                                    ---------         ---------
Gross profit on sales.......................................            2,630             2,204
                                                                    ---------         ---------

Selling, general and
   administrative
   expenses.................................................            2,043             1,997
Product development
   costs....................................................               72               163
Restructuring
   charges (credits)........................................                -              (170)
Interest expense............................................                -               218
Interest income.............................................              (11)              (24)
Equity in income of
   joint venture............................................                -              (162)
Gain on disposition
   of property, plant
   and equipment............................................                -            (1,363)
Other income, net...........................................              (46)             (133)
                                                                    ---------         ---------
                                                                        2,058               526
                                                                    ---------         ---------

Earnings before
   income taxes.............................................              572             1,678
Income tax expense..........................................              231               667
                                                                    ---------         ---------
Net earnings................................................       $      341             1,011
                                                                    =========         =========

Basic earnings
   per share................................................       $      .08               .24
                                                                    =========         =========

Diluted earnings
   per share................................................       $      .08               .23
                                                                    =========         =========

Weighted average
   shares outstanding.......................................        4,277,595         4,256,098
Dilutive effect of
   stock options............................................           89,738            62,067
                                                                    ---------         ---------
Weighted average
   shares outstanding
   assuming dilution........................................        4,367,333         4,318,165
                                                                    =========         =========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       4
<PAGE>

Item 1.    Financial Statements (Continued)
-------    --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income (Unaudited)
For the Three Months Ended March 31, 2004 and 2003
     (In Thousands)


<TABLE>
<CAPTION>
                                                                       Three Months Ended
                                                               ------------------------------------
                                                                   March 31,           March 31,
                                                                     2004                2003
                                                               ----------------    ----------------
<S>                                                                <C>                <C>
Net earnings................................................       $      341             1,011

Other comprehensive loss, net of tax:
      Interest rate swap:
        Change in fair value
           of derivative, net
           of tax...........................................                -                (8)
                                                                    ---------         ---------
              Total other
                 comprehensive
                 loss.......................................               -                 (8)
                                                                    ---------         ---------

              Comprehensive
                 income.....................................       $      341             1,003
                                                                    =========         =========
</TABLE>




          See accompanying notes to consolidated financial statements.

                                       5
<PAGE>

Item 1.    Financial Statements (Continued)
-------    --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2004 and 2003
     (In Thousands, Except Share Data)


<TABLE>
<CAPTION>
                                                                    Three Months Ended
                                                          ----------------------------------------
                                                               March 31,            March 31,
                                                                 2004                 2003
                                                          -------------------   ------------------
<S>                                                           <C>                    <C>
Cash flows from operating activities:
   Net earnings .......................................        $    341                1,011
   Adjustments to reconcile net earnings
     to net cash provided (used) by operating
     activities:
       Depreciation of plant and equipment.............             110                  147
       Amortization of intangibles.....................               -                   17
       Gain on disposition of property,
         plant and equipment...........................               -               (1,363)
       Amortization of deferred gain on sale-
         leaseback.....................................             (41)                 (16)
       Equity in income of joint venture...............               -                 (162)
       Issuance of common shares as interest
         payment on subordinated notes.................               -                   90
       Change in operating assets and liabilities:
           Receivables.................................             379                2,055
           Costs and estimated earnings in
              excess of billings.......................              85                  (69)
           Inventories.................................            (298)                (318)
           Deferred tax expenses.......................             643                  378
           Prepaid expenses and other
              current assets...........................              13                   30
           Accounts payable............................           1,417                  384
           Customers' deposits and billings
              in excess of costs and estimated
              earnings.................................            (879)                (125)
           Accrued salaries, wages, and
              commissions..............................             209                 (129)
           Income taxes payable........................            (863)                 480
           Accrued product warranty....................             (68)                   7
           Accrued other liabilities...................          (1,206)                (418)
           Deferred compensation.......................               4                    4
                                                                 ------               ------
   Net cash provided (used) by
     operating activities..............................            (154)               2,003
                                                                 ------               ------

Cash flows from investing activities:
   Proceeds from the disposition of
     property, plant and equipment ....................               -                2,734
   Additions to property, plant and equipment..........             (66)                (122)
                                                                 ------               ------
   Net cash provided (used) by
     investing activities..............................             (66)               2,612
                                                                 ------               ------
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       6
<PAGE>

Item 1.    Financial Statements (Continued)
-------    --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited) (Continued)
For the Three Months Ended March 31, 2004 and 2003
     (In Thousands, Except Share Data)


<TABLE>
<CAPTION>
                                                                    Three Months Ended
                                                          ----------------------------------------
                                                               March 31,            March 31,
                                                                 2004                 2003
                                                          -------------------   ------------------
<S>                                                           <C>                    <C>
Cash flows from financing activities:
   Increase in restricted cash........................                -                (104)
   Repayment of long-term debt........................                -              (1,675)
                                                                 ------              ------
       Net cash provided (used) by
         financing activities.........................                -              (1,779)
                                                                 ------              ------

   Increase (decrease) in cash and
     cash equivalents.................................             (220)              2,836
   Cash and cash equivalents,
     beginning of period..............................            5,591               5,385
                                                                 ------              ------
   Cash and cash equivalents,
     end of period....................................        $   5,371               8,221
                                                                 ======              ======

   Supplemental disclosures of cash flow information:
     Cash paid (received) during the period for:
         Interest.....................................        $       -                 114
                                                                 ------              ------
         Income taxes.................................        $     594              (1,061)
                                                                 ======              ======
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       7
<PAGE>

Item 1.    Financial Statements (Continued)
-------    --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
For the Three Months Ended March 31, 2004 and 2003


(1)  In the opinion of the management of Paragon Technologies, Inc. ("Paragon"
     or the "Company"), the unaudited interim financial statements furnished
     reflect all adjustments and accruals that are necessary to present a fair
     statement of results for the interim periods. The financial statements
     include the accounts of the Company and Ermanco Incorporated ("Ermanco"), a
     wholly owned subsidiary company, after elimination of intercompany balances
     and transactions. Results for interim periods are not necessarily
     indicative of results expected for the full fiscal year. This quarterly
     report should be read in conjunction with, and is qualified in its entirety
     by reference to, the Consolidated Financial Statements of the Company and
     the related Notes thereto appearing in our annual report on Form 10-K for
     the year ended December 31, 2003 as filed with the Securities and Exchange
     Commission. Refer to the Company's Form 10-K for the year ended December
     31, 2003 for more complete financial information.


(2)  Restructuring
     -------------
     In June 2001, the Company restructured its business operations, including
     curtailment of a defined benefit plan, and recorded a charge of $1,538,000
     for restructuring costs. In December 2002, the Company partially settled
     its obligations by making lump-sum distributions to those participants who
     elected that payment option and correspondingly recorded a restructuring
     credit of $859,000 during 2002. In February 2003, the Company settled its
     remaining obligations by purchasing annuities for those participants who
     elected that payment option and correspondingly recorded a restructuring
     credit of $170,000 during 2003.

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

<TABLE>
<CAPTION>
                       Beginning                                                       Ending
                        Balance      Charge/        Cash                               Balance
                       January 1     (Credit)     Spending     Reclassification       March 31
                      ------------ ------------- ------------ ------------------- ------------------
     <S>                 <C>           <C>          <C>             <C>                  <C>
     2004............    $   68           -           2               -                   66
     2003............    $  216        (170)        (28)            170                  188
</TABLE>

     The $66,000 restructuring accrual at March 31, 2004 relates to professional
     fees for the 2001 restructuring that are still expected to be paid and is
     included in accrued other liabilities.

     The amount reclassified out of the restructuring accrual was previously
     included in accrued pension and retirement savings plan liabilities.


(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, ranging from one to two percent depending on the type of system
     sold, and a detailed review of products still in the warranty period.


                                       8
<PAGE>

Item 1.    Financial Statements (Continued)
-------    --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
For the Three Months Ended March 31, 2004 and 2003


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

<TABLE>
<CAPTION>
                          Beginning                                                 Ending
                           Balance                                                 Balance
                          January 1        Additions          Deductions           March 31
                         ------------- ------------------  -----------------  -------------------
  <S>                       <C>                <C>                <C>                 <C>
  2004..................    $ 925              12                 (80)                857
  2003..................    $ 894              74                 (67)                901
</TABLE>


(4)  Major Segments of Business
     --------------------------
     Operating segments are defined as components of an enterprise in which
     separate financial information is available and evaluated regularly by the
     chief operating decision maker in deciding how to allocate resources and in
     assessing performance. The Company identified such segments based on both
     management responsibility and types of products offered for sale. The
     Company operates in two major market segments.

     SI Systems
     ----------
     The Company's Easton, Pennsylvania operation (hereafter referred to as "SI
     Systems") is a specialized systems integrator supplying branded automated
     material handling systems to manufacturing, assembly, order selection, and
     distribution operations customers located primarily in North America,
     including the U.S. government. The 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. Integrated material handling solutions involve both
     standard and specially designed components and include integration of
     non-proprietary automated handling technologies so as to provide turnkey
     solutions for its customers' unique material handling needs. The
     engineering staff develops and designs computer control programs required
     for the efficient operation of the systems and for optimizing
     manufacturing, assembly, and fulfillment operations.

     Ermanco
     -------
     The Company's Spring Lake, Michigan operation (hereafter referred to as
     "Ermanco") is a manufacturer of Ermanco branded light to medium duty unit
     handling conveyor products, serving the material handling industry through
     a worldwide network of approximately 100 experienced material handling
     equipment distributors and licensees. Ermanco also provides complete
     conveyor systems for a variety of applications, including distribution and
     manufacture of computers and electronic products, utilizing primarily its
     own manufactured conveyor products, engineering services by its own staff
     or subcontractors, and subcontracted installation services. Ermanco
     supplies material handling systems and equipment to both national and
     international markets. Ermanco offers services ranging from the delivery of
     basic transportation conveyors to turnkey installations of complex, fully
     automated work-in-process production lines and distribution centers,
     utilizing sophisticated, custom-designed controls software. Many of
     Ermanco's sales are to distributors who have non-exclusive agreements with
     the Company.

                                       9
<PAGE>

Item 1.    Financial Statements (Continued)
-------    --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
For the Three Months Ended March 31, 2004 and 2003


     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 by
     brand during the three months ended March 31, 2004 and 2003 are as follows
     (in thousands):

     For the three months ended March 31, 2004:
<TABLE>
<CAPTION>
                                                                                     % of Total
                                     SI Systems        Ermanco          Total           Sales
                                   --------------   -------------  --------------  --------------
     <S>                              <C>                <C>            <C>             <C>
     Systems sales.................   $  2,081            7,142          9,223           87.2%
     Aftermarket sales.............        832              521          1,353           12.8%
                                        ------           ------         ------          -----
     Total sales...................   $  2,913            7,663         10,576          100.0%
                                        ======           ======         ======          =====
     As a % of total sales.........      27.5%            72.5%         100.0%
</TABLE>

     For the three months ended March 31, 2003:
<TABLE>
<CAPTION>
                                                                                     % of Total
                                     SI Systems        Ermanco          Total           Sales
                                   --------------   -------------  --------------  --------------
     <S>                              <C>                <C>            <C>             <C>
     Systems sales.................   $  2,607            4,777          7,384           86.2%
     Aftermarket sales.............        765              415          1,180           13.8%
                                        ------           ------         ------          -----
     Total sales...................   $  3,372            5,192          8,564          100.0%
                                        ======           ======         ======          =====
     As a % of total sales.........      39.4%            60.6%         100.0%
</TABLE>

     The Company's products are sold worldwide through its own sales personnel,
     along with a network of independent distributors and licensees. Domestic
     and international sales by brand during the three months ended March 31,
     2004 and 2003 are as follows (in thousands):

     For the three months ended March 31, 2004:
<TABLE>
<CAPTION>
                                                                                     % of Total
                                     SI Systems        Ermanco          Total           Sales
                                   --------------   -------------  --------------  --------------
     <S>                              <C>                <C>            <C>             <C>
     Domestic sales................   $  2,225            7,532          9,757           92.3%
     International sales...........        688              131            819            7.7%
                                        ------           ------         ------          -----
     Total sales...................   $  2,913            7,663         10,576          100.0%
                                        ======           ======         ======          =====
</TABLE>

     For the three months ended March 31, 2003:
<TABLE>
<CAPTION>
                                                                                     % of Total
                                     SI Systems        Ermanco          Total           Sales
                                   --------------   -------------  --------------  --------------
     <S>                              <C>                <C>            <C>             <C>
     Domestic sales................   $  3,283            4,966          8,249           96.3%
     International sales...........         89              226            315            3.7%
                                        ------           ------         ------          -----
     Total sales...................   $  3,372            5,192          8,564          100.0%
                                        ======           ======         ======          =====
</TABLE>


                                       10
<PAGE>

Item 1.    Financial Statements (Continued)
-------    --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
For the Three Months Ended March 31, 2004 and 2003


     The Company identifies operating segments based on the types of products
offered for sale as follows:

<TABLE>
<CAPTION>
For the Three Months Ended
March 31, 2004 (In Thousands):                     SI Systems        Ermanco          Total
-------------------------------------------       ------------    ------------    ------------
<S>                                                 <C>               <C>             <C>
Sales.....................................          $ 2,913            7,663          10,576
Earnings (loss) before interest
  expense, interest income, and
  income taxes............................              (37)             598             561
Total assets..............................            4,421           28,394          32,815
Capital expenditures......................               25               41              66
Depreciation and amortization
  expense.................................               24               86             110
</TABLE>

<TABLE>
<CAPTION>
For the Three Months Ended
March 31, 2003 (In Thousands):                     SI Systems          Ermanco       Total
-------------------------------------------       ------------    ------------    ------------
<S>                                                 <C>               <C>             <C>
Sales.....................................          $ 3,372            5,192           8,564
Earnings before interest expense,
  interest income, restructuring
  credits, equity in income of
  joint venture, gain on disposition
  of property, plant and equipment,
  and income taxes........................               53              124             177
Restructuring credits.....................              170                -             170
Gain on disposition of property,
  plant and equipment.....................            1,363                -           1,363
Total assets..............................            8,620           28,618          37,238
Capital expenditures......................               26               96             122
Depreciation and amortization
  expense.................................               47              100             147
</TABLE>

(5)  Recently Issued Accounting Pronouncements
     -----------------------------------------
     In December 2003, the Company adopted SFAS No. 132 (revised), "Employers'
     Disclosures about Pensions and Other Postretirement Benefits" ("FAS 132")
     as amended. This standard retains the existing disclosures and requires
     additional disclosures to provide details about pension plan assets,
     benefit obligations, cash flows, benefit costs, and related information.
     The disclosure requirements are included in the Company's financial
     statements.

     In December 2003, the FASB issued Interpretation No. 46 (revised December
     2003), "Consolidation of Variable Interest Entities" ("FIN 46R"), which
     addresses how a business enterprise should evaluate whether it has a
     controlling financial interest in an entity through means other than voting
     rights and accordingly should consolidate the entity. FIN 46R replaces
     Interpretation No. 46, "Consolidation of Variable Interest Entities," which
     was issued in January 2003. The Company would be required to apply FIN 46R
     to variable interest entities ("VIE") created after December 31, 2003. For
     variable interests in VIE's created before January 1, 2004, FIN 46R will be
     applied beginning January 1, 2005. The application of FIN 46R is not
     expected to have a material effect on the Company's financial statements.


                                       11
<PAGE>

Item 1.    Financial Statements (Continued)
-------    --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
For the Three Months Ended March 31, 2004 and 2003


(6)  Sale-Leaseback
     --------------
     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 $17,703 (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 lease expires on February 21, 2008.
     The sale-leaseback resulted in a gain of $2,189,000, of which $1,363,000
     was recorded as a gain during the three months ended March 31, 2003. The
     remaining gain of $826,000 was deferred and is being recognized as a
     reduction in rent expense over the term of the lease. During the three
     months ended March 31, 2004 and March 31, 2003, $41,000 and $16,000,
     respectively, of the deferred gain was recognized.


(7)  Investment in SI/BAKER Joint Venture
     ------------------------------------
     On March 1, 1993, the Company and Automated Prescription Systems, Inc.
     formed a 50/50 joint venture, SI/BAKER, INC. ("SI/BAKER"). In 1998,
     Automated Prescription Systems, Inc. was renamed McKesson Automation
     Systems Inc. ("McKesson"). On September 19, 2003, the Company sold its
     entire ownership interest in SI/BAKER to McKesson and received cash
     proceeds of $5,600,000. Prior to the sale, the Company received royalty
     income from SI/BAKER at a rate of 2% of SI/BAKER's gross sales for
     marketing and sales efforts on behalf of SI/BAKER. The Company accounted
     for its investment in the joint venture on the equity basis by recognizing
     its proportionate share (50%) of SI/BAKER's net earnings. The sale resulted
     in a gain of $4,901,000 in 2003.


(8)  Line of Credit
     --------------
     The Company has a line of credit facility which may not exceed $1,000,000
     and is to be used primarily for working capital purposes. Interest on the
     line of credit facility is at the bank's prime rate of interest or LIBOR
     Market Index Rate plus 2%.

     To obtain the line of credit, the Company granted the bank a security
     interest in all personal property, including, without limitation, all
     accounts, deposits, documents, equipment, fixtures, general intangibles,
     goods, instruments, inventory, letters of credit, money, and securities.
     The line of credit facility contains various restrictive covenants relating
     to additional indebtedness, asset acquisitions or dispositions,
     investments, and guarantees. In addition, the Company is restricted from
     paying dividends in excess of 15% of its net earnings. The Company was in
     compliance with all covenants as of March 31, 2004. As of March 31, 2004,
     the Company did not have any borrowings under the line of credit facility,
     and the line of credit facility expires effective June 30, 2004.


(9)  Long-Term Debt
     --------------
     The Company received $14,000,000 in the form of a seven-year term loan from
     its principal bank to finance the acquisition of Ermanco on September 30,
     1999. The interest rate on the term loan was variable at a rate equal to
     the three-month LIBOR Market Index Rate plus 2.65%.


                                       12
<PAGE>

Item 1.       Financial Statements (Continued)
-------       --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
For the Three Months Ended March 31, 2004 and 2003


     Also in connection with the acquisition of Ermanco, on September 30, 1999,
     the Company also issued promissory notes to the stockholders of Ermanco,
     including notes in the amounts of $1,382,861 and $1,001,382 to Steven
     Shulman and Leon C. Kirschner, respectively, both of whom are directors of
     the Company. Mr. Kirschner also serves as the President of Ermanco and
     Chief Operating Officer of the Company. The notes, with an original term of
     seven years, bore interest at an annual rate of 10% through September 30,
     2002, and 12% from October 1, 2002 through the prepayment date. Interest on
     the promissory notes was payable quarterly, in cash or under certain
     conditions, in the Company's common stock upon approval of the Company's
     Board of Directors.

     In 2003, the Company prepaid all of its outstanding term and subordinated
     debt.


(10) Pension Benefits
     ----------------
     The Company maintains a defined benefit plan for employees covered by its
     collective bargaining agreement. Retirement benefits are based on the
     employee's years of service multiplied by the appropriate monthly benefit
     amount. Employee compensation does not impact pension benefits. The
     Company's policy is to fund retirement plans in compliance with applicable
     laws and regulations. Assets of the Company's defined benefit plan are
     primarily invested in publicly traded common stocks, corporate and
     government debt securities, mutual funds, and cash or cash equivalents.

     Components of Net Periodic Pension Expense (Benefit)
     ---------------------------------------------------
     The Company uses the projected unit credit actuarial method to compute
     pension expense, which includes amortization of past service costs over 30
     years. The net periodic pension expense (benefit) and total pension expense
     (benefit) for the three months ended March 31, 2004 and 2003 includes the
     following components (in thousands):

<TABLE>
<CAPTION>
                                                                        2004            2003
                                                                   -------------   -------------
     <S>                                                              <C>               <C>
     Service cost-benefits earned
       during the period....................................          $    23              22
     Interest cost on projected
        benefit obligation..................................               11              30
     Expected return on plan assets -
        increase............................................              (14)            (52)
     Recognized net actuarial gain..........................                1              (5)
                                                                        -----           -----
     Net periodic pension expense
        (benefit)...........................................               21              (5)
     Curtailment cost (settlement credit)...................                -            (144)
                                                                        -----           -----
     Total pension expense (benefit)........................          $    21            (149)
                                                                        =====           =====
</TABLE>


     Contributions
     -------------
     The Company did not make any contributions to its defined benefit plan
     during the three months ended March 31, 2004. The Company expects total
     pension plan contributions to its defined benefit plan to approximate
     $41,000 for the year ended December 31, 2004.

                                       13
<PAGE>

Item 1.    Financial Statements (Continued)
-------    --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
For the Three Months Ended March 31, 2004 and 2003


(11) Stock-Based Compensation
     ------------------------
     The Company grants stock options for a fixed number of shares to employees
     and non-employee directors with an exercise price equal to the fair value
     of the shares at the date of grant. The Company has elected to continue to
     account for its stock-based compensation plans under the guidelines of
     Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
     Employees," and, accordingly, recognizes no compensation expense on options
     granted to employees for the stock option grants. The Company recognizes
     compensation expense on options granted to non-employee directors. To date,
     the effect of options granted to non-employee directors has been
     immaterial. Additional disclosure as required under the guidelines of SFAS
     No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), as amended
     by FAS 148, is included below. If the Company had elected to recognize
     stock-based compensation expense for options granted to employees based on
     the fair value of granted options at the grant date (as determined under
     FAS 123), net earnings (in thousands) and basic and diluted earnings per
     share for the three months ended March 31, 2004 and 2003, would have been
     as follows:

<TABLE>
<CAPTION>
                                                                     2004                2003
                                                               ----------------   -----------------
     <S>                                                            <C>                  <C>
     Net earnings, as reported...........................           $   341              1,011
     Deduct:  total stock-based employee
        compensation determined under
        fair value method, net of related
        tax effects......................................               (34)               (72)
                                                                     ------              -----
     Pro forma net earnings..............................           $   307                939
                                                                     ======              =====

     Earnings per share:
        Basic-- as reported..............................           $   .08                .24
                                                                        ===                ===
        Basic-- pro forma................................           $   .07                .22
                                                                        ===                ===
        Diluted-- as reported............................           $   .08                .23
                                                                        ===                ===
        Diluted-- pro forma..............................           $   .07                .22
                                                                        ===                ===
</TABLE>

     The above pro forma net earnings and basic and diluted earnings per share
     were computed using the fair value of granted options at the date of grant
     as calculated by the Black-Scholes option pricing method. No options were
     granted to employees during the three months ended March 31, 2004 and the
     year ended December 31, 2003.


(12) Legal Proceedings
     -----------------
     In July 2003, a competitor filed an action against the Company in the
     United States District Court for the District of New Jersey alleging that
     certain of the Company's products infringed patents held by the competitor
     and also asserting claims for breach of contract, unjust enrichment, unfair
     competition, tortious interference with prospective economic advantage, and
     violation of New Jersey's consumer fraud act as a result of alleged
     improper use of the competitor's trade secrets, technology, and other
     proprietary information. Based on these allegations, the competitor was
     seeking monetary damages and injunctive relief against the Company.


                                       14
<PAGE>

Item 1.    Financial Statements (Continued)
-------    --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
For the Three Months Ended March 31, 2004 and 2003


     In February 2004, a settlement was reached between the Company and the
     competitor. Under the settlement, the competitor dismissed the action and
     agreed that the Company's products involved in the litigation are immune
     from suit for infringement of any of the competitor's intellectual property
     rights. In exchange, Paragon agreed to dismiss its counterclaims and paid
     the competitor $1,125,000. Total costs associated with the litigation
     recognized during 2003, inclusive of settlement costs and legal costs, were
     $1,375,000.

     The Company is involved in various other claims and legal actions arising
     in the ordinary course of business. In the opinion of management, the
     ultimate disposition of these matters will not have a material adverse
     effect on the Company's consolidated financial position, results of
     operations, or liquidity.

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














                                       15
<PAGE>

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


     The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the unaudited
consolidated financial statements for the period ended March 31, 2004, 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, 2003. 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. The Company has gone to market with a multiple brand,
multiple channel strategy under the SI Systems and Ermanco brands.
     Founded in 1958, SI Systems 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. Since 1964, Ermanco conveyor technologies and integrated conveyor
systems have been based on core technologies in transportation, accumulation,
and sortation and continue to address the needs of the distribution, assembly,
and manufacturing marketplace. Ermanco is known as the originator of the
line-shaft-driven, live-roller conveyor.

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

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

     Capacity Utilization
     --------------------
     Capacity Utilization, as documented in the Federal Reserve Statistical
Release, 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 above
80%, as occurred in fiscal 2000, the Company may see an increase in rate of new
orders, and therefore, an increase 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, rate
of new orders, and sales also typically increases. The following table depicts
the Company's backlog, orders, sales, and Capacity Utilization for the three
months ended March 31, 2004, and for the years ended December 31, 2003, 2002,
2001, and 2000.
<TABLE>
<CAPTION>
                                          Three Months              Year Ended December 31,
                                             Ended           ---------------------------------------
(Dollars in Thousands)                   March 31, 2004       2003       2002       2001       2000
                                         --------------      ------     ------     ------     ------
<S>                                         <C>              <C>        <C>        <C>        <C>
Backlog of orders - Beginning............   $ 10,525          6,924     13,342     22,913     23,685
   Add: orders...........................      8,456         40,896     31,806     41,181     63,534
   Less: sales...........................     10,576         37,295     38,224     50,752     64,306
                                              ------         ------     ------     ------     ------
Backlog of orders - Ending...............   $  8,405         10,525      6,924     13,342     22,913
                                              ======         ======     ======     ======     ======

Capacity Utilization.....................      76.3%          74.8%      75.6%      77.7%      82.6%
</TABLE>
                                       16
<PAGE>

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


     Current Ratio
     -------------
     The Company's current ratio, which is the ratio of current assets to
current liabilities, has been relatively consistent. 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 March 31, 2004, and as of December 31, 2003, 2002, 2001, and
2000:
<TABLE>
<CAPTION>
                                             As of                    As of December 31,
                                           March 31,       --------------------------------------------
(Dollars in Thousands)                       2004          2003        2002        2001        2000
                                           ---------      ------      ------      ------      ------
<S>                                        <C>            <C>         <C>         <C>         <C>
Current assets...........................  $ 13,776       14,691      15,444      19,200      22,850
                                             ------       ------      ------      ------      ------
Current liabilities......................     8,256        9,646       9,472      13,388      15,193

Current ratio............................      1.67         1.52        1.63        1.43        1.50
</TABLE>

     Debt to Equity Ratio
     --------------------
     With an emphasis over the past several years on generating cash flows to
eliminate the Company's senior and subordinated debt, the Company has eliminated
its financial leverage as evidenced by its debt to equity ratio, which is the
ratio of total debt to stockholders' equity. Management believes the absence of
debt provides greater protection for its shareholders 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 March 31, 2004,
and as of December 31, 2003, 2002, 2001, and 2000:
<TABLE>
<CAPTION>
                                             As of                    As of December 31,
                                           March 31,       -----------------------------------------
(Dollars in Thousands)                       2004          2003        2002        2001        2000
                                           ---------      ------      ------      ------      ------
<S>                                        <C>            <C>         <C>         <C>         <C>
Current installments of
   long-term debt........................  $      -            -       1,437       2,305       1,521
Long-term debt...........................         -            -       7,263       9,900      12,780
                                             ------       ------      ------      ------      ------
Total debt...............................         -            -       8,700      12,205      14,301
                                             ------       ------      ------      ------      ------
Total stockholders' equity...............  $ 22,310       21,969      17,829      16,881      16,980
                                             ======       ======      ======      ======      ======

Debt to equity ratio.....................          -          -          .49         .72         .84
</TABLE>

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

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

                                       17
<PAGE>

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


     Revenue Recognition on Systems Sales
     ------------------------------------
     Revenues on systems contracts, accounted for in accordance with SOP 81-1 of
the American Institute of Certified Public Accountants, are recorded on the
basis of the Company's estimates of the percentage of completion of individual
contracts. Gross margin is recognized on the basis of the ratio of aggregate
costs incurred to date to the most recent estimate of total costs. As contracts
may extend over one or more years, revisions in cost and profit estimates during
the course of the work are reflected in the accounting periods in which the
facts requiring revisions become known. At the time a loss on a contract becomes
known, the entire amount of the estimated ultimate loss is accrued. As of March
31, 2004, there are no contracts that are anticipated to result in a loss.
     The Company believes that it has the ability to reasonably estimate the
total costs and applicable gross profit margins at the inception of the contract
for all of its systems contracts. However, where cost estimates change, there
could be a significant impact on the amount of revenue recognized. The Company's
failure to estimate accurately can result in cost overruns which will result in
the loss of profits if the Company determines that it has significantly
underestimated the costs involved in completing contracts. The Company has not
had any significant cost overruns resulting in loss of profits during the three
months ended March 31, 2004.

     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, ranging from one to
two percent depending on the type of system 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 recorded warranty reserve as of March 31, 2004 is $857,000.

     Inventories
     -----------
     Inventories are valued at the lower of average cost or market. The Company
provides an inventory reserve determined by a specific identification of
individual slow moving items and other inventory items based on historical
experience. The reserve is considered to be a write-down of inventory to a new
cost basis. Upon disposal of inventory, the cost and related inventory reserve
are removed from the accounts. Historically, the level of inventory reserve has
been appropriate based on management's assessment of estimated future inventory
disposals.

     Allowance for Doubtful Accounts
     -------------------------------
     The Company provides an allowance for doubtful accounts determined by a
specific identification of individual accounts and other accounts based on
historical experience. The Company writes off receivables upon determination
that no further collections are probable. Historically, receivable write offs
have not had a material impact on the Company's financial statements.

     Asset Impairments
     -----------------
     On January 1, 2002, the Company adopted SFAS No. 142, analyzed its goodwill
for impairment, and makes similar evaluations on a periodic basis. During 2003,
the Company performed the required impairment test of goodwill and determined
that there was no impairment. In assessing the recoverability of the Company's
goodwill, the Company must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the respective asset. If
these

                                       18
<PAGE>

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


     Asset Impairments (Continued)
     ----------------
estimates or their related assumptions change the fair value of the asset in the
future, the Company may be required to record impairment charges. The book value
of goodwill as of March 31, 2004 is $17,657,000.


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


Results of Operations - Three Months Ended March 31, 2004 Compared to the Three
-------------------------------------------------------------------------------
Months Ended March 31, 2003
---------------------------

Earnings Summary
----------------
     The Company had net earnings of $341,000 (or $0.08 basic earnings per
share) for the three months ended March 31, 2004, compared to net earnings of
$1,011,000 (or $0.24 basic earnings per share) for the three months ended March
31, 2003. The decrease in net earnings was primarily due to the prior year
comparable period containing:
      o   a pre-tax gain on the sale-leaseback of the Company's Easton,
          Pennsylvania facility of $1,363,000;
      o   a restructuring credit of $170,000 pertaining to the final settlement
          of the remaining pension obligations associated with the Company's
          terminated pension plan;
      o   equity in income of the Company's former SI/BAKER joint venture of
          $162,000; and o royalty income from the Company's former SI/BAKER
          joint venture of $83,000.
     Contributing to net earnings for the three months ended March 31, 2004 was
an increase in total revenues and gross profit of $2,012,000 and $426,000,
respectively, as described below, and a reduction of $218,000 in interest
expense as a result of the elimination of the Company's senior and subordinated
debt in September 2003.

Net Sales and Gross Profit on Sales
-----------------------------------
<TABLE>
<CAPTION>
                                                               2004                   2003
                                                       ---------------------   --------------------
<S>                                                         <C>                      <C>
Net sales.............................................      $ 10,576,000              8,564,000
Cost of sales.........................................         7,946,000              6,360,000
                                                              ----------             ----------
Gross profit on sales.................................      $  2,630,000              2,204,000
                                                              ==========             ==========

Gross profit as a percentage of sales.................             24.9%                  25.7%
                                                                   ====                   ====
</TABLE>

     The net sales increase was primarily attributable to an increase in Ermanco
branded sales of $2,471,000, partially offset by a decline of approximately
$459,000 in SI Systems branded sales. The increase in Ermanco branded sales was
primarily attributable to a larger backlog of Ermanco branded orders entering
fiscal 2004 when compared to the backlog of Ermanco branded orders entering
fiscal 2003. The decline in SI Systems branded orders was associated with delays
in customer buying decisions and competitive pressures.
     Gross profit, as a percentage of sales, for the three months ended March
31, 2004 was unfavorably impacted by approximately 2.0% due to competitive
pricing pressures and product mix when compared to the three months ended March
31, 2003. Partially offsetting the aforementioned unfavorable variance by
approximately 1.1% was a higher sales volume to cover fixed overhead costs for
the three months ended March 31, 2004.


                                       19
<PAGE>

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


Results of Operations - Three Months Ended March 31, 2004 Compared to the Three
-------------------------------------------------------------------------------
Months Ended March 31, 2003 (Continued)
---------------------------

Selling, General and Administrative Expenses
--------------------------------------------
     Selling, general and administrative expenses of $2,043,000 were higher by
$46,000 for the three months ended March 31, 2004 than for the three months
ended March 31, 2003. The increase was comprised of the addition of resources
aimed at expanding the customer base and an increase in salaries and fringe
benefits totaling $182,000. The prior year comparable period included
approximately $142,000 in expenses associated with the Company's participation
in a biannual industry trade show during the first quarter of 2003.

Product Development Costs
-------------------------
     Product development costs, including patent expense, of $72,000 was lower
by $91,000 for the three months ended March 31, 2004 than for the three months
ended March 31, 2003. Development programs in the three months ended March 31,
2004 were aimed at enhancements to the Company's sortation and accumulation
conveyor technologies, and improvements to the Company's Order Picking,
Fulfillment, and Replenishment systems. Development programs in the three months
ended March 31, 2003 included the new NBA-23(TM) narrow belt accumulation
conveyor, computer software for warehousing and distribution center operations,
and improvements to the Company's Order Picking, Fulfillment, and Replenishment
systems.

Restructuring Charges (Credits)
------------------------------
     In 2001, the Company restructured its business operations, including
curtailment of a defined benefit plan. In February 2003, the Company settled its
remaining pension obligations by purchasing annuities and correspondingly
recorded a restructuring credit of $170,000.

Interest Expense
----------------
     In September 2003, the Company repaid all of its outstanding senior and
subordinated debt. The favorable variance of $218,000 in interest expense for
the three months ended March 31, 2004 as compared to the three months ended
March 31, 2003 was attributable to fiscal 2003 containing interest expense on
the Company's outstanding senior and subordinated debt.

Equity in Income of Joint Venture
---------------------------------
     In September 2003, the Company sold its entire ownership interest in
SI/BAKER, INC. During the three months ended March 31, 2003, equity in income of
the SI/BAKER joint venture was $162,000.

Gain on Disposition of Property, Plant and Equipment
----------------------------------------------------
     The gain on the disposition of property, plant and equipment of $1,363,000
for the three months ended March 31, 2003 was attributable to the sale-leaseback
of the Company's Easton, Pennsylvania facility in February 2003. The
sale-leaseback resulted in a total gain of $2,189,000, of which $1,363,000 was
recorded in 2003. The remaining gain of $826,000 was deferred and is being
recognized as a reduction in rent expense over the five-year term of the lease.

Other Income, Net
-----------------
     In September 2003, the Company sold its entire ownership interest in
SI/BAKER, INC. The unfavorable variance of $87,000 in other income, net for the
three months ended March 31, 2004 as compared to the three months ended March
31, 2003 was primarily attributable to revenue-based royalty income from the
Company's SI/BAKER recognized during the first quarter of 2003.

                                       20
<PAGE>

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


Results of Operations - Three Months Ended March 31, 2004 Compared to the Three
-------------------------------------------------------------------------------
Months Ended March 31, 2003 (Continued)
---------------------------

Income Tax Expense
------------------
     The Company recognized income tax expense of $231,000 during the three
months ended March 31, 2004 compared to income tax expense of $667,000 during
the three months ended March 31, 2003. Income tax expense was generally recorded
at statutory federal and state tax rates.


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


Liquidity and Capital Resources
-------------------------------
     The Company's cash and cash equivalents decreased to $5,371,000 at March
31, 2004 from $5,591,000 at December 31, 2003. The decrease resulted primarily
from:
      o cash used by operating activities totaling $154,000; and o purchases of
      capital equipment of $66,000.
     Cash used by operating activities of $154,000 during the three months ended
March 31, 2004 as compared to cash provided by operating activities of
$2,003,000 during the three months ended March 31, 2003 decreased primarily due
to the payment of settlement and legal costs of $1,170,000 associated with an
action against the Company by a competitor relating to the Company's
intellectual property. Also contributing to cash provided by operating
activities during the three months ended March 31, 2003 was the receipt of a
federal income tax refund of $1,093,000.
     In 2003, the Company repaid all of its outstanding term debt and
subordinated debt.
     The Company's line of credit facility may not exceed $1,000,000 and is to
be used primarily for working capital purposes. As of March 31, 2004, the
Company did not have any borrowings under the line of credit facility, and the
line of credit facility expires effective June 30, 2004.
     To obtain the line of credit, the Company granted the bank a security
interest in all personal property, including, without limitation, all accounts,
deposits, documents, equipment, fixtures, general intangibles, goods,
instruments, inventory, letters of credit, money, and securities. The line of
credit facility contains various restrictive covenants relating to additional
indebtedness, asset acquisitions or dispositions, investments, and guarantees.
     The Company anticipates that its financial resources, consisting of cash
generated from operations, 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 plans to consider strategic alternatives to increase
shareholder value, including expansion opportunities as they arise, although the
ongoing operating results of the Company, the economics of the expansion, and
the circumstances justifying the expansion will be key factors in determining
the amount of resources the Company will devote to further expansion.


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


                                       21
<PAGE>

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


Contractual Obligations
-----------------------
     Ermanco's operations are located in a 94,000 square foot steel building in
Spring Lake, Michigan. The building is leased from a limited liability company
that is affiliated with the Company through a common director and officer of the
Company, Messrs. Shulman and Kirschner. The leasing agreement requires fixed
monthly rentals of $33,283 through September 30, 2004. Thereafter, monthly
rentals are $29,310 (with annual increases of 2.5%). The terms of the lease
require the payment by Ermanco of all taxes, insurance, and other ownership
related costs of the property. The lease, as amended on April 1, 2004, expires
on September 30, 2008.
     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 $17,703 (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 lease expires on February 21, 2008.
     The Company also leases certain automobiles and office equipment, computer
equipment, and software under various operating leases with terms extending
through September 2007.
     Future contractual obligations and commercial commitments at March 31, 2004
as noted above are as follows:

<TABLE>
<CAPTION>
                                              Payments Due by Period
                   ---------------------------------------------------------------------------------
                        Total         2004          2005         2006         2007         2008
                        -----         ----          ----         ----         ----         ----
<S>                  <C>           <C>          <C>           <C>          <C>          <C>
Contractual
obligations:
  Operating
   leases........    $2,681,000      531,000       636,000      590,000      606,000      318,000
                      ---------    ---------    ----------    ---------    ---------    ---------
   Total.........    $2,681,000      531,000       636,000      590,000      606,000      318,000
                      =========    =========    ==========    =========    =========    =========
</TABLE>

<TABLE>
<CAPTION>
                                                       Amount of Commitment
                                                      Expiration Per Period
                                       ------------------------------------------------------------
                      Total Amounts
                        Committed        2004        2005         2006         2007         2008
                      -------------      ----        ----         ----         ----         ----
<S>                     <C>               <C>      <C>             <C>          <C>          <C>
Other
commercial
commitments:
  Letters of
   credit........       $200,000          -        200,000         -            -            -
  Line of
   credit........              -          -           -            -            -            -
</TABLE>

Off-Balance Sheet Arrangements
------------------------------
     As of March 31, 2004, 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), 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.

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

                                       22
<PAGE>

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


Recently Issued Accounting Pronouncements
-----------------------------------------
     The adoption of SFAS No. 132 (revised) and FASB  Interpretation  No. 46
did not have a material impact on the Company's financial statements.


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


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

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)  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 March 31, 2004. 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
     recorded, processed, summarized and reported as specified in Securities and
     Exchange Commission rules and forms.

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


                                       23
<PAGE>

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


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

     In July 2003, a competitor filed an action against the Company in the
United States District Court for the District of New Jersey alleging that
certain of the Company's products infringed patents held by the competitor and
also asserting claims for breach of contract, unjust enrichment, unfair
competition, tortious interference with prospective economic advantage, and
violation of New Jersey's consumer fraud act as a result of alleged improper use
of the competitor's trade secrets, technology, and other proprietary
information. Based on these allegations, the competitor was seeking monetary
damages and injunctive relief against the Company.
     In February 2004, a settlement was reached between the Company and the
competitor. Under the settlement, the competitor dismissed the action and agreed
that the Company's products involved in the litigation are immune from suit for
infringement of any of the competitor's intellectual property rights. In
exchange, Paragon agreed to dismiss its counterclaims and paid the competitor
$1,125,000.
     The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations, or liquidity.











                                       24
<PAGE>

Item 6.    Exhibits and Reports on Form 8-K
-------    --------------------------------

              (a)  Exhibits:

                   31.1      Certification by Chief Executive Officer pursuant
                             to Rule 13a-14(a) and 15d-14(a), as adopted
                             pursuant to Section 302 of the Sarbanes-Oxley Act
                             of 2002 signed by Leonard S. Yurkovic, President
                             and CEO (filed herewith).
                   31.2      Certification by Chief Financial Officer pursuant
                             to Rule 13a-14(a) and 15d-14(a), as adopted
                             pursuant to Section 302 of the Sarbanes-Oxley Act
                             of 2002 signed by Ronald J. Semanick, Chief
                             Financial Officer and Vice President - Finance and
                             Treasurer (filed herewith).
                   32.1      Certification pursuant to 18 U.S.C. Section 1350,
                             as adopted pursuant to Section 906 of the
                             Sarbanes-Oxley Act of 2002 signed by Leonard S.
                             Yurkovic, President and CEO (filed herewith).
                   32.2      Certification pursuant to 18 U.S.C. Section 1350,
                             as adopted pursuant to Section 906 of the
                             Sarbanes-Oxley Act of 2002 signed by Ronald J.
                             Semanick, Chief Financial Officer and Vice
                             President - Finance and Treasurer (filed herewith).

              (b) The following reports on Form 8-K were filed during the
                  quarter ended March 31, 2004:

                  The Company filed a Current Report on Form 8-K on February
                  17, 2004 announcing the settlement of litigation.

                  A Current Report on Form 8-K was furnished on March 29, 2004
                  announcing the Company's financial results for the fourth
                  quarter and year ended December 31, 2003.














                                       25
<PAGE>

                                    SIGNATURE
                                    ---------

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
                                President & CEO



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





Dated:   May 13, 2004
       ---------------

















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