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Paragon Technologies' Chairman Sham Gad's Annual Letter To Stockholders

The single most important litmus test that shareholders should conduct when evaluating a company is to determine whether or not the management of that company has the same alignment of interests as the shareholders.  Alignment of interests between shareholders and management is met when managers themselves are shareholders.  Let me start with your Chairman: as of June 30, 2012, I beneficially own approximately 28% of Paragon's outstanding shares.  Not a single share was acquired via an option grant or other compensatory means but all were purchased at or above prevailing market prices.  My fortunes are 100% aligned with yours; I prosper when you prosper but more importantly, I will equally feel any financial pain.

Our two other Directors, who joined the Board earlier this year, have already become shareholders.  And the compensation structure of both our recently hired Chief Executive Officer and Chief Financial Officer was designed to ensure that their financial fortunes prosper when intrinsic value is increased.  We will benefit with you, not at your expense.

Operational Review:  2011 versus 2010

Paragon Technologies reported a net profit of $191,000 in 2011 compared with a net loss of $1.054 million in 2010.  The turn to profitability in 2011 was a result of higher gross margins and a reduction in SG&A expense.  In 2009, SG&A expense was $3.5 million, or 38% of sales.  By 2011, SG&A expense had been reduced by approximately 30% or $1 million, to $2.4 million.  Yet as any experienced business operator understands, cost cuts are not a permanent path to profitability.  In 2011, SG&A expense still constituted 29% of sales.  Going forward, our Company will be managed in a very cost efficient manner but our future profitability requires revenue growth, specifically profitable revenue growth.  Our intermediate and long-term goals consist of addressing our current lines of business, ascertaining our product relevance in the marketplace, and developing a sound and efficient business plan focused on positioning us in markets where we can be a competitive material handling and fulfillment solutions provider.

As of December 31, 2011, Paragon's per share book value stood at $3.27 compared to $3.14 in 2010.  As of June 30, 2012, per share book value stood at $3.14.  In the long run, the change in Paragon's per share book value should come to serve as a useful measure of the performance of management.  Over the past several years, however, we believe Paragon's book value has merely represented the value of the Company's current assets ascribing no value to the operation of the business.

Given the inconsistent track record of profitability that has plagued Paragon for years, it is explainable that little consideration is given to the business.  But we are implementing significant changes that we believe, over time, will lead to a more accurate valuation of the Company, a valuation we currently believe is below intrinsic value.  We are working vigorously in this pursuit.  I will provide greater color and detail on our operational endeavors in our next annual letter which, for the reasons noted below, will be out around the mid-point of the year as opposed to the tail end of the year.

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