UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 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, 2008


                         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, a non-accelerated filer, or a smaller reporting company. See
definition of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
 Large Accelerated Filer |_|   Accelerated Filer |_|   Non-Accelerated Filer |_|
                          Smaller Reporting Company |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 11, 2008 was 1,979,170.



<PAGE>





                       [PARAGON TECHNOLOGIES, INC. LOGO]






                           Paragon Technologies, Inc.
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                             Page
                                                                                            Number
                                                                                          -----------

PART I -- FINANCIAL INFORMATION

<S>  <C>          <C>                                                                           <C>
     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............        28

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



PART II -- OTHER INFORMATION

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

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

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

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

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

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

     Item 6.      Exhibits..............................................................        31



SIGNATURES..............................................................................        32



EXHIBIT INDEX...........................................................................        33
</TABLE>



<PAGE>




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


Item 1.       Financial Statements
-------       --------------------
Paragon Technologies, Inc.
Balance Sheets (Unaudited)
September 30, 2008 and December 31, 2007
     (In Thousands, Except Share Data)


<TABLE>
<CAPTION>
                                                               September 30,          December 31,
                                                                   2008                   2007
                                                            -------------------    ------------------

Assets
------
<S>                                                             <C>                       <C>
Current assets:
   Cash and cash equivalents.......................             $   8,854                 12,104
   Short-term investments..........................                     -                    200
                                                            -------------------    ------------------
       Total cash and cash equivalents and
         short-term investments....................                 8,854                 12,304
                                                            -------------------    ------------------

   Receivables:
     Trade (net of allowance for doubtful
       accounts of $100 as of September 30,
       2008 and $0 as of December 31, 2007)........                 1,721                  2,640
     Notes and other receivables...................                   347                    310
                                                            -------------------    ------------------
       Total receivables...........................                 2,068                  2,950
                                                            -------------------    ------------------

   Costs and estimated earnings in excess
     of billings...................................                   612                  1,353

   Inventories:
     Raw materials.................................                   222                    160
     Work-in-process...............................                    22                    224
     Finished goods................................                   549                    475
                                                            -------------------    ------------------
       Total inventories...........................                   793                    859
                                                            -------------------    ------------------

   Deferred income tax benefits....................                     -                    263
   Prepaid expenses and other current assets.......                   188                    113
                                                            -------------------    ------------------
       Total current assets........................                12,515                 17,842
                                                            -------------------    ------------------

Machinery and equipment, at cost:
   Machinery and equipment.........................                 1,384                  1,313
   Less:  accumulated depreciation.................                 1,062                  1,000
                                                             -------------------    ------------------
     Net machinery and equipment...................                   322                    313
                                                            -------------------    ------------------

Deferred income tax benefits.......................                     -                    161
                                                            -------------------    ------------------
   Total assets....................................             $  12,837                 18,316
                                                            ===================    ==================
</TABLE>


                 See accompanying notes to financial statements.



                                                                     (Continued)


                                       1
<PAGE>



Item 1.       Financial Statements (Continued)
-------       --------------------
Paragon Technologies, Inc.
Balance Sheets (Unaudited) (Continued)
September 30, 2008 and December 31, 2007
     (In Thousands, Except Share Data)


<TABLE>
<CAPTION>
                                                            September 30,         December 31,
                                                                2008                  2007
                                                        ---------------------  -------------------

Liabilities and Stockholders' Equity
------------------------------------
<S>                                                          <C>                      <C>
Current liabilities:
   Accounts payable..................................        $    1,189                1,726
   Customers' deposits and billings in excess
     of costs and estimated earnings ................             1,089                3,063
   Accrued salaries, wages, and commissions..........               297                  173
   Accrued product warranties........................               447                  234
   Deferred gain on sale-leaseback...................                 -                   28
   Unearned support contract revenue.................               246                  254
   Accrued other liabilities.........................               325                  324
                                                        ---------------------  -------------------
       Total current liabilities.....................             3,593                5,802
                                                        ---------------------  -------------------

Long-term liabilities:
   Income taxes payable..............................               242                  261
                                                        ---------------------  -------------------
       Total long-term liabilities...................               242                  261
                                                        ---------------------  -------------------

Commitments and contingencies (See Note 13)

   Stockholders' equity:
     Common stock, $1 par value; authorized
       20,000,000 shares; issued and
       outstanding 2,256,811 shares as
       of September 30, 2008 and 2,769,192
       shares as of December 31, 2007................             2,257                2,769
     Additional paid-in capital......................             4,522                5,537
     Retained earnings...............................             2,223                3,947
                                                        ---------------------  -------------------
       Total stockholders' equity....................             9,002               12,253
                                                        ---------------------  -------------------

       Total liabilities and stockholders' equity....        $   12,837               18,316
                                                        =====================  ===================
</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, 2008 and 2007
     (In Thousands, Except Share and Per Share Data)


<TABLE>
<CAPTION>
                                          Three Months Ended                  Nine Months Ended
                                 ----------------------------------    ----------------------------------
                                   September 30,     September 30,      September 30,      September 30,
                                       2008              2007               2008               2007
                                 ---------------    ---------------    ---------------    ---------------
<S>                              <C>                    <C>                <C>                <C>
Net sales...................     $       3,715             7,298             12,883             16,924
Cost of sales...............             2,540             5,559              9,217             12,780
                                 ---------------    ---------------    ---------------    ---------------
Gross profit on sales.......             1,175             1,739              3,666              4,144
                                 ---------------    ---------------    ---------------    ---------------

Selling, general and
   administrative
   expenses.................             1,363             1,382              3,992              4,322
Product development
   costs....................                 3                27                109                 95
Interest expense............                 -                 1                  -                  1
Interest income.............               (75)             (108)              (289)              (337)
Other expense (income),
   net......................                 1                (2)                 -                (21)
                                 ---------------    ---------------    ---------------    ---------------
                                         1,292             1,300              3,812              4,060
                                 ---------------    ---------------    ---------------    ---------------

Income (loss) before
   income taxes.............              (117)              439               (146)                84
Income tax expense
   (benefit)................               484              (217)               458               (315)
                                 ---------------    ---------------    ---------------    ---------------
Net income (loss)...........       $      (601)              656               (604)               399
                                 ===============    ===============    ===============    ===============

Basic and diluted
   earnings (loss)
   per share................       $      (.24)              .24               (.23)               .14
                                 ===============    ===============    ===============    ===============

Weighted average
   basic and diluted
   shares outstanding.......         2,516,012         2,769,192          2,638,643          2,798,772
                                 ===============    ===============    ===============    ===============
</TABLE>

                 See accompanying notes to financial statements.


                                       3
<PAGE>



Item 1.       Financial Statements (Continued)
-------       --------------------
Paragon Technologies, Inc.
Statements of Cash Flows (Unaudited)
For the Three and Nine Months Ended September 30, 2008 and 2007
     (In Thousands)


<TABLE>
<CAPTION>
                                                                     Nine Months Ended
                                                          ----------------------------------------
                                                             September 30,         September 30,
                                                                 2008                  2007
                                                          -------------------    -----------------
<S>                                                           <C>                    <C>
Cash flows from operating activities:
   Net income (loss)...................................       $    (604)                399

   Adjustments to reconcile net income (loss)
     to net cash used by operating activities:
       Depreciation of machinery and equipment.........              94                  82
       Deferred income tax expense.....................             424                  36
       Provision for doubtful accounts.................             100                   -
       Amortization of deferred gain on sale-
         leaseback.....................................             (28)               (124)
       Stock-based compensation........................              18                   8
       Change in operating assets and liabilities:
           Receivables.................................             782              (1,568)
           Costs and estimated earnings in
              excess of billings.......................             741              (1,147)
           Inventories.................................              66                (210)
           Prepaid expenses and other
              current assets...........................             (75)                (72)
           Other assets................................               -                   4
           Accounts payable............................            (537)              2,337
           Customers' deposits and billings
              in excess of costs and estimated
              earnings.................................          (1,974)               (402)
           Accrued salaries, wages, and
              commissions..............................             124                  98
           Income taxes payable........................             (19)               (314)
           Accrued product warranties..................             213                  48
           Unearned support contract revenue...........              (8)                (50)
           Accrued other liabilities...................               1                 (72)
                                                          -------------------    -----------------
   Net cash used by operating activities...............            (682)               (947)
                                                          -------------------    -----------------

Cash flows from investing activities:
   Proceeds from sales of short-term
     investments.......................................             200               3,345
   Purchases of short-term investments.................               -                (500)
   Purchases of machinery and equipment................            (103)               (107)
                                                          -------------------    -----------------
   Net cash provided by investing activities...........              97               2,738
                                                          -------------------    -----------------
</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 Three and Nine Months Ended September 30, 2008 and 2007
     (In Thousands)


<TABLE>
<CAPTION>
                                                                     Nine Months Ended
                                                          ----------------------------------------
                                                             September 30,         September 30,
                                                                 2008                  2007
                                                          -------------------    -----------------
<S>                                                           <C>                    <C>
Cash flows from financing activities:
   Repurchase and retirement of
     common stock......................................          (2,665)               (567)
                                                          -------------------  -------------------
       Net cash used by
         financing activities..........................          (2,665)               (567)
                                                          -------------------  -------------------

   Increase (decrease) in cash and cash
     equivalents.......................................          (3,250)              1,224
   Cash and cash equivalents,
     beginning of period...............................          12,104               2,447
                                                          -------------------  -------------------
   Cash and cash equivalents,
     end of period.....................................       $   8,854               3,671
                                                           ===================  ===================

   Supplemental disclosures of cash flow
   information:
     Cash paid (received) during
       the period for:
         Interest expense..............................       $       -                   1
                                                           ===================  ===================
         Income taxes..................................       $     123                 (36)
                                                          ===================  ===================
</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, 2008 and 2007


(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. 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, 2007 as filed with the
     Securities and Exchange Commission on March 28, 2008. Refer to the
     Company's annual report on Form 10-K for the year ended December 31, 2007
     for more complete financial information.

     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. These 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. Short-term investments as of September 30, 2008 and
     December 31, 2007 were $0 and $200,000, respectively.


(3)  Allowance for Doubtful Accounts
     -------------------------------

     The Company provides an allowance for doubtful accounts determined by a
     specific identification of individual accounts. The Company writes off
     receivables upon determination that no further collections are probable.
     The allowance for doubtful accounts as of September 30, 2008 and December
     31, 2007 was $100,000 and $0, respectively.




                                       6
<PAGE>



Item 1.       Financial Statements (Continued)
-------       --------------------
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2008 and 2007


(4)  Accrued Product Warranties
     --------------------------

     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. 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 Balance    Additions Charged to                   Ending Balance
                                January 1         Costs and Expenses      Deductions     September 30
                            -----------------    ---------------------    ----------    ---------------
<S>                              <C>                     <C>                  <C>             <C>
2008...................          $ 234                   287                  (74)            447
2007...................          $ 192                   127                  (79)            240
</TABLE>



(5)  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.





                                       7
<PAGE>

Item 1.       Financial Statements (Continued)
-------       --------------------
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2008 and 2007


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

     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'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, 2008 and 2007 are as follows
     (in thousands):

     For the three months ended September 30, 2008 and 2007:

<TABLE>
<CAPTION>
                                         September 30, 2008              September 30, 2007
                                   ------------------------------  ------------------------------
                                                     % of Total                     % of Total
                                       Sales            Sales          Sales           Sales
                                   --------------   -------------  --------------  --------------
     <S>                              <C>                <C>             <C>            <C>
     Systems sales.................   $  2,732            73.5%          6,352           87.0%
     Aftermarket sales.............        983            26.5%            946           13.0%
                                   --------------   -------------  --------------  --------------
        Total sales................   $  3,715           100.0%          7,298          100.0%
                                   ==============   =============  ==============  ==============
</TABLE>

     For the nine months ended September 30, 2008 and 2007:

<TABLE>
<CAPTION>
                                         September 30, 2008              September 30, 2007
                                   ------------------------------  ------------------------------
                                                     % of Total                     % of Total
                                       Sales            Sales          Sales           Sales
                                   --------------   -------------  --------------  --------------
     <S>                              <C>                <C>            <C>             <C>
     Systems sales.................   $ 10,451            81.1%         14,275           84.3%
     Aftermarket sales.............      2,432            18.9%          2,649           15.7%
                                   --------------   -------------  --------------  --------------
        Total sales................   $ 12,883           100.0%         16,924          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, 2008 and 2007 are as follows: (in thousands):

     For the three months ended September 30, 2008 and 2007:

<TABLE>
<CAPTION>
                                         September 30, 2008              September 30, 2007
                                   ------------------------------  ------------------------------
                                                     % of Total                     % of Total
                                       Sales            Sales          Sales           Sales
                                   --------------   -------------  --------------  --------------
     <S>                              <C>                <C>             <C>            <C>
     Domestic sales................   $  3,048            82.0%          4,793           65.7%
     International sales...........        667            18.0%          2,505           34.3%
                                   --------------   -------------  --------------  --------------
        Total sales................   $  3,715           100.0%          7,298          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, 2008 and 2007


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

     For the nine months ended September 30, 2008 and 2007:

<TABLE>
<CAPTION>
                                         September 30, 2008              September 30, 2007
                                   ------------------------------  ------------------------------
                                                     % of Total                     % of Total
                                       Sales            Sales          Sales           Sales
                                   --------------   -------------  --------------  --------------
     <S>                              <C>                <C>            <C>             <C>
     Domestic sales................   $  9,703            75.3%         12,111           71.6%
     International sales...........      3,180            24.7%          4,813           28.4%
                                   --------------   -------------  --------------  --------------
        Total sales................   $ 12,883           100.0%         16,924          100.0%
                                   ==============   =============  ==============  ==============
</TABLE>

     Sales from external customers for each of the Company's products during the
     three and nine months ended September 30, 2008 and 2007 are as follows (in
     thousands):

     For the three months ended September 30, 2008 and 2007:

<TABLE>
<CAPTION>
                                         September 30, 2008              September 30, 2007
                                   ------------------------------  ------------------------------
                                                     % of Total                     % of Total
                                       Sales            Sales          Sales           Sales
                                   --------------   -------------  --------------  --------------
     <S>                              <C>                <C>             <C>            <C>
     LO-TOW(R)  sales..............   $  2,005            54.0%          2,287           31.3%
     CARTRAC(R) sales..............          -             -                64             .9%
     DISPEN-SI-MATIC(R),
        SINTHESIS(R), and related
        order fulfillment sales....        727            19.6%          4,001           54.8%
     Aftermarket sales.............        983            26.4%            946           13.0%
                                   --------------   -------------  --------------  --------------
        Total sales................   $  3,715           100.0%          7,298          100.0%
                                   ==============   =============  ==============  ==============
</TABLE>

     For the nine months ended September 30, 2008 and 2007:

<TABLE>
<CAPTION>
                                         September 30, 2008              September 30, 2007
                                   ------------------------------  ------------------------------
                                                     % of Total                     % of Total
                                       Sales            Sales          Sales           Sales
                                   --------------   -------------  --------------  --------------
     <S>                              <C>                <C>            <C>             <C>
     LO-TOW(R)  sales..............   $  6,235            48.4%          5,693           33.6%
     CARTRAC(R) sales..............          -               -             119             .7%
     DISPEN-SI-MATIC(R),
        SINTHESIS(R), and related
         order fulfillment sales...      4,216            32.7%          8,428           49.8%
     Other sales...................          -             -                35             .2%
     Aftermarket sales.............      2,432            18.9%          2,649           15.7%
                                   --------------   -------------  --------------  --------------
        Total sales................   $ 12,883           100.0%         16,924          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 engages in sales with the U.S. government. Sales to the U.S.
     government during the three months ended September 30, 2008 and 2007 were
     $67,515 and $62,759, respectively. Sales to the U.S. government during the
     nine months ended September 30, 2008 and 2007 were $136,712 and $256,734,
     respectively.

                                       9
<PAGE>



Item 1.       Financial Statements (Continued)
-------       --------------------
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2008 and 2007


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

     The Company's backlog of orders at September 30, 2008 and September 30,
     2007 was $3,298,000 and $7,172,000, 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. The Company expects to fill,
     within the next twelve months, all of the September 30, 2008 backlog of
     orders indicated above.


(6)  Recently Issued Accounting Pronouncements
     -----------------------------------------

     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. SFAS
     No. 157's fair value measurement  requirements for non-financial assets and
     liabilities that are not required or permitted to be measured at fair value
     on a recurring  basis have been deferred until fiscal years beginning after
     November 15, 2008. The Company has certain  non-financial  assets,  such as
     long-lived assets, that may be re-measured to fair value on a non-recurring
     basis. The Company adopted SFAS No. 157 on January 1, 2008. The adoption of
     SFAS No.  157 did not have a  material  impact 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. The Company adopted SFAS No. 159 on
     January 1, 2008. The adoption of SFAS No. 159 did not have a material
     impact on the Company's financial statements.



                                       10
<PAGE>



Item 1.       Financial Statements (Continued)
-------       --------------------
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2008 and 2007


(6)  Recently Issued Accounting Pronouncements (Continued)
     -----------------------------------------

     In December 2007, the Financial Accounting Standards  Board issued SFAS No.
     141(R),  Business  Combinations  ("SFAS No. 141R").  SFAS No. 141R replaces
     SFAS No. 141,  Business  Combinations  and applies to all  transactions  or
     other events in which an entity obtains control of one or more  businesses.
     SFAS No. 141R requires the acquiring  entity in a business  combination  to
     recognize  all  the  assets  acquired  and   liabilities   assumed  in  the
     transaction; establishes the acquisition-date fair value as the measurement
     objective for all assets acquired and liabilities assumed; and requires the
     acquirer  to  disclose  additional   information  needed  to  evaluate  and
     understand  the nature and  financial  effect of the business  combination.
     SFAS No. 141R is effective  prospectively  for fiscal years beginning after
     December 15, 2008 and may not be applied  before that date.  The Company is
     currently evaluating the impact, if any, the adoption of SFAS No. 141R will
     have on the Company's financial statements.

     Noncontrolling Interests in Consolidated Financial Statements--an amendment
     of ARB No. 51 ("SFAS No. 160"). SFAS No. 160 is effective for fiscal years,
     and interim periods within those fiscal years, beginning on or after
     December 15, 2008, with earlier adoption prohibited. SFAS No. 160 requires
     the recognition of a noncontrolling interest (minority interest) as equity
     in the consolidated financial statements and separate from the parent's
     equity. The amount of net earnings attributable to the noncontrolling
     interest will be included in consolidated net income on the face of the
     income statement. SFAS No. 160 also amends certain of ARB No. 51's
     consolidation procedures for consistency with the requirements of SFAS No.
     141R. SFAS No. 160 also includes expanded disclosure requirements regarding
     the interests of the parent and its noncontrolling interest. The Company is
     currently evaluating the impact, if any, the adoption of SFAS No. 160 will
     have on the Company's financial statements.

     In May 2008, the Financial Accounting Standards Board issued SFAS No. 162,
     The Hierarchy of Generally Accepted Accounting Principles ("SFAS No. 162").
     SFAS No. 162 identifies the sources of accounting principles and the
     framework for selecting the principles to be used in the preparation of
     financial statements of nongovernmental entities that are presented in
     conformity with generally accepted accounting principles in the United
     States. This Statement will become effective 60 days following the SEC's
     approval of the Public Company Accounting Oversight Board (PCAOB)
     amendments to AU Section 411, The Meaning of Presented Fairly in Conformity
     With Generally Accepted Accounting Principles. The Company does not
     anticipate a material impact on its financial statements from the adoption
     of SFAS No. 162.


(7)  Sale-Leaseback
     --------------

     The Company's principal office is located in a 173,000 square foot,
     concrete, brick, and steel facility in Easton, Pennsylvania. In connection
     with the February 2003 sale of the Company's Easton, Pennsylvania facility,
     the Company entered into a leaseback arrangement for 25,000 square feet of
     office space for five years. The leasing agreement required fixed monthly
     rental payments of $19,345 during the fifth year of the lease, which ran
     from February 21, 2007 through February 20, 2008. 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.



                                       11
<PAGE>



Item 1.       Financial Statements (Continued)
-------       --------------------
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2008 and 2007


(7)  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 was amortized in equal amounts as a reduction in rent
     expense over the initial five-year term of the lease. The amortization of
     the deferred profit expired during the first quarter of 2008. During the
     three months ended September 30, 2008 and 2007, $0 and $41,000,
     respectively, of the deferred gain was recognized. During the nine months
     ended September 30, 2008 and 2007, $28,000 and $124,000, respectively, of
     the deferred gain was recognized.

     On November 14, 2007, the Company amended the lease agreement to extend the
     term of the lease for a period of five years, commencing immediately upon
     the February 21, 2008 expiration date of the original term of the lease.
     The amended lease agreement requires fixed monthly rental payments of
     $18,000 for five years through the February 20, 2013 expiration date of the
     lease. The amended lease agreement incorporates the terms and conditions of
     the original lease agreement.


(8)  Line of Credit
     --------------

     The Company's line of credit facility expired on September 30, 2008. Prior
     to expiration, the Company had a line of credit facility which could not
     exceed $5,000,000 and was to be used primarily for working capital
     purposes. Interest on the line of credit facility was at the LIBOR Market
     Index Rate plus 1.4%. As of its September 30, 2008 expiration date, the
     Company did not have any borrowings under the line of credit facility.

     The line of credit facility contained various non-financial covenants and
     was secured by all of the Company's accounts receivables and inventory. The
     Company was in compliance with all covenants prior to the line of credit
     facility's September 30, 2008 expiration date. The Company expects to
     obtain a new line of credit facility under similar terms and conditions as
     its recently expired line of credit facility during the fourth quarter of
     2008.


(9)  Stock Repurchase Program
     ------------------------

     On August 12, 2004, the Company's Board of Directors approved a program to
     repurchase up to $1,000,000 of its outstanding common stock. The Company's
     Board of Directors amended its existing stock repurchase program on several
     occasions during 2005, 2006, and 2007 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 $15,000,000.

     On January 9, 2008, 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 $15,000,000 of the Company's common
     stock to up to $17,000,000.


                                       12
<PAGE>



Item 1.       Financial Statements (Continued)
-------       --------------------
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2008 and 2007


(9)  Stock Repurchase Program (Continued)
     ------------------------

     On August 27, 2008, 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 $17,000,000 of the Company's common
     stock to up to $20,000,000.

     During the three months ended September 30, 2008, the Company repurchased
     413,433 shares of common stock at a weighted average cost, including
     brokerage commissions, of $5.14 per share. During the nine months ended
     September 30, 2008, the Company repurchased 512,381 shares of common stock
     at a weighted average cost, including brokerage commissions, of $5.20 per
     share. Cash expenditures for the stock repurchases during the three and
     nine months ended September 30, 2008 were $2,124,133 and $2,664,920,
     respectively. From the inception of the Company's stock repurchase program
     on August 12, 2004 through September 30, 2008, the Company repurchased
     2,150,099 shares of common stock at a average cost, including brokerage
     commissions, of $7.80 per share. Cash expenditures for the stock
     repurchases since the inception of the program were $16,781,063. As of
     September 30, 2008, $3,218,937 remained available for repurchases under the
     stock repurchase program.

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


(10) 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.


(11) Stock-Based Compensation
     ------------------------

     The Company accounts for stock-based compensation in accordance with SFAS
     No. 123 (revised) "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R
     addresses all forms of share-based payment awards, including shares issued
     under employee stock purchase plans, stock options, restricted and
     nonvested stock, and stock appreciation rights. It requires companies to
     recognize in the statement of operations the grant-date fair value of stock
     options and other equity-based compensation issued to employees.


                                       13
<PAGE>



Item 1.       Financial Statements (Continued)
-------       -------------------
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2008 and 2007


(11) Stock-Based Compensation (Continued)
     ------------------------

     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 (loss) to net cash
     provided (used) by operating activities.

     SFAS No. 123R requires that cash flows resulting from excess tax benefits
     be classified as financing cash flows. For the three and nine months ended
     September 30, 2008 and for the year ended December 31, 2007, no excess tax
     benefits were generated.

     1997 Equity Compensation Plan
     The Company's stock-based compensation program, the 1997 Equity
     Compensation Plan ("ECP"), expired in July 2007. Prior to expiration, the
     ECP provided for grants of stock options, restricted and nonvested stock,
     and stock appreciation rights to selected 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 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 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, 2008, 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, 2008 and 2007 for stock-based compensation programs was
     $6,000 and $6,000, respectively. Stock-based compensation expense
     recognized during the three months ended September 30, 2008 and 2007
     consisted of expensing $1,000 and $1,000, respectively, for employee stock
     options, and $5,000 and $5,000, respectively, for nonvested stock.

     Stock-based compensation expense recognized during the nine months ended
     September 30, 2008 and 2007 for stock-based compensation programs was
     $18,000 and $8,000, respectively. Stock-based compensation expense
     recognized during the nine months ended September 30, 2008 and 2007
     consisted of expensing $4,000 and $4,000, respectively, for employee stock
     options, and $14,000 and $4,000 respectively, for nonvested stock.

     All of the stock-based compensation expense (income) 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.



                                       14
<PAGE>



Item 1.       Financial Statements (Continued)
-------       --------------------
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2008 and 2007


(11) Stock-Based Compensation (Continued)
     ------------------------

     Stock Options
     There were no stock options exercised, forfeited, or granted during the
     three and nine months ended September 30, 2008, and no further grants are
     available under the plan.

     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, 2008, there is unrecognized
     compensation cost of $7,000 on the stock option awards which will be
     recognized over the next 1.4 years.

     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.

     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, 2008, there is unrecognized
     compensation cost of $27,000 on the nonvested stock awards which will be
     recognized over the next 1.4 years.


(12) 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.

     Valuation allowances are provided to reduce the carrying amounts of
     deferred tax assets when it is more likely than not that some portion or
     all of the deferred tax assets will not be realized. When assessing the
     realizability of deferred tax assets, management considers whether it is
     more likely than not that some portion or all of the deferred tax assets
     will not be realized. The ultimate realization of deferred tax assets is
     dependent upon the generation of future taxable income in the appropriate
     taxing jurisdictions during the periods in which the temporary differences
     become deductible. Management considers the scheduled reversal of deferred
     tax liabilities, projected future taxable income, and tax planning
     strategies in making this assessment.


                                       15
<PAGE>



Item 1.       Financial Statements (Continued)
-------       --------------------
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2008 and 2007


(12) Income Taxes (Continued)
     ------------

     Based upon the level of historical taxable income and projections for
     future taxable income, management believes that the Company's deferred tax
     assets are more likely than not to expire before the Company can use them.
     Therefore, the Company established a valuation allowance of $623,000 as of
     September 30, 2008, primarily related to $418,000 of deferred tax assets,
     $61,000 of the federal income tax portion of unrecognized tax benefits, and
     $144,000 of the tax benefit for the current year pre-tax loss. The
     valuation allowance for deferred tax assets primarily relates to inventory,
     warranty, alternative minimum tax, net operating loss carryforwards, and
     other temporary differences.

     The Company recognized income tax expense of $484,000 during the three
     months ended September 30, 2008 compared to an income tax benefit of
     $217,000 during the three months ended September 30, 2007. Income tax
     expense for the three months ended September 30, 2008 was higher than
     statutory federal and state tax rates primarily due to the establishment of
     a valuation allowance for deferred tax assets, the federal income tax
     portion of unrecognized tax benefits, and the tax benefit for the current
     year pre-tax loss, partially offset by a change in unrecognized tax
     benefits. 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,
     tax-exempt interest, and an adjustment in the effective income tax rate
     expected to apply based on the projected profitability of the Company for
     2007.

     The Company recognized income tax expense of $458,000 during the nine
     months ended September 30, 2008 compared to an income tax benefit of
     $315,000 during the nine months ended September 30, 2007. Income tax
     expense for the nine months ended September 30, 2008 was higher than
     statutory federal and state tax rates primarily due to the establishment of
     a valuation allowance for deferred tax assets, the federal income tax
     portion of unrecognized tax benefits, and the tax benefit for the current
     year pre-tax loss, partially offset by a change in unrecognized tax
     benefits. 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,
     tax-exempt interest, and an adjustment in the effective income tax rate
     expected to apply based on the projected profitability of the Company for
     2007.

     During the three months ended September 30, 2008, accrued interest related
     to unrecognized tax benefits did not change during the quarter. During the
     nine months ended September 30, 2008, the Company accrued additional
     interest related to unrecognized tax benefits of $3,000.

     During the three and nine months ended September 30, 2008, the Company
     decreased the total unrecognized tax benefits by $1,000 and $15,000,
     respectively, due to the expiration of statutes of limitations.

     The Company is subject to U.S. federal income tax as well as income tax of
     multiple state and foreign jurisdictions. The Company has substantially
     concluded all U.S. federal income tax matters for years through 2004. The
     Company has operations in approximately 30 state and foreign taxing
     jurisdictions. The Company has substantially concluded state income tax
     matters for years through 2002.


                                       16
<PAGE>



Item 1.       Financial Statements (Continued)
-------       --------------------
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2008 and 2007


(13) Legal Proceedings
     -----------------

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




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


     The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the unaudited
financial statements and related notes thereto included in this Quarterly Report
on Form 10-Q for the period ended September 30, 2008, 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, 2007. 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.


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











                                       17
<PAGE>
Item 2.       Management's Discussion and Analysis of Financial Condition and
-------       ---------------------------------------------------------------
              Results of Operations (Continued)
              ---------------------

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

     Capacity Utilization
     --------------------

     Capacity Utilization, as documented in the Federal Reserve Statistical
Release, 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 the backlog of orders 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 of orders 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 of orders, orders, sales, and
Capacity Utilization for the nine months ended September 30, 2008, and for the
years ended December 31, 2007, 2006, 2005, 2004, and 2003:

<TABLE>
<CAPTION>
                                            Nine Months
                                               Ended                   Year Ended December 31,
                                           September 30,    -----------------------------------------------
(Dollars in Thousands)                          2008           2007     2006     2005      2004     2003
                                         ------------------ -----------------------------------------------
<C>                                          <C>               <C>      <C>      <C>       <C>      <C>
Backlog of orders - Beginning............    $   7,934          5,932    6,918    5,514     4,052    4,834
   Add: orders...........................        8,247         23,450   16,802   18,080    13,164   11,301
   Less: sales...........................       12,883         21,448   17,788   16,676    11,702   12,083
                                         ------------------ -----------------------------------------------
Backlog of orders - Ending...............    $   3,298          7,934    5,932    6,918     5,514    4,052
                                         ================== ===============================================

Capacity Utilization.....................        79.6%          81.0%    80.9%    80.2%     78.0%    76.0%
</TABLE>

     Current Ratio
     -------------

     Management of the Company monitors the current ratio as a measure of
determining liquidity and believes the current ratio illustrates that the
Company's financial resources are adequate to satisfy its future cash
requirements through the next year. The following table depicts the Company's
current assets, current liabilities, and current ratio as of September 30, 2008
and as of December 31, 2007, 2006, 2005, 2004, and 2003:

<TABLE>
<CAPTION>
                                                                           As of December 31,
                                 As of September 30,    ---------------------------------------------------------------
(Dollars in Thousands)                 2008                2007         2006          2005         2004         2003
                              ------------------------  ----------   ----------   -----------   ----------   ----------
<S>                                  <C>                   <C>          <C>          <C>           <C>          <C>
Current assets...............        $ 12,515              17,842       16,370       22,134        14,249       14,720
                              ------------------------  ----------   ----------   -----------   ----------   ----------
Current liabilities..........        $  3,593               5,802        4,296        5,337         7,355        9,583

Current ratio................            3.48                3.08         3.81         4.15          1.94         1.54
</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.

                                       18
<PAGE>



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


Critical Accounting Policies and Estimates (Continued)
------------------------------------------

     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, 2008, 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 had cost
overruns which resulted in a reduction in profits on one contract during the
nine months ended September 30, 2008.

     Accrued Product Warranties
     --------------------------

     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. A detailed review of products still in the
warranty period is performed each quarter. Historically, the level of warranty
reserve has been appropriate based on management's assessment of estimated
future warranty claims. However, if unanticipated warranty issues arise in the
future, there could be a significant impact on the recorded warranty reserve.

     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.




                                       19
<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, 2008 Compared to
     ------------------------------------------------------------------------
     the Nine Months Ended September 30, 2007
     ----------------------------------------

Earnings Summary
----------------

     The Company had a net loss of $604,000 (or $0.23 basic loss per share) for
the nine months ended September 30, 2008, compared to net income of $399,000 (or
$0.14 basic earnings per share) for the nine months ended September 30, 2007.
The decrease in net income was primarily due to:
     o   a decrease during the first nine months of 2008 in sales and gross
         profit of $4,041,000 and $478,000, respectively, as described below;
     o   an increase in product development costs of $14,000 as described below;
     o   a decrease of $48,000 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 the reduced level of interest rates earned on
         funds available for investment;
     o   a decrease of $21,000 in other income, net attributable to a decrease
         in royalty income from a license agreement related to material handling
         equipment sales; and
     o   an increase in income tax expense of $773,000 as described below.

     Partially offsetting the above decrease in net income was a decrease in
selling, general and administrative expenses of $330,000 as described below.

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

<TABLE>
<CAPTION>
                                                                  2008               2007
                                                            -----------------  ------------------

<S>                                                            <C>                  <C>
Net sales..............................................        $ 12,883,000         16,924,000
Cost of sales..........................................           9,217,000         12,780,000
                                                            -----------------  ------------------
Gross profit on sales..................................        $  3,666,000          4,144,000
                                                            =================  ==================

Gross profit as a percentage of sales..................               28.5%              24.5%
                                                            =================  ==================
</TABLE>

     The decrease in sales was associated with a smaller amount of orders
received during 2008 when compared to the amount of orders received during 2007.

     Gross profit, as a percentage of sales, for the nine months ended September
30, 2008, when compared to the nine months ended September 30, 2007, was
favorably impacted by 8.7% due to product mix, and unfavorably impacted by 4.7%
due to the reduced absorption of overhead costs.

Selling, General and Administrative Expenses
--------------------------------------------

     Selling, general and administrative expenses of $3,992,000 were lower by
$330,000 for the nine months ended September 30, 2008 than for the nine months
ended September 30, 2007. The favorable variance in selling, general and
administrative expenses was primarily attributable to a decrease of $443,000 of
expenditures relating to sales efforts in response to quoting and sales
activities, and a decrease of $74,000 in professional fees and consulting
expenses. Partially offsetting the aforementioned favorable variance was an
increase of $85,000 in marketing expenses primarily associated with product
promotion, and $100,000 of provision related to the allowance for doubtful
accounts associated with a possible uncollectible receivable.



                                       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, 2008 Compared to
     ------------------------------------------------------------------------
     the Nine Months Ended September 30, 2007 (Continued)
     ----------------------------------------

Product Development Costs
-------------------------

     Product development costs, including patent expense, of $109,000 were
higher by $14,000 for the nine months ended September 30, 2008 than for the nine
months ended September 30, 2007. Development programs in the nine months ended
September 30, 2008 and 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, 2008 and 2007 included
voice-directed replenishment and DISPEN-SI-MATIC(R) software enhancements aimed
at promoting workplace efficiencies for the Company's customers.

Interest Income
---------------

     Interest income of $289,000 was lower by $48,000 for the nine months ended
September 30, 2008 than for the nine months ended September 30, 2007. 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 and the reduced
level of interest rates earned on funds available for investment.

Other Income, Net
-----------------

     The unfavorable variance of $21,000 in other income, net for the nine
months ended September 30, 2008 as compared to the nine months ended September
30, 2007 was primarily attributable to a decrease in royalty income from a
license agreement related to material handling equipment sales. Effective
February 1, 2007, the license agreement became royalty-free. Therefore, the
Company no longer receives royalty income from the license agreement.

Income Tax Expense (Benefit)
---------------------------

     The Company recognized income tax expense of $458,000 during the nine
months ended September 30, 2008 compared to an income tax benefit of $315,000
during the nine months ended September 30, 2007. Income tax expense for the nine
months ended September 30, 2008 was higher than statutory federal and state tax
rates primarily due to the establishment of a valuation allowance for deferred
tax assets, the federal income tax portion of unrecognized tax benefits, and the
tax benefit for the current year pre-tax loss, partially offset by a change in
unrecognized tax benefits. 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, tax-exempt interest, and an adjustment in the effective income tax
rate expected to apply based on the projected profitability of the Company for
2007.






                                       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, 2008 Compared to
     -------------------------------------------------------------------------
     the Three Months Ended September 30, 2007
     -----------------------------------------

Earnings Summary
----------------

     The Company had a net loss of $601,000 (or $0.24 basic loss per share) for
the three months ended September 30, 2008, compared to net income of $656,000
(or $0.24 basic earnings per share) for the three months ended September 30,
2007. The decrease in net income was primarily due to:
     o   a decrease  during the third quarter of 2008 in sales and gross profit
         of $3,583,000 and 564,000, respectively, as described
         below;
     o   a decrease of $33,000 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 the reduced level of interest rates earned on
         funds available for investment; and
     o   an increase in income tax expense of $701,000 as described below.

     Partially offsetting the above decrease in net income was:
     o   a decrease in selling, general and administrative expenses of $19,000
         as described below; and
     o   a decrease of $24,000 in product development costs
         as described below.

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

<TABLE>
<CAPTION>
                                                                   2008               2007
                                                            -----------------  ------------------

<S>                                                            <C>                  <C>
Net sales..............................................        $  3,715,000         7,298,000
Cost of sales..........................................           2,540,000         5,559,000
                                                            -----------------  ------------------
Gross profit on sales..................................        $  1,175,000         1,739,000
                                                            =================  ==================

Gross profit as a percentage of sales..................               31.6%             23.8%
                                                            =================  ==================
</TABLE>

     The decrease in sales was associated with a smaller amount of orders
received during 2008 when compared to the amount of orders received during 2007.

     Gross profit, as a percentage of sales, for the three months ended
September 30, 2008, when compared to the three months ended September 30, 2007,
was favorably impacted by 14.7% due to product mix, and unfavorably impacted by
6.9% due to the reduced absorption of overhead costs.

Selling, General and Administrative Expenses
--------------------------------------------

     Selling, general and administrative expenses of $1,363,000 were lower by
$19,000 for the three months ended September 30, 2008 than for the three months
ended September 30, 2007. The favorable variance in selling, general and
administrative expenses was primarily attributable to a decrease of $165,000 of
expenditures relating to sales efforts in response to quoting and sales
activities. Partially offsetting the aforementioned favorable variance was an
increase of $12,000 in marketing expenses primarily associated with product
promotion, an increase of $27,000 in professional fees and consulting expenses,
and $100,000 of provision related to the allowance for doubtful accounts
associated with a possible uncollectible receivable.




                                       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, 2008 Compared to
     -------------------------------------------------------------------------
     the Three Months Ended September 30, 2007 (Continued)
     -----------------------------------------

Product Development Costs
-------------------------

     Product development costs, including patent expense, of $3,000 were lower
by $24,000 for the three months ended September 30, 2008 than for the three
months ended September 30, 2007. 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 voice-directed replenishment
and DISPEN-SI-MATIC(R) software enhancements aimed at promoting workplace
efficiencies for the Company's customers.

Interest Income
---------------

     Interest income of $75,000 was lower by $33,000 for the three months ended
September 30, 2008 than for the three months ended September 30, 2007. 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 and the reduced
level of interest rates earned on funds available for investment.

Income Tax Expense (Benefit)
----------------------------

        The Company recognized income tax expense of $484,000 during the three
months ended September 30, 2008 compared to an income tax benefit of $217,000
during the three months ended September 30, 2007. Income tax expense for the
three months ended September 30, 2008 was higher than statutory federal and
state tax rates primarily due to the establishment of a valuation allowance for
deferred tax assets, the federal income tax portion of unrecognized tax
benefits, and the tax benefit for the current year pre-tax loss, partially
offset by a change in unrecognized tax benefits. 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, tax-exempt interest, and an adjustment in the effective
income tax rate expected to apply based on the projected profitability of the
Company for 2007.


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


Liquidity and Capital Resources
-------------------------------

     The Company's cash and cash equivalents and short-term investments at
September 30, 2008 were $8,854,000, representing 69.0% of total assets, compared
to $12,304,000, or 67.2% of total assets, at December 31, 2007. The decrease was
primarily due to the repurchase and retirement of common stock totaling
$2,665,000, purchases of capital equipment totaling $103,000, and cash used by
operating activities totaling $682,000.

     Cash used by operating activities totaling $682,000 during the nine months
ended September 30, 2008 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 $1,974,000 in
         accordance with contractual requirements; and
     o   a decrease in accounts payable in the amount of $537,000 associated
         with payments for purchases of goods and services rendered in
         accordance with job completion requirements;



                                       23
<PAGE>



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


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

     Partially offset by the following factors:
     o   a decrease in receivables, net of the allowance for doubtful accounts,
         in the amount of $882,000 in accordance with contractual requirements;
     o   a decrease in costs and estimated earnings in excess of billings in the
         amount of $741,000 in accordance with contractual requirements; and
     o   an increase in accrued product warranties in the amount of $213,000
         primarily associated with the establishment of warranties for contracts
         entering the warranty period.

     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,
compared to $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, purchases of capital equipment totaling $107,000, and cash
used by operating activities totaling $947,000.

     Cash used by operating activities totaling $947,000 during the nine months
ended September 30, 2007 was primarily due to:
      o   a decrease in customers' deposits and billing in excess of costs and
          estimated earnings in the amount of $402,000 in accordance with
          contractual requirements;
      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;
          and
      o   an increase in inventories in the amount of $210,000 relating to the
          purchase of safety stock and long-lead time items.

     Partially offset by an increase in accounts payable in the amount of
$2,337,000 associated with the purchases of goods and services rendered in
accordance with job completion requirements.

     The Company repurchased $2,665,000 of its common stock during the nine
months ended September 30, 2008 compared with $567,000 of stock repurchases
during the nine months ended September 30, 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 $17,000,000 of the
Company's common stock to up to $20,000,000. As of September 30, 2008, the
Company has $3,218,937 authorized by the Board of Directors to use for future
stock repurchases.

     The Company's line of credit facility expired on September 30, 2008. Prior
to expiration, the Company had a line of credit facility which could not exceed
$5,000,000 and was to be used primarily for working capital purposes. Interest
on the line of credit facility was at the LIBOR Market Index Rate plus 1.4%. As
of its September 30, 2008 expiration date, the Company did not have any
borrowings under the line of credit facility.

     The line of credit facility contained various non-financial covenants and
was secured by all of the Company's accounts receivables and inventory. The
Company was in compliance with all covenants prior to the line of credit
facility's September 30, 2008 expiration date. The Company expects to obtain a
new line of credit facility under similar terms and conditions as its recently
expired line of credit facility during the fourth quarter of 2008.




                                       24
<PAGE>

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


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

     The Company anticipates that its financial resources, consisting of cash
and cash equivalents, 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 continues to review opportunities with the goal of maximizing
resources, increasing stockholder value, and considering strategies and
transactions intended to improve 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, 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 of these strategic options.

Contractual Obligations
-----------------------

     The Company leases approximately 25,000 square feet in Easton, Pennsylvania
for use as its principal office. The leasing agreement, as amended, requires
fixed monthly rental payments of $18,000. 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 20, 2013.

     During the third quarter of 2008, the Company issued a $638,000 letter of
credit in the ordinary course of business to secure cash received from a
customer in connection with the sale of an automated material handling system.
The expiration date of the letter of credit is April 15, 2009.

     Future contractual obligations and commercial commitments at September 30,
2008 as noted above are as follows:

<TABLE>
<CAPTION>
                                                                            Payments Due by Period
                                                  ----------------------------------------------------------------------------------
                                   Total               2008            2009          2010         2011        2012       After 2012
                            -------------------   --------------   ------------  ------------ ----------- ------------  ------------
<S>                              <C>                  <C>             <C>           <C>         <C>          <C>           <C>
Contractual
obligations:
  Operating leases......         $  954,000           54,000          216,000       216,000     216,000      216,000       36,000
                            ===================   ==============   ============  ============ =========== ============  ============
</TABLE>

<TABLE>
<CAPTION>
                                                                   Amount of Commitment Expiration Per Period
                               Total Amounts      ----------------------------------------------------------------------------------
                                 Committed             2008            2009          2010         2011        2012       After 2012
                            -------------------   --------------   ------------  ------------ ----------- ------------  ------------
<S>                              <C>                  <C>             <C>           <C>         <C>          <C>           <C>
Other commercial
commitments:
  Letters of credit.....         $  838,000                -          838,000             -           -            -            -
                            ===================   ==============   ============  ============ =========== ============  ============
</TABLE>

     As of September 30, 2008, the Company has unrecognized tax benefits of
$242,000. The timing of cash settlement cannot be reasonably estimated.

     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, 2007.

                                       25
<PAGE>



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


Off-Balance Sheet Arrangements
------------------------------

     As of September 30, 2008, 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, 2007.

Recently Issued Accounting Pronouncements
-----------------------------------------

     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.  SFAS No. 157's fair value
measurement  requirements for non-financial  assets and liabilities that are not
required or  permitted  to be  measured at fair value on a recurring  basis have
been deferred until fiscal years  beginning after November 15, 2008. The Company
has  certain  non-financial  assets,  such as  long-lived  assets,  that  may be
re-measured to fair value on a non-recurring basis. The Company adopted SFAS No.
157 on  January 1, 2008.  The  adoption  of SFAS No. 157 did not have a material
impact 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
adopted SFAS No. 159 on January 1, 2008. The adoption of SFAS No. 159 did not
have a material impact on the Company's financial statements.



                                       26
<PAGE>



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


Recently Issued Accounting Pronouncements (Continued)
-----------------------------------------

     In December 2007, the Financial Accounting Standards Board issued SFAS No.
141(R), Business Combinations ("SFAS No. 141R"). SFAS No. 141R replaces SFAS No.
141, Business Combinations and applies to all transactions or other events in
which an entity obtains control of one or more businesses. SFAS No. 141R
requires the acquiring entity in a business combination to recognize all (and
only) the assets acquired and liabilities assumed in the transaction;
establishes the acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed; and requires the acquirer to disclose
additional information needed to evaluate and understand the nature and
financial effect of the business combination. SFAS No. 141R is effective
prospectively for fiscal years beginning after December 15, 2008 and may not be
applied before that date. The Company is currently evaluating the impact, if
any, the adoption of SFAS No. 141R will have on the Company's financial
statements.

     In December 2007, the Financial  Accounting Standards Board issued SFAS No.
160, Noncontrolling Interests in Consolidated Financial Statements--an amendment
of ARB No. 51 ("SFAS No. 160").  SFAS No. 160 is effective for fiscal years, and
interim  periods  within those fiscal years,  beginning on or after December 15,
2008, with earlier adoption prohibited. SFAS No. 160 requires the recognition of
a  noncontrolling  interest  (minority  interest) as equity in the  consolidated
financial  statements and separate from the parent's  equity.  The amount of net
earnings  attributable  to the  noncontrolling  interest  will  be  included  in
consolidated net income on the face of the income  statement.  SFAS No. 160 also
amends certain of ARB No. 51's consolidation procedures for consistency with the
requirements  of SFAS No. 141R. SFAS No. 160 also includes  expanded  disclosure
requirements  regarding  the  interests  of the  parent  and its  noncontrolling
interest.  The Company is currently  evaluating the impact, if any, the adoption
of SFAS No. 160 will have on the Company's financial statements.

     In May 2008, the Financial Accounting Standards Board issued SFAS No. 162,
The Hierarchy of Generally Accepted Accounting Principles ("SFAS No. 162"). SFAS
No. 162 identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States. This Statement will become
effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board (PCAOB) amendments to AU Section 411, The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles. The Company
does not anticipate a material impact on its financial statements from the
adoption of SFAS No. 162.


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









                                       27
<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, 2008. 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, 2008
     that has materially affected, or that is reasonably likely to materially
     affect the Company's internal control over financial reporting.

                                     28
<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 2007 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, 2007.


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, 2008:

<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>
7/01/08 - 7/31/08          30,350          $ 5.68              30,350         $   172,461         $ 2,170,609
8/01/08 - 8/31/08         145,894          $ 5.17             145,894         $   754,684         $ 4,415,925
9/01/08 - 9/30/08         237,189          $ 5.05             237,189         $ 1,196,988         $ 3,218,937
                     ------------------------------------------------------------------------
                          413,433          $ 5.14             413,433         $ 2,124,133
--------------------------------------------------------------------------------------------------------------------
</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, 2006, and 2007 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 $15,000,000.

     On January 9, 2008, 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 $15,000,000 of the Company's common stock to up to
$17,000,000.

     On August 27, 2008, 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 $17,000,000 of the Company's common stock to up to
$20,000,000.

     During the three months ended September 30, 2008, the Company repurchased
413,433 shares of common stock at a weighted average cost, including brokerage
commissions, of $5.14 per share. During the nine months ended September 30,
2008, the Company repurchased 512,381 shares of common stock at a weighted
average cost, including brokerage commissions, of $5.20 per share. Cash
expenditures for the stock repurchases during the three and nine months ended
September 30, 2008 were $2,124,133 and $2,664,920, respectively. From the
inception of the Company's stock repurchase program on August 12, 2004 through
September 30, 2008, the Company repurchased 2,150,099 shares of common stock at
a weighted average cost, including brokerage commissions, of $7.80 per share.
Cash expenditures for the stock repurchases since the inception of the program
were $16,781,063. As of September 30, 2008, $3,218,937 remained available for
repurchases under the stock repurchase program.

                                       29
<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 Matter to a Vote of Security Holders
-------       --------------------------------------------------

     The Company's Annual Meeting of Stockholders was held on August 8, 2008
with the following item being submitted to a vote of stockholders:

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

     Details of the proposal noted above was provided to stockholders in the
form of a Notice of Annual Meeting and Proxy Statement dated and mailed on July
3, 2008, with such solicitation being in accordance with Section 14 of the
Securities and Exchange Act of 1934, as amended, and the regulations promulgated
thereunder.

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

     The voting results on the election of directors are set forth as follows:

     1. Election of Directors:

         Name of Nominee         Votes For        Votes Withheld      Non-Voting
         ---------------         ---------        --------------      ----------
        Ronald J. Izewski        2,390,582            10,338            269,324
        Theodore W. Myers        2,391,456             9,464            269,324
        Robert J. Schwartz       2,391,456             9,464            269,324
        Samuel L. Torrence       2,390,982             9,938            269,324
        Leonard S. Yurkovic      2,336,497            64,423            269,324


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

     Not applicable.






                                       30
<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).







                                       31
<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:       /s/ November 13, 2008
        ---------------------------------



















                                       32
<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).






















                                       33