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

FORM 10-Q

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

For the quarterly period ended September 30, 2006

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from _______ to __________

Commission File Number 000-30271

PARADIGM HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)

WYOMING 83-0211506
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)

9715 KEY WEST AVE., 3RD FLOOR
ROCKVILLE, MARYLAND 20850
(Address of principal executive offices) (Zip Code)

(301) 468-1200
Registrant's telephone number, including area code

(Former name, former address, and former fiscal year,
if changed since last report)

Indicate by check mark 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 check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Large accelerated filer |_| Accelerated filer |_| Non-accelerated
filer |X|

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|

Shares of common stock outstanding on November 7, 2006 were 20,697,929.

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PART I. FINANCIAL INFORMATION.................................................3

Item 1. Consolidated Financial Statements (Unaudited)....................3
Consolidated Balance Sheets (Unaudited)..........................3
Consolidated Statements of Operations (Unaudited)................5
Consolidated Statements of Cash Flows (Unaudited)................6
Notes to Consolidated Financial Statements.......................8

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk......25

Item 4. Controls and Procedures.........................................26

PART II. OTHER INFORMATION....................................................27

Item 1. Legal Proceedings...............................................27

Item 1A. Risk Factors....................................................27

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.....27

Item 3. Defaults Upon Senior Securities.................................27

Item 4. Submission of Matters to a Vote of Security Holders.............27

Item 5. Other Information...............................................27

Item 6. Exhibits and Reports on Form 8-K................................28

SIGNATURES....................................................................30

CERTIFICATIONS
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PARADIGM HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

9/30/2006 12/31/2005
- -------------------------------------------------------------- ------------ ------------

ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 195,989 $ 943,017
Accounts receivable - contracts 14,382,319 15,641,424
Prepaid expenses 1,034,689 622,594
Other current assets 29,270 157,804
------------ ------------
TOTAL CURRENT ASSETS 15,642,267 17,364,839
------------ ------------

PROPERTY AND EQUIPMENT, AT COST
Furniture and fixtures 151,802 147,896
Software 608,368 573,612
Leasehold improvements 140,559 119,981
Automobiles 14,897 66,737
Equipment 1,238,453 1,002,538
------------ ------------
TOTAL PROPERTY AND EQUIPMENT 2,154,079 1,910,764
Less: Accumulated depreciation (1,318,929) (796,857)
------------ ------------
NET PROPERTY AND EQUIPMENT 835,150 1,113,907
------------ ------------
OTHER ASSETS
Intangible assets, net of accumulated amortization 239,860 420,589
Capitalized software costs, net of accumulated amortization 109,691 --
Goodwill 628,408 2,387,372
Deposits 102,569 85,884
Other long-term assets 50,430 10,266
------------ ------------
TOTAL ASSETS $ 17,608,375 $ 21,382,857
============ ============

The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.

PARADIGM HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

9/30/2006 12/31/2005
- --------------------------------------------------- ----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 59,672 $ 2,305,486
Note payable - line of credit 4,731,698 4,882,871
Accounts payable and accrued expenses 6,024,413 5,322,234
Accrued salaries and related liabilities 2,126,676 2,260,410
Income taxes payable -- 3,595
Provision for contract loss 963,742 --
Deferred revenue 232,426 232,433
Deferred rent, current portion 31,935 16,388
Capital leases payable, current portion 31,778 25,953
Deferred income taxes, current portion 830,221 781,813
----------- -----------
TOTAL CURRENT LIABILITIES 15,032,561 15,831,183
----------- -----------
LONG-TERM LIABILITIES
Deferred rent 173,575 135,295
Capital leases payable, net of current portion 40,938 56,370
Security deposits held 33,408 --
Deferred income taxes, net of current portion 162,166 681,085
----------- -----------
TOTAL LIABILITIES 15,442,648 16,703,933
----------- -----------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Common stock - $.01 par value, 50,000,000 shares
authorized, 20,600,707 shares and 20,503,486 shares
issued and outstanding as of September 30, 2006 and
December 31, 2005, respectively 206,007 205,034
Additional paid-in capital 1,717,414 1,495,000
Retained earnings 242,306 2,978,890
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,165,727 4,678,924
----------- -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,608,375 $21,382,857
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The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.

PARADIGM HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

------------------------------- -------------------------------
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2006 2005 2006 2005
- -------------------------------------------- ------------ ------------ ------------ ------------

Contract Revenue
Service contracts $ 10,903,410 $ 10,524,664 $ 35,777,918 $ 31,691,621
Repair and maintenance contracts 3,588,557 5,018,669 11,491,569 14,527,534
------------ ------------ ------------ ------------
Total contract revenue 14,491,967 15,543,333 47,269,487 46,219,155
------------ ------------ ------------ ------------
Cost of revenue
Service contracts 9,877,670 8,417,929 29,791,898 25,603,568
Repair and maintenance contracts 3,205,251 4,699,727 10,175,066 13,528,080
------------ ------------ ------------ ------------
Total cost of revenue 13,082,921 13,117,656 39,966,964 39,131,648
------------ ------------ ------------ ------------

Gross margin 1,409,046 2,425,677 7,302,523 7,087,507

Selling, general and administrative 2,723,383 1,996,307 8,015,506 5,876,367
Impairment loss 1,901,145 -- 1,901,145 --
------------ ------------ ------------ ------------
(Loss) income from operations (3,215,482) 429,370 (2,614,128) 1,211,140
------------ ------------ ------------ ------------
Other (expense) income
Interest and other income (17,695) 2,865 (23,475) 9,516
Interest expense (115,114) (53,396) (352,347) (154,961)
------------ ------------ ------------ ------------
Total other (expense) income (132,809) (50,531) (375,822) (145,445)
------------ ------------ ------------ ------------

(Loss) income before income taxes (3,348,291) 378,839 (2,989,950) 1,065,695
------------ ------------ ------------ ------------

(Benefits) provision for income taxes (391,733) 131,452 (253,366) 362,190
------------ ------------ ------------ ------------

Net (loss) income $ (2,956,558) $ 247,387 $ (2,736,584) $ 703,505
------------ ------------ ------------ ------------

Weighted average number of common shares:
Basic 20,535,893 20,003,368 20,514,288 20,003,368
Diluted 20,535,893 20,003,368 20,514,288 20,003,368

Net (loss) income per common share:
Basic $ (0.14) $ 0.01 $ (0.13) $ 0.04
Diluted $ (0.14) $ 0.01 $ (0.13) $ 0.04
------------ ------------ ------------ ------------

The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.

PARADIGM HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

For the nine months ended Sept. 30, 2006 2005
- --------------------------------------------------------------- ------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (2,736,584) $ 703,505

ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Impairment loss 1,901,145 --
Share-based compensation expense 223,387 --
Depreciation and amortization 426,731 275,053
Bad debt expense 10,025 931
Loss on sale and disposal of property and equipment 29,779 40,722
Deferred income taxes (470,511) (524,854)

(INCREASE) DECREASE IN
Accounts receivable - contracts 1,249,080 (1,840,880)
Inventory, net -- (32,914)
Prepaid expenses (412,095) 4,086,518
Other current assets 128,534 10,603
Deposits (16,685) (6,200)
Other long-term assets (40,164) --
(DECREASE) INCREASE IN
Accounts payable and accrued expenses 702,179 (1,044,262)
Accrued salaries and related liabilities (133,734) 210,367
Income taxes payable (3,595) --
Provision for contract loss 963,742 --
Deferred revenue (7) (1,283,092)
Deferred rent 53,827 5,436
Security deposit held 33,408 --
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,908,462 600,933
------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES
Additional purchase price consideration for business acquired (29,597) --
Capitalized software costs (146,255) --
Proceeds from sale of assets 40,885 300,000
Purchase of property and equipment (103,292) (337,808)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (238,259) (37,808)
------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft (2,245,814) 431,078
Payments on capital leases (20,244) (5,056)
Proceeds from line of credit 40,912,408 32,289,074
Payments on line of credit (41,063,581) (32,326,434)
------------ ------------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (2,417,231) 388,662
------------ ------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (747,028) 951,787

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 943,017 179,389
------------ ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD $ 195,989 $ 1,131,176
============ ============

The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.

(Unaudited) (Unaudited)
For the nine months ended Sept. 30, 2006 2005
- --------------------------------------------------- ---------- ----------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Assets sold in exchange for a note receivable $ -- $ 750,000
========== ==========
Equipment purchased under capital leases $ 10,637 $ 40,825
========== ==========
Cash paid for income taxes $ 816,612 $ 212,205
========== ==========
Cash paid for interest $ 346,959 $ 154,961
========== ==========

The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.

PARADIGM HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

Paradigm Holdings, Inc. (the "Company") is the parent of three wholly-owned
subsidiaries that include Paradigm Solutions Corp. ("PSC"), Paradigm Solutions
International ("PSI") and Blair Management Services ("Blair") t/d/b/a Blair
Technology Group. Reference is made to the Annual Report on Form 10-K for the
Company for the year ended December 31, 2005 filed with the Securities and
Exchange Commission ("SEC") for additional information on the corporate
structure.

The interim consolidated financial statements have been prepared pursuant to the
rules and regulations of the SEC. Therefore, certain financial information and
footnote disclosures accompanying annual financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") are omitted in this interim report pursuant to the SEC rules
and regulations. The interim consolidated financial statements and notes thereto
should be read in conjunction with the Annual Report on Form 10-K for the
Company for the year ended December 31, 2005.

The accompanying unaudited consolidated financial statements for the Company
reflect all normal recurring adjustments that are necessary, in the opinion of
management, to present fairly the results of operations in accordance with GAAP.
All significant intercompany accounts and transactions have been eliminated in
consolidation.

For a description of the Company's accounting policies, refer to Note 1 of the
Notes to Consolidated Financial Statements of the Annual Report on Form 10-K for
the Company for the year ended December 31, 2005. Certain reclassifications have
been made to the consolidated financial statements for the prior period
presented to conform to the current period presentation.

On September 26, 2006, the Company announced its plan to consider strategic
alternatives, including divestiture, regarding its Commercial business. The
Company defines the Commercial business as the operations and associated assets
related to both its OpsPlanner software solutions and the Blair entity. The
Commercial business is equal to the PSI and Blair subsidiaries. The Company did
not classify the Commercial business as discontinued operations as of September
30, 2006 since the Company did not meet the requirements of Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." The Company is actively marketing the
Commercial business and the Commercial business is available for immediate sale
in its present condition. Management believes the sale of the Commercial
business will be completed within one year of the announcement date.

REVENUE RECOGNITION

The Company generated substantially all of its revenue from long-term contracts
including time and materials, fixed price and cost-type contracts.

Revenue from time and materials contracts is recognized as costs are incurred at
amounts represented by the agreed-upon billing amounts.

Fixed price labor hour and level of effort contracts involve defined numbers of
hours or categories of personnel. Revenue on fixed unit price contracts, where
specific units of output under service agreements are delivered, is recognized
as units are delivered based on the specific price per unit. Fixed price
maintenance contracts are recognized as revenue on a pro-rata basis over the
life of the contract. In certain arrangements, the Company enters into contracts
that include the delivery of a combination of two or more of its service
offerings. Such contracts are divided into separate units of accounting and
revenue is recognized separately, and in accordance with, the Company's revenue
recognition policy for each element. Revenue from cost-type contracts is
recognized as costs are incurred on the basis of direct costs plus allowable
operating costs and expenses and an allocable portion of the fixed fee.

Software revenue recognition is in accordance with AICPA Statement of Position
97-2, "Software Revenue Recognition." Since the Company has not established
vendor specific objective evidence of fair value, recognition of revenue from
the sale of licenses is over the term of the contract.

The Company is subject to audits from federal government agencies. The Company
has reviewed its contracts and determined there is no material risk of financial
adjustments due to government audit. To date, no such audits have been
conducted.

Revenue recognized on contracts for which billings have not yet been presented
to customers is included in the accounts receivable - contracts classification
on the accompanying consolidated balance sheets.

Deferred revenue relates to contracts for which customers pay in advance for
services to be performed at a future date. The Company recognizes deferred
revenue attributable to our maintenance contracts over the related service
periods, which run through 2011.

Revenue related to our OpsPlanner offering, including consulting, software
subscriptions and technical support, is deferred and recognized over the
appropriate contract service period. These payments are nonrefundable.

MAJOR CUSTOMERS

During the three months ended September 30, 2006 and 2005, the Company's
revenues generated from five major customers, totaled 83% and 81% of total
revenue, respectively. During the nine months ended September 30, 2006 and 2005,
the Company's revenues generated from five major customers, totaled 80% and 81%
of total revenue, respectively. The Company's accounts receivable related to
these five major customers were 90% and 80% of total accounts receivable at
September 30, 2006 and December 31, 2005, respectively. For the three and nine
months ended September 30, 2006, the Internal Revenue Service, Bureau of
Alcohol, Tobacco, Firearms and Explosives, Office of Community Planning and
Development and the Office of the Comptroller of the Currency each comprised
greater than 10% of the Company's revenues. The Company defines major customer
by agency within the federal government.

GOODWILL AND INTANGIBLE ASSETS

The Company's acquisition of Blair resulted in the recording of intangible
assets and goodwill. Pursuant to SFAS No. 142, "Goodwill and Other Intangible
Assets", identifiable intangible assets associated with non-compete agreements
and customer relationships will be amortized over their economic lives of one
and ten years, respectively. Goodwill is subject to impairment to the extent the
Company's operations experience significant negative results. These negative
results can be the result of the Company's individual operations or negative
trends in the Company's industry or in the general economy, which impact the
Company. To the extent the Company's goodwill is determined to be impaired then
these balances are written down to their estimated fair value on the date of the
impairment.

IMPAIRMENT OF LONG-LIVED ASSETS

Pursuant to SFAS No. 144,"Accounting for the Impairment or Disposal of
Long-Lived Assets", the Company periodically evaluates the recoverability of its
long-lived assets. This evaluation consists of a comparison of the carrying
value of the assets with the assets' expected future cash flows, undiscounted
and without interest costs. Estimates of expected future cash flows represent
management's best estimate based on reasonable and supportable assumptions and
projections. If the expected future cash flow, undiscounted and without interest
charges, exceeds the carrying value of the asset, no impairment is recognized.
Impairment losses are measured as the difference between the carrying value of
long-lived assets and their fair market value, based on discounted future cash
flows of the related assets. Management believes circumstances or conditions
have arisen that would indicate impairment of the goodwill at September 30,
2006. During the quarter ended September 30, 2006, the Company conducted its
annual impairment review of long-lived assets and as a result of this review,
the Company recorded an impairment charge of $1,901,145 against the goodwill
recorded from the acquisition of Blair in October 2005. The impairment is the
result of slower than expected revenue growth and operating losses within the
Company's Commercial business that have continued to occur through the period
ended September 30, 2006.

CAPITALIZED SOFTWARE COSTS

The Company has capitalized costs related to the development of a certain
software product. SFAS No. 86, "Accounting for the Cost of Computer Software to
be Sold, Leased or Otherwise Marketed", requires the capitalization of certain
software development costs when technological feasibility has been established,
which the Company generally defines as completion of a working model.
Capitalization ceases when the products are available for general release to
customers, at which time amortization of the capitalized costs begins on a
straight-line basis over the estimated product life, or on the ratio of current
revenues to total projected product revenues, whichever is greater. This product
has an estimated economic life of two years based on anticipated sales and the
Company's experience with previously released versions. Due to inherent
technological changes in software development, however, the period over which
such capitalized costs will be amortized may be modified.

As of December 31, 2005, the Company had not established technological
feasibility for this software product, and therefore, no costs had been
capitalized. Technological feasibility was established on January 3, 2006 upon
the completion of a working model and the Company capitalized software
development costs of $146,255 during the quarter ended March 31, 2006. The
Company capitalized compensation and consulting expenses related to the
development and testing of the software. Capitalization of such costs ceased on
March 20, 2006 when the software product was available for general release.

Capitalized software costs at September 30, 2006 were $146,255 with accumulated
amortization of $36,564. The capitalized software cost has no residual value at
the end of its useful life. Amortization expense for the three and nine months
ended September 30, 2006 was $18,282 and $36,564, respectively.

Prior to January 1, 2006, all costs incurred related to the development of this
software product were expensed. All other research and development costs are
expensed as incurred. For the three and nine months ended September 30, 2006 and
2005, the Company's research and development expenses totaled $114,309 and
$234,315 and $284,545 and $565,229, respectively.

STOCK-BASED COMPENSATION

On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
"Share-Based Payment", which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and
directors including employee stock options based on estimated fair values. SFAS
No. 123 (revised) supersedes the Company's previous accounting under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" for periods beginning in 2006. In March 2005, the SEC issued Staff
Accounting Bulletin ("SAB") No. 107 relating to SFAS No. 123 (revised). The
Company has applied provisions of SAB No. 107 in its adoption of SFAS No. 123
(revised).

The Company has adopted SFAS No. 123 (revised) using the modified prospective
transition method, which requires the application of the accounting standard as
of January 1, 2006, the first day of the Company's fiscal year 2006. The
Company's Consolidated Financial Statements as of and for the three and nine
months ended September 30, 2006 reflect the impact of SFAS No. 123 (revised). In
accordance with the modified prospective transition method, the Company's
Consolidated Financial Statements for the three and nine months ended September
30, 2005 have not been restated to reflect, and do not include, the impact of
SFAS No. 123 (revised).

SFAS No. 123 (revised) requires companies to estimate the fair value of
share-based payment awards on the grant-date using an option-pricing model.
Prior to the adoption of SFAS No. 123 (revised), the Company accounted for
share-based awards to employees and directors using the intrinsic value method
in accordance with APB No. 25 as allowed under SFAS No. 123 "Accounting for
Stock-Based Compensation." Effective May 15, 2006, the Company granted options
to acquire 500,000 shares of common stock to one of its officers pursuant to an
offer of employment. One-third of the options will vest on each anniversary of
the grant date. The options have an exercise price equal to $2.50 per share, and
expire on May 14, 2016. The options are not intended to be incentive stock
options under Section 422 of the Internal Revenue Code of 1986, as amended and
will be interpreted accordingly. Effective September 1, 2006, the Company issued
97,221 shares of common stock to two employees as part of their employment
agreements. These shares vested immediately. The Company did not grant any
share-based awards to employees, officers and directors for the three and nine
months ended September 30, 2005.

In accordance with SFAS No. 123 (revised), the Company recognizes share-based
compensation expense over the requisite service period for: (i) compensation
expense for share-based payment awards granted prior, but not yet vested as of
December 31, 2005, based on the grant-date fair value estimated in accordance
with the pro forma provisions of SFAS 123 and (ii) compensation expense for the
share-based payment awards granted subsequent to December 31, 2005, based on the
grant-date fair value estimated in accordance with the provisions of SFAS No.
123 (revised). The Company recognized $70,194 and $88,250 as share-based
compensation expense for the options granted on May 15, 2006 for the three and
nine months ended September 30, 2006, respectively. The Company recognized
$135,137 as share-based compensation expense for the common stock issued on
September 1, 2006.

There was no share-based compensation expense related to employee stock options
recognized during the three and nine months ended September 30, 2005.

Upon adoption of SFAS No. 123 (revised), the Company continues to use the
Black-Scholes option pricing models for share-based awards, as was utilized
previously and required under SFAS No. 123.

Under SFAS No. 123 (revised), all tax benefits of deductions resulting from the
exercise of stock options in excess of compensation costs recognized from those
options (excess tax benefits) are to be classified as financing cash flows
within the Consolidated Statements of Cash Flows. For the three and nine months
ended September 30, 2006, no vested stock options held by employees or directors
were exercised.

RECENT ACCOUNTING PRONOUNCEMENTS

In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments," an amendment of FASB Statements No. 133 and 140. SFAS
No. 155 will be effective for the Company beginning in the first quarter of
2007. The statement permits interests in hybrid financial instruments that
contain an embedded derivative that would otherwise require bifurcation, to be
accounted for as a single financial instrument at fair value, with changes in
fair value recognized in earnings. This election is permitted on an
instrument-by-instrument basis for all hybrid financial instruments held,
obtained, or issued as of the adoption date. The adoption of SFAS No. 155 is not
expected to have a material impact on the Company's statements of operations,
financial position, or cash flows.

In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets", which requires all separately recognized servicing assets and
servicing liabilities to be measured initially at fair value and permits, but
does not require, an entity to subsequently measure those servicing assets or
liabilities at fair value. SFAS No. 156 is effective at the beginning of the
first fiscal year after September 15, 2006. All requirements for recognition and
initial measurement of servicing assets and servicing liabilities will be
applied prospectively to all transactions occurring after the adoption of this
statement. The Company will adopt SFAS No. 156 on January 1, 2007. The adoption
of SFAS No. 156 is not expected to have a material impact on the Company's
statements of operations, financial position, or cash flows.

In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB No. 109" (FIN No. 48).
FIN No. 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The Company will adopt FIN No. 48 on
January 1, 2007. The adoption of FIN No. 48 is not expected to have a material
impact on the Company's statements of operations, financial position, or cash
flows.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements",
which defines fair value, establishes a framework for a measuring fair value in
GAAP, and expands disclosures about fair value measurements. The Company will
adopt SFAS No. 157 on January 1, 2008. The adoption of SFAS No. 157 is not
expected to have a material impact on the Company's statements of operations,
financial position, or cash flows.

In September 2006, the SEC issued SAB No. 108 regarding the quantification of
financial statement misstatements. SAB No. 108 requires a "dual approach" for
quantifications of errors using both a method that focuses on the income
statement impact, including the cumulative effect of prior years' misstatements,
and a method that focuses on the period-end balance sheet. SAB No. 108 will be
effective for the Company on January 1, 2007. The adoption of SAB No. 108 is not
expected to have a material impact on the Company's statements of operations,
financial position, or cash flows.

2. ACCOUNTS RECEIVABLE

The accounts receivable consist of billed and unbilled amounts under contracts
in progress with governmental units, principally the Office of Community
Planning and Development, Bureau of Alcohol, Tobacco, Firearms and Explosives,
the Office of the Comptroller of the Currency, the U.S. Secret Service, and the
Internal Revenue Service, as well as commercial businesses. The components of
accounts receivable at September 30, 2006 and December 31, 2005 are:

Sept. 30, 2006 Dec. 31, 2005
-------------- -------------
Billed receivables $ 4,428,850 $ 7,466,935
Unbilled receivables 9,953,469 8,174,489
-------------- -------------
Total $ 14,382,319 $ 15,641,424
============== =============

All receivables are expected to be collected during the next twelve months and
are pledged to the bank as collateral for the line of credit. The Company's
unbilled receivables are comprised of contract costs that cover the current
service period, which are normally billed in the following month, and contracts
performed on a fixed-price milestone basis, which will be billed within one
year. The Company's billed receivables at September 30, 2006 and December 31,
2005 contained retainage of approximately $10,000.

3. PREPAID EXPENSES

Prepaid expenses at September 30, 2006 and December 31, 2005, consist of the
following:

Sept. 30, 2006 Dec. 31, 2005
-------------- -------------
Prepaid insurance, rent and
software maintenance agreements $ 225,930 $ 163,068
Prepaid corporate income taxes 616,442 20,120
Employee advances and prepaid travel 5,921 41,444
Contract-related prepaid expenses 9,238 299,132
Other prepaid expenses 177,158 98,830
-------------- -------------
Total prepaid expenses $ 1,034,689 $ 622,594
============== =============

4. INTANGIBLE ASSETS

Intangible assets consisted of the following at September 30, 2006 and December
31, 2005:

September 30, 2006 December 31, 2005
-------------------------- --------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
-------- -------- -------- --------

Non-compete agreements $ 97,903 $ 93,823 $ 97,903 $ 20,396
Customer relationships 260,771 24,991 350,382 7,300
-------- -------- -------- --------
Total $358,674 $118,814 $448,285 $ 27,696
======== ======== ======== ========

The intangible assets have no residual value at the end of their useful lives.
Amortization expense for the three and nine months ended September 30, 2006 was
$21,928 and $118,814, respectively. There was no amortization for the
corresponding periods in 2005.

5. NOTE PAYABLE - LINE OF CREDIT

On July 28, 2005, the Company entered into a two year Loan and Security
Agreement with Chevy Chase Bank that provides for a revolving line of credit
facility of up to $9 million. The Loan and Security Agreement became effective
August 4, 2005. The revolving line of credit will be used to borrow revolving
loans for working capital and general corporate purposes.

The revolving loans under the Chevy Chase Bank Loan and Security Agreement are
collateralized by a first priority lien on substantially all of the assets of
the Company, excluding intellectual property. Under the Loan and Security
Agreement, the line of credit is due on demand and interest is payable monthly
depending on the Company's leverage ratio at the LIBOR rate plus the applicable
spread which ranges from 2.25% to 3.00%. Of the total borrowings, the Company
may use up to $500,000 for letters of credit. As of September 30, 2006, the
Company had set aside $400,000 in total letters of credit. The Loan and Security
Agreement requires that the Company maintains certain covenants and ratios,
which are calculated quarterly. On March 30, 2006, the Company amended the Loan
and Security Agreement with Chevy Chase Bank to modify the tangible net worth,
debt service coverage ratio and maximum leverage ratio covenants as follows: (1)
minimum tangible net worth of not less than $1,800,000 for December 31, 2005 and
March 31, 2006, which was increased to $2,000,000 by June 30, 2006 and increased
again by 50% of the Company's net income for each fiscal year end beginning with
December 31, 2006; (2) minimum debt service coverage ratio as of December 31,
2005 of not less than 1.150 to 1.000, which was increased to 1.500 to 1.000 by
September 30, 2006; (3) maximum leverage ratio of 9.100 to 1.000 for December
31, 2005, which was decreased to 7.500 to 1.000 by March 31, 2006, 5.500 to
1.000 by June 30, 2006, 5.250 to 1.000 by September 30, 2006 and 4.000 to 1.000
by December 31, 2006. Because the Company was not in compliance with the maximum
leverage ratio covenant for the period ending March 31, 2006, the Company
amended the Loan and Security Agreement with Chevy Chase Bank to modify the
maximum leverage ratio for March 31, 2006 to 9.100 to 1.000, for June 30, 2006
to 6.500 to 1.000 and for December 31, 2006 to 4.500 to 1.000. On August 11,
2006, Chevy Chase Bank waived the covenant and ratio requirements for the
quarter ended June 30, 2006. On November 14, 2006, Chevy Chase Bank waived the
covenant and ratio requirements for the quarter ending September 30, 2006.

6. NET INCOME PER COMMON SHARE

Net income per common share is computed by dividing net income by the weighted
average number of common shares outstanding during the reported period. Diluted
net income per common share assumes the issuance of common shares pursuant to
stock-based compensation plans at the beginning of the applicable period. The
following table reflects the computation of the Company's basic and diluted net
income per common share for the three and nine months ended September 30, 2006
and 2005.

Net Per Share
Income Shares Amount
----------- ---------- -----

Basic net loss per common share for the
three months ended September 30, 2006:
Loss available to common stockholders $(2,956,558) 20,535,893 $(0.14)
Effect of dilutive stock options -- -- --
----------- ---------- ------
Diluted net loss per common share for
the three months ended September 30, 2006: $(2,956,558) 20,535,893 $(0.14)
=========== ========== ======

Basic net income per common share for the
three months ended September 30, 2005:
Income available to common stockholders $ 247,387 20,003,368 $ 0.01
Effect of dilutive stock options -- -- --
----------- ---------- ------
Diluted net income per common share for
the three months ended September 30, 2005: $ 247,387 20,003,368 $ 0.01
=========== ========== ======

Basic net loss per common share for the
nine months ended September 30, 2006:
Loss available to common stockholders $(2,736,584) 20,514,288 $(0.13)
Effect of dilutive stock options -- -- --
----------- ---------- ------
Diluted net loss per common share for
the nine months ended September 30, 2006: $(2,736,584) 20,514,288 $(0.13)
=========== ========== ======

Basic net income per common share for
the nine months ended September 30, 2005:
Income available to common stockholders $ 703,505 20,003,368 $ 0.04
Effect of dilutive stock options -- -- --
----------- ---------- ------
Diluted net income per common share for
the nine months ended September 30, 2005: $ 703,505 20,003,368 $ 0.04
=========== ========== ======

The Company incurred net losses for the three and nine months ended September
30, 2006. Therefore, all common shares issuable pursuant to stock-based
compensation plans were not considered in the diluted loss per share
calculations due to the anti-dilutive effect of such shares. For the three and
nine months ended September 30, 2006, the Company had total weighted average
stock options of 117,815 shares and 124,084 shares, respectively, that were not
included in the calculation of diluted net loss per common share as their effect
would be anti-dilutive.

7. STOCK OPTIONS

The Company periodically provides compensation in the form of common stock to
certain employees and Company's directors.

Effective May 15, 2006, the Company granted options to acquire 500,000 shares of
common stock to one of the officers of the Company. One-third of the options
will vest on each anniversary of the grant date for the next three years. The
options have an exercise price equal to $2.50 per share and expire on May 14,
2016. The options are not intended to be incentive stock options under Section
422 of the Internal Revenue Code of 1986, as amended and will be interpreted
accordingly. The Company did not grant any share-based awards to employees,
officers and directors for the three and nine months ended September 30, 2005.

Effective September 1, 2006, the Company issued 97,221 shares of common stock to
two employees in accordance with their employment agreements. The fair value of
the options granted on May 15, 2006 and the common stock shares issued on
September 1, 2006 was estimated on the date of the issuance using the
Black-Scholes options-pricing model, with the following assumptions:

Options Stock
------- -----
Dividend yield None None
Risk-free interest rate 5.16% 5.16%
Expected volatility 53.6% 53.6%
Expected term of common stock 6 years N/A
Forfeiture rate Zero Zero

Dividend Yield - The Company has never declared or paid dividends on its common
stock and has no plans to do so in the foreseeable future.

Risk-Free Interest Rate - Risk-free interest rate is based on U.S. Treasury
zero-coupon issues with a remaining term approximating the expected life of the
option term assumed at the date of grant.

Expected Volatility - Volatility is a measure of the amount by which a financial
variable such as a share price has fluctuated (historical volatility) or is
expected to fluctuate (expected volatility) during a period. The expected
volatility is based on a combination of the historical volatility of the
Company's stock for the prior year and supported by volatilities of similar
entities.

Expected Term of the Options and Common Stock - This is the period of time that
the options granted are expected to remain unexercised. The Company estimates
the expected life of the option term based on an estimated average life of the
options granted. Based on a lack of historical information, the Company
estimated the expected life would be six years for options granted in May 2006
using the safe harbor criteria of SEC SAB No. 107. Since the common stock was
granted with no vesting period and was immediately issued at the grant date, the
expected term is not applicable to this grant of common stock.

Forfeiture Rate - This is the estimated percentage of options granted that are
expected to be forfeited or canceled on an annual basis before becoming fully
vested. The Company uses a forfeiture rate that is a blend of past turnover data
and a projection of expected results over the following twelve month period
based on projected levels of operations and headcount levels at various
classification levels with the Company. A forfeiture rate of zero was used for
the options granted in May 2006 as they related to one officer and was used for
the common stock issued in September 2006 as the common stock was issued
immediately upon grant.

The fair value of the options granted on May 15, 2006 was approximately
$705,000, which was included as part of additional paid-in capital. The fair
value of the common stock issued on September 1, 2006 was approximately
$135,137, which was expensed during the quarter ended September 30, 2006 and was
included as part of additional paid-in capital.

The following table summarized information regarding the 2006 options activity.

Weighted Average
Number of Options Exercise Price
------------------ ----------------
Outstanding, beginning of year 2,122,000 $ 1.70
Granted 500,000 2.50
Exercised -- --
Expired -- --
Cancelled (302,000) 1.70

Outstanding, September 30, 2006 2,320,000 $ 1.87
---------- --------

Exercisable, September 30, 2006 1,820,000 $ 1.70
========== ========

As of September 30, 2006, the 500,000 options granted on May 15, 2006 are the
only non vested options.

The following summarizes the stock options outstanding and exercisable at
September 30, 2006.

Options Outstanding Options Exercisable

Weighted
Weighted Average Weighted
Average Remaining Average
Options Exercise Contractual Options Exercise
Exercise Price Outstanding Price Life Exercisable Price
----------------------------------------------------------------

$1.70 1,820,000 $ 1.70 9 years 1,820,000 $ 1.70
$2.50 500,000 $ 2.50 9.50 years -- --
============ ========= =========== =========== ========

The intrinsic value of the options outstanding is zero based on the September 29
closing stock price of $1.30.

8. CONTRACT STATUS

PROVISIONAL INDIRECT COST RATES

Billings under cost-type government contracts are calculated using provisional
rates which permit recovery of indirect costs. These rates are subject to audit
on an annual basis by the government agencies' cognizant audit agency. The cost
audits will result in the negotiation and determination of the final indirect
cost rates which the Company may use for the period(s) audited. The final rates,
if different from the provisionals, may create an additional receivable or
liability.

As of September 30, 2006, the Company has had no final settlements on indirect
rates. The Company periodically reviews its cost estimates and experience rates
and adjustments, if needed, are made and reflected in the period in which the
estimates are revised. In the opinion of management, redetermination of any
cost-based contracts for the open years will not have any material effect on the
Company's financial position or results of operations.

The Company has authorized but uncompleted contracts on which work is in
progress at September 30, 2006 approximately, as follows:

Total contract prices of initial contract awards, including
exercised options and approved change orders (modifications) $ 238,204,415
Completed to date 211,232,625
- -------------------------------------------------------------------------------
Authorized backlog $ 26,971,790
=============

The foregoing contracts contain unfunded and unexercised options not reflected
in the above amounts of approximately $51,758,000.

9. PROVISION FOR CONTRACT LOSS

Based on an updated and revised estimate at completion ("EAC"), the Company
estimates that its firm fixed price software development contract is expected to
perform at an operating loss for the remainder of the contract term. The Company
has recorded the expected future operating loss of approximately $963 thousand
during the quarter ended September 30, 2006. The Company will update its EAC on
a monthly basis and record changes to the EAC during the period they become
known.

10. SUBSEQUENT EVENTS

On November 1, 2006, the Company issued an additional 97,222 shares of common
stock to the employees disclosed in the Stock-Based Compensation section of Note
1 as part of their employment agreements. The fair value of the common shares
issued on November 1, 2006 will be estimated based on the date of issuance using
the Black-Scholes options-pricing model.

PARADIGM HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

This quarterly report contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "could," "forecasts," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," "see," "target," "projects," "position,"
or "continue" or the negative of such terms and other comparable terminology.
These statements reflect our current expectations, estimates, and projections.
These statements are not guarantees of future performance and involve risks,
uncertainties, and assumptions that are difficult to predict. Actual events or
results may differ materially from what is expressed or forecasted in these
forward-looking statements. We disclaim any intention or obligation to update
any forward-looking statement.

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

Paradigm Holdings, Inc. (the "Company" or "Paradigm") provides information
technology and business continuity solutions to government and commercial
customers. Headquartered in Rockville, Maryland, the Company was founded on the
philosophy of high standards of performance, honesty, integrity, customer
satisfaction, and employee morale.

With an established core foundation of experienced executives, the Company has
rapidly grown from six employees in 1996 to the current level of approximately
300 personnel. Revenues have grown from $51 million in 2003 to over $63 million
by the end of 2005.

Paradigm operates through two subsidiary companies: 1) Paradigm Solutions
Corporation ("PSC"), which was incorporated in 1996 to deliver information
technology (IT) services to federal agencies, and 2) Paradigm Solutions
International ("PSI"), which was incorporated in 2004 to deliver IT solutions
(with a special focus in Business Continuity Planning and Emergency Management)
and software to commercial clients. On October 14, 2005, PSI acquired Blair
Management Services, Inc. t/d/b/a Blair Technology Group ("Blair).

On September 26, 2006, the Company announced its plan to consider strategic
alternatives, including divestiture, regarding its Commercial business. The
Company defines the Commercial business as the operations and associated assets
related to both its OpsPlanner software solutions and the Blair entity. The
Commercial business is equal to the PSI and Blair subsidiaries. The Company did
not classify the Commercial business as discontinued operations at September 30,
2006 since the Company did not meet one of the necessary criteria listed in
paragraph 30 of Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." The Company is
actively marketing the Commercial business and the Commercial business is
available for immediate sale in its present condition. Management believes the
sale of the Commercial business will be completed within one year of the
announcement date.

The Company derives substantially all of its revenues from fees for information
technology solutions and services. The Company generates these fees from
contracts with various payment arrangements, including time and materials
contracts, fixed-price contracts and cost-type contracts. The Company typically
issues invoices monthly to manage outstanding accounts receivable balances. The
Company recognizes revenues on time and materials contracts as the services are
provided. For the quarter ended September 30, 2006, Paradigm revenue was
comprised of 58.3% fixed price, 23.6% time and material, and 18.1% cost-type
contracts.

Paradigm's historical revenue growth is attributable to various factors,
including an increase in the size and number of projects for existing and new
clients. For the quarter ended September 30, 2006, contracts with the federal
government and contracts with prime contractors of the federal government
accounted for approximately 92% of the Company's revenues. During that same
period, the Company's five largest clients, all agencies within the federal
government, generated approximately 83% of the Company's revenues. In most of
these engagements, the Company retains full responsibility for the end-client
relationship and direct and manage the activities of the Company's contract
staff.

PSC utilized the Small Business Administration ("SBA") 8(a) Business Development
("BD") Program to access the federal marketplace starting in October of 1995 and
graduated from the program in October of 2004. The term "graduate" is used to
refer to a Participant's exit from the 8(a) BD Program at the expiration of the
participant's term, thus the business is no longer considered 8(a). This
program, allowed PSC to build a base of business with various federal civilian
agencies. The backlog of federal business under this program will continue until
the contracts end, after which the Company will pursue several avenues to
maintain the business it believes is important to its strategy in this
marketplace. This includes either migrating this work to other government
contract vehicles, if allowed by the customer, or taking on a subcontract role
when the business comes up for re-compete and teaming with a SBA business who
would be the prime. As of September 30, 2006, 100% of the Company's remaining
SBA 8(a) contracts are scheduled for re-compete in 2007.

Due to graduation from the SBA 8(a) BD Program, Paradigm is no longer classified
as a small disadvantaged business by the federal government. Accordingly, the
Company no longer has access to contract vehicles set aside for 8(a) businesses,
unless as a subcontractor to a non-graduated 8(a) company. As of October 2004,
PSC began competing solely in the open marketplace for federal business. The
Company has a history of winning contracts in "full and open" competitions,
including contracts at the Department of Housing and Urban Development,
Department of Treasury and the Department of Commerce. PSC will continue to
aggressively pursue opportunities in the federal and commercial marketplace.
Paradigm believes it can mitigate the impact of transitioning from the 8(a)
program through the acquisition of new contract vehicles and the expansion of
work with current customers.

The Company's most significant expense is direct costs, which consist primarily
of direct labor, subcontractors, materials, equipment, travel and an allocation
of indirect costs including fringe. The number of subcontract and consulting
employees assigned to a project will vary according to the size, complexity,
duration and demands of the project.

Selling, general and administrative expenses consist primarily of costs
associated with executive management, finance and administrative groups, human
resources, marketing and business development resources, employee training,
occupancy costs, research and development expenses, depreciation and
amortization, travel, and all other corporate costs.

Other income and expense consists primarily of interest income earned on cash
and cash equivalents and interest payable on the Company's revolving credit
facility.

CRITICAL ACCOUNTING POLICIES

Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires management to make estimates and judgments that affect the
reported amount of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, management evaluates its estimates including those related to
contingent liabilities, revenue recognition, and other intangible assets.
Management bases its estimates on historical experience and on various other
factors that are believed to be reasonable at the time the estimates are made.
Actual results may differ from these estimates under different assumptions or
conditions.

The following critical accounting policies require management's judgment and
estimation, where such estimates have a material effect on the consolidated
financial statements:

o accounting for revenue recognition
o accounting for cost of revenue
o accounting for property and equipment
o accounting for impairment of long-lived assets
o accounting for goodwill and intangible assets
o accounting for software development costs
o accounting for stock-based compensation
o accounting for deferred income taxes

For a description of these critical accounting policies, refer to Management's
Discussion section within the Annual Report on Form 10-K for Paradigm Holdings,
Inc. for the fiscal year ended December 31, 2005, and Management's Discussion
contained herein.

CAPITALIZED SOFTWARE COSTS

The Company has capitalized costs related to the development of a certain
software product, which provides users with a complete business resiliency tool
that incorporates assessment, planning, recovery and notification. Statement of
Financial Accounting Standards, ("SFAS") No. 86, "Accounting for the Cost of
Computer Software to be Sold, Leased or Otherwise Marketed", requires the
capitalization of certain software development costs when technological
feasibility has been established, which the Company generally defines as
completion of a working model. Capitalization ceases when the products are
available for general release to customers, at which time amortization of the
capitalized costs begins on a straight-line basis over the estimated product
life, or on the ratio of current revenues to total projected product revenues,
whichever is greater. This product has an estimated economic life of two years
based on anticipated sales. Due to inherent technological changes in software
development, however, the period over which such capitalized costs will be
amortized may be modified.

STOCK-BASED COMPENSATION

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
"Share-Based Payment", which replaces SFAS No. 123, and supersedes Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and SFAS No. 148, "Accounting for Stock-Based Compensation-Transition
and Disclosure." Under SFAS No. 123 (revised), the Company measures and records
compensation expense for both its stock options and performance share awards
based on their fair value at the date of grant. Prior to January 1, 2006, the
Company had accounted for its share-based awards in accordance with SFAS No.
123, as amended, which permitted the Company to apply APB Opinion No. 25 and
related interpretations in accounting for its stock-based compensation plans. In
accordance with APB Opinion No. 25, the Company did not record in its financial
statements compensation expense related to its stock option grants.

As permitted by SFAS No. 123 (revised), the Company used the modified
prospective method of adopting the new accounting standard; accordingly,
financial results for the prior period presented have not been retroactively
adjusted to reflect the effects of SFAS No. 123 (revised). Effective May 15,
2006, the Company granted options to acquire 500,000 shares of common stock to
one of its officers. One-third of the options will vest on each anniversary of
the grant date. The options have an exercise price equal to $2.50 per share, and
expire on May 14, 2016. The options are not intended to be incentive stock
options under Section 422 of the Internal Revenue Code of 1986, as amended and
will be interpreted accordingly. Effective September 1, 2006, the Company issued
97,221 shares of common stock to two employees as part of their employment
agreements. The Company did not grant any share-based awards to employees,
officers and directors for the three and nine months ended September 30, 2005.

In accordance with SFAS No. 123 (revised), the Company recognizes share-based
compensation expense over the requisite service period for: (i) compensation
expense for share-based payment awards granted prior to, but not yet vested as
of December 31, 2005, based on the grant-date fair value estimated in accordance
with the pro forma provisions of SFAS 123 and (ii) compensation expense for the
share-based payment awards granted subsequent to December 31, 2005, based on the
grant-date fair value estimated in accordance with the provisions of SFAS No.
123 (revised). The Company recognized $70,194 and $88,250 as share-based
compensation expense for the options granted on May 15, 2006 for the three and
nine months ended September 30, 2006. The Company recognized $135,137
share-based compensation expense for the common stock issued on September 1,
2006. There was no share-based compensation expense related to employee stock
options recognized during the three and nine months ended September 30, 2005.

Upon adoption of SFAS No. 123 (revised), the Company continues to use the
Black-Scholes option pricing models for share-based awards, as was utilized
previously and required under SFAS No. 123.

Refer to Note 1 of the Notes to Consolidated Financial Statements for a further
discussion of the Company's share-based awards.

RECENT ACCOUNTING PRONOUNCEMENTS

STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 155

ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS

SCOPE OF THIS STATEMENT

The statement permits interests in hybrid financial instruments that contain an
embedded derivative that would otherwise require bifurcation, to be accounted
for as a single financial instrument at fair value, with changes in fair value
recognized in earnings. This election is permitted on an
instrument-by-instrument basis for all hybrid financial instruments held,
obtained, or issued as of the adoption date. The adoption of SFAS No. 155 is not
expected to have a material impact on the Company's statements of operations,
financial position, or cash flows.

STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 156

ACCOUNTING FOR SERVICING OF FINANCIAL ASSETS

In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets".

SCOPE OF THIS STATEMENT

The statement requires all separately recognized servicing assets and servicing
liabilities to be measured initially at fair value and permits, but does not
require, an entity to subsequently measure those servicing assets or liabilities
at fair value. SFAS No. 156 is effective at the beginning of the first fiscal
year after September 15, 2006. All requirements for recognition and initial
measurement of servicing assets and servicing liabilities will be applied
prospectively to all transactions occurring after the adoption of this
statement. The Company will adopt SFAS No. 156 on January 1, 2007. The adoption
of SFAS No. 156 is not expected to have a material impact on the Company's
statements of operations, financial position or cash flows.

FASB INTERPRETATION NO. 48

ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES

In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN No. 48). FIN No. 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with SFAS No. 109, "Accounting for Income Taxes."

SCOPE OF THIS STATEMENT

The Company will adopt FIN No. 48 on January 1, 2007. The Company is currently
evaluating the effect that adoption of this interpretation will have on the
Company's consolidated financial position and results of operations.

STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 157

FAIR VALUE MEASUREMENTS

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."

SCOPE OF THIS STATEMENT

The statement defines fair value, establishes a framework for a measuring fair
value in GAAP, and expands disclosures about fair value measurements. The
Company will adopt SFAS No. 157 on January 1, 2008. The adoption of SFAS No. 157
is not expected to have a material impact on the Company's statements of
operations, financial position or cash flows.

STAFF ACCOUNTING BULLETIN NO. 108

In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108 (SAB No. 108) regarding the quantification of
financial statement misstatements.

SCOPE OF THIS STATEMENT

SAB No. 108 requires a "dual approach" for quantifications of errors using both
a method that focuses on the income statement impact, including the cumulative
effect of prior years' misstatements, and a method that focuses on the
period-end balance sheet. SAB No. 108 will be effective for the Company on
January 1, 2007. The adoption of SAB No. 108 is not expected to have a material
impact on the Company's statements of operations, financial position, or cash
flows.

RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with
Paradigm's Condensed Consolidated Financial Statements and related notes
included elsewhere in this Quarterly Report on Form 10-Q and with Paradigm's
Consolidated Financial Statements and the information under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included in Paradigm's Annual Report on Form 10-K for the
fiscal year ended December 31, 2005.

The following table sets forth certain items from our consolidated statements of
operations for the periods indicated.

Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
(Dollars in thousands) 2006 2005 2006 2005 2006 2005 2006 2005
-------- -------- ----- ----- -------- -------- ----- -----

Contract revenue $ 14,492 $ 15,543 100.0% 100.0% $ 47,269 $ 46,219 100.0% 100.0%

Cost of revenue 13,083 13,118 90.3 84.4 39,967 39,132 84.6 84.7
-------- -------- ----- ----- -------- -------- ----- -----
Gross margin 1,409 2,425 9.7 15.6 7,302 7,087 15.4 15.3

Selling, general & administrative 2,723 1,996 18.8 12.8 8,015 5,876 17.0 12.7
Impairment loss 1,901 -- 13.1 0.0 1,901 -- 4.0 0.0
-------- -------- ----- ----- -------- -------- ----- -----
(Loss) income from operations (3,215) 429 (22.2) 2.8 (2,614) 1,211 (5.6) 2.6

Other expense (133) (51) (0.9) (0.3) (376) (145) (0.8) (0.3)

(Benefits) provision for income taxes (392) 131 (2.7) 0.9 (253) 362 (0.5) 0.8
-------- -------- ----- ----- -------- -------- ----- -----
Net (loss) income $ (2,956) $ 247 (20.4%) 1.6% $ (2,737) $ 704 (5.9%) 1.5%

The table below sets forth, for the periods indicated the service mix in revenue
with related percentages of total contract revenue.

Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
(Dollars in thousands) 2006 2005 2006 2005 2006 2005 2006 2005
------- ------- ------- ------- ------- ------- ------- -------

Federal service contracts $10,375 $10,366 71.6% 66.7% $33,850 $31,140 71.6% 67.4%

Federal repair & maintenance
contracts 3,589 5,019 24.8 32.3 11,492 14,528 24.3 31.4

Commercial 528 158 3.6 1.0 1,927 551 4.1 1.2
------- ------- ------- ------- ------- ------- ------- -------
Total contract revenue $14,492 $15,543 100.0% 100.0% $47,269 $46,219 100.0% 100.0%

The Company's revenues and operating results may be subject to significant
variation from quarter to quarter depending on a number of factors, including
the progress of contracts, revenues earned on contracts, the number of billable
days in a quarter, the timing of the pass-through of other direct costs, the
commencement and completion of contracts during any particular quarter, the
schedule of the government agencies for awarding contracts, the term of each
contract that has been awarded and general economic conditions. Because a
significant portion of total expenses, such as personnel and facilities costs,
are fixed in the short term, successful contract performance and variation in
the volume of activity as well as in the number of contracts commenced or
completed during any quarter may cause significant variations in operating
results from quarter to quarter.

The Federal Government's fiscal year ends September 30. If a budget for the next
fiscal year has not been approved by that date, the Company's clients may have
to suspend engagements that are in progress until a budget has been approved.
Such suspensions may cause the Company to realize lower revenues in the fourth
quarter of the year. Further, a change in presidential administrations and in
senior government officials may negatively affect the rate at which the Federal
Government purchases technology.

As a result of the factors above, period-to-period comparisons of Paradigm's
revenues and operating results may not be meaningful. You should not rely on
these comparisons as indicators of future performance as no assurances can be
given that quarterly results will not fluctuate; causing a possible material
adverse effect on Paradigm's operating results and financial condition.

COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

Revenue. For the three months ended September 30, 2006, revenue decreased 6.8%
to $14.5 million from $15.5 million for the same period in 2005. The decrease in
revenue is attributable to $1.4 million decrease in federal maintenance
contracts business and partially off-set by $0.4 million growth in commercial
service contracts business during the three months ended September 30, 2006. The
decrease in maintenance business is attributable to residual revenue from a
system upgrade performed on behalf of a civilian agency customer, which was
recognized during the three months ended September 30, 2005 but did not reoccur
during the three months ended September 30, 2006. The increase in commercial
service contracts business is primarily related to the acquisition of Blair.

Cost of Revenue. Cost of revenue includes direct labor, materials,
subcontractors and an allocation for indirect costs. Generally, changes in cost
of revenue correlate to fluctuations in revenue as resources are consumed in the
production of that revenue. For the three months ended September 30, 2006 and
2005, cost of revenue was $13.1 million. As a percentage of revenue, cost of
revenue was 90.3% for the three months ended September 30, 2006 as compared to
84.4% for the same period in 2005. The increase in cost as a percentage of
revenue for the three months ended September 30, 2006 was primarily due to the
$963 thousand contract loss allowance recorded against the Company's firm fixed
price software development contract. The cost of revenue excluding this charge
was 83.6% for the three months ended September 30, 2006.

Gross Margin. For the three months ended September 30, 2006, gross margin
decreased 41.9% to $1.4 million from $2.4 million for the same period in 2005.
Gross margin as a percentage of revenue decreased to 9.7% for the three months
ended September 30, 2006 from 15.6% for the same period in 2005. Gross margin as
a percentage of revenue decreased primarily due to the contract loss allowance.
Gross margin as a percentage of revenue excluding the charge was 16.4% for the
three months ended September 30, 2006 or slightly higher than the gross margin
for the same period in 2005. Gross margin as it relates to the service contracts
decreased 51.3% to $1 million from $2.1 million for the same period in 2005.
Service gross margin as a percentage of revenue decreased to 9.4% for the three
months ended September 30, 2006 from 20% for the same period in 2005. The
decrease as a percentage of revenue was primarily related to the contract loss
allowance. Gross margin, as it relates to the maintenance contracts, increased
20.2% to $0.4 million from $0.3 million for the same period in 2005. The
increase in maintenance gross margin is attributable to price renegotiation for
one of the Company's contracts when it was re-competed in 2006.

Selling, General & Administrative Expenses. For the three months ended September
30, 2006, selling, general and administrative ("SG&A") expenses increased 36.4%
to $2.7 million from $2 million for the same period in 2005. As a percentage of
revenue, SG&A expenses increased to 18.8% from 12.8% for the same period in
2005. The increase in SG&A expenses was due to $0.6 million increase in SG&A
from its commercial business and $0.4 million increase in compensation expenses
for potential severance and stock compensation expenses recorded in accordance
with SFAS No. 123 (revised), which was partially off-set by $0.3 million cost
savings in SG&A.

Impairment Loss. During the three months ended September 30, 2006, the Company
conducted its annual review of goodwill and long-lived assets recorded from the
acquisition of Blair in October 2005 for impairment. The Company used the
discounted cash flow valuation model based on management's projection of future
commercial cash flows to determine the fair value of goodwill and long-lived
assets. The review indicated the fair value of goodwill and long-lived assets
was less than the carrying value. Accordingly, the Company recorded an
impairment loss of $1.9 million in the quarter ended September 30, 2006. The
impairment is the result of slower than expected revenue growth and operating
losses within the commercial consulting area that have continued to occur
through the period ended September 30, 2006.

Net Loss. For the three months ended September 30, 2006, net income decreased to
a loss of $3 million from net income of $247 thousand for the same period in
2005. This decrease in net income was due to increased SG&A expenses and the
contract loss allowance as discussed above, which was partially off-set by $0.4
million of income tax benefits for the three months ended September 30, 2006.

COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

Revenue. For the nine months ended September 30, 2006, revenues increased 2.3%
to $47.3 million from $46.2 million for the same period in 2005. The slight
increase in revenue is attributable to growth in the federal and commercial
service contracts business of $2.7 million and $1.4 million, respectively.
Revenue growth in the service business was off-set by a decrease of $3 million
in the federal maintenance business. Federal service revenue growth was driven
by increased billable labor positions with existing civilian agency customers.
Commercial service revenue growth was a result of the acquisition of Blair on
October 14, 2005. The decrease in maintenance business is attributable to
residual revenue from a system upgrade performed on behalf of a civilian agency
customer, which was recognized during the nine months ended September 30, 2005
but did not reoccur during the nine months ended September 30, 2006.

Cost of Revenue. Cost of revenue includes direct labor, materials,
subcontractors and an allocation for indirect costs. Generally, changes in cost
of revenue correlate to fluctuations in revenue as resources are consumed in the
production of that revenue. For the nine months ended September 30, 2006, cost
of revenue increased 2.1% to $40 million from $39.1 million for the same period
in 2005. The increase in cost of revenue was primarily attributable to the
contract loss allowance on the Company's firm fixed price federal service
contract. Cost of revenue excluding the contract loss allowance decreased
slightly because of the growth in federal services contracts which generally
have lower costs as a percentage of revenue than maintenance contracts. As a
percentage of revenue, cost of revenue was 84.6% for the nine months ended
September 30, 2006 as compared to 84.7% for the same period in 2005. As a
percentage of revenue, cost of revenue excluding the contract loss allowance,
was 82.5% for the nine months ended September 30, 2006.

Gross Margin. For the nine months ended September 30, 2006, gross margin
increased 3% to $7.3 million from $7.1 million for the same period in 2005.
Gross margin as a percentage of revenue increased to 15.4% for the nine months
ended September 30, 2006 from 15.3% for the same period in 2005. Gross margin as
a percentage of revenue was 17.5% excluding the contract loss allowance for the
nine months ended September 30, 2006. The increase was due to the increase in
revenue and a change in the business mix as services revenue, which has a higher
gross margin than the maintenance business, comprised a greater percentage of
the overall business. Gross margin as it relates to service contracts decreased
1.7% to $6 million from $6.1 million for the same period in 2005. The decrease
in service contract gross margin was due to the contract loss allowance. Gross
margin as it related to service contracts excluding the contract loss allowance
increased 14.2% to $6.9 million. Gross margin, as it relates to the maintenance
contracts, increased 31.7% to $1.3 million from $1 million for the same period
in 2005. The increase in maintenance gross margin is attributable to a
non-recurring increase of $0.3 million related to the contract finalization
activities on a fixed price maintenance contract, which ended during the quarter
ended June 30, 2006.

Selling, General & Administrative Expenses. For the nine months ended September
30, 2006, SG&A expenses increased 36.4% to $8 million from $5.9 million for the
same period in 2005. As a percentage of revenue, SG&A expenses increased to 17%
from 12.7% for the same period in 2005. The increase in SG&A expenses was due to
$1.7 million in increased SG&A from the commercial business and $0.4 million
increase in compensation expenses due to potential severance expense and stock
compensation expenses recorded in accordance with SFAS No. 123 (revised).

Net Loss. For the nine months ended September 30, 2006, net income decreased to
a loss of $2.7 million from net income of $0.7 million for the same period in
2005. This decrease in net income was due to increased SG&A expenses as
discussed above, which was partially off-set by higher gross margin and the $0.3
million income tax benefits for the nine months ended September 30, 2006.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary liquidity needs are financing the cost of operations,
capital expenditures and servicing its debt. The Company's sources of liquidity
are its existing cash, cash generated from operations, and cash available from
borrowings under its revolving credit facility. The Company has historically
financed its operations through its existing cash, cash generated from
operations and cash available from borrowings under its revolving credit
facility. Based upon the current level of operations, the Company believes that
cash flow from operations, together with borrowings available from its existing
credit facility, are adequate to meet future liquidity needs for the next twelve
months.

For the nine months ended September 30, 2006, the Company used $747 thousand in
cash and cash equivalents versus $952 thousand in cash provided for the same
period in 2005.

Cash provided by operating activities was $1.9 million for the nine months ended
September 30, 2006 compared to $0.6 million for the same period in 2005. As of
September 30, 2006, the Company had cash on hand of $0.2 million.

Accounts receivable decreased by $1.2 million for the nine months ended
September 30, 2006 versus an increase of $1.8 million for the same period in
2005. The decrease in the accounts receivable balance for 2006 is attributable
to more focused billing and collection efforts. The increase in the accounts
receivable balance for 2005 was attributable to delays in billing of a fixed
price milestone contract with a civilian agency client. The Company expects to
bill and collect the outstanding receivables within the next 12 months.

Prepaid expenses increased by $0.4 million for the nine months ended September
30, 2006 versus a decrease of $4.1 million for the same period in 2005. The
decrease in prepaid expenses for 2005 was due to the fulfillment of contractual
obligations on the IRS LTMCC contract. Deferred revenue for the nine months
ended September 30, 2006 had no change versus a decrease of $1.3 million for the
same period in 2005. The decrease during the nine months ended September 30,
2005 was primarily related to the Company's IRS LTMCC contract. The deferred
revenue for IRS LTMCC was associated with the remaining amortization of software
maintenance revenue related to a system upgrade purchased in October 2004.

Accounts payable increased by $0.7 million for the nine months ended September
30, 2006 versus a decrease of $1 million for the same period in 2005. The
increase during the nine months ended September 30, 2006 was due to the timing
of vendor invoices at end of the period as well as better cash management
related to vendor payments. The decrease during the nine months ended September
30, 2005 was due to system upgrade and software maintenance related invoices,
associated with the IRS LTMCC contract, which were accrued during the three
months ending December 31, 2004 but paid during the nine months ended September
30, 2005.

Net cash used by investing activities was $0.2 million for the nine months ended
September 30, 2006 versus $38 thousand for the same period in 2005. Cash used by
investing activities during the nine months ended September 30, 2006 was
primarily the result of capitalization of software development costs associated
with the Company's OpsPlanner software solution and purchase of property and
equipment.

Net cash used by financing activities was $2.4 million for the nine months ended
September 30, 2006 compared to cash provided of $0.3 million for the same period
in 2005. The increase in cash used is due to payments on the Company's line of
credit.

On July 28, 2005, the Company entered into a two year Loan and Security
Agreement with Chevy Chase Bank that provides for a revolving line of credit
facility of up to $9 million. The Loan and Security Agreement became effective
August 4, 2005. The revolving line of credit is used to borrow funds for working
capital and general corporate purposes.

The revolving loans under the Chevy Chase Bank Loan and Security Agreement are
secured by a first priority lien on substantially all of the assets of the
Company, excluding intellectual property. Under the Loan and Security Agreement,
the line of credit is due on demand and interest is payable monthly depending on
the Company's leverage ratio at the LIBOR rate plus the applicable spread which
ranges from 2.25% to 3.00%. Under the terms of the Loan and Security Agreement,
the Company may borrow up to the lesser of $9,000,000 or 90% of eligible U.S.
Government receivables plus 80% of eligible commercial receivables plus 75% of
the aggregate amount of billable but unbilled accounts to a maximum of
$3,000,000. Of the total borrowings, the Company may use up to $500,000 for
letters of credit. As of September 30, 2006, the Company had set aside $400,000
in total letters of credit. The Loan and Security Agreement requires that the
Company maintain certain covenants and ratios, which are calculated quarterly.
On March 30, 2006, the Company amended the Loan and Security Agreement with
Chevy Chase Bank to modify the tangible net worth, debt service coverage ratio
and maximum leverage ratio covenants as follows: (1) minimum tangible net worth
of not less than $1,800,000 for December 31, 2005 and March 31, 2006, which was
increased to $2,000,000 by June 30, 2006 and increased again by 50% of the
Company's net income for each fiscal year end beginning with December 31, 2006;
(2) minimum debt service coverage ratio as of December 31, 2005 of not less than
1.150 to 1.000, which was increased to 1.500 to 1.000 by September 30, 2006; (3)
maximum leverage ratio of 9.100 to 1.000 for December 31, 2005, which was
decreased to 7.500 to 1.000 by March 31, 2006, 5.500 to 1.000 by June 30, 2006,
5.250 to 1.000 by September 30, 2006 and 4.000 to 1.000 by December 31, 2006.
Because the Company was not in compliance with the maximum leverage ratio
covenant for the period ending March 31, 2006, the Company amended the Loan and
Security Agreement with Chevy Chase Bank on May 12, 2006 to modify the maximum
leverage ratio to for March 31, 2006 to 9.100 to 1.000, for June 30, 2006 to
6.500 to 1.000 and for December 31, 2006 to 4.500 to 1.000. On August 11, 2006,
Chevy Chase Bank waived the covenant and ratio requirements for the quarter
ended June 30, 2006. On November 14, 2006, Chevy Chase Bank waived the covenant
and ratio requirements for the quarter ending September 30, 2006.

The Loan and Security Agreement contains events of default that include among
other things, non-payment of principal, interest or fees, violation of
covenants, inaccuracy of representations and warranties, cross default to
certain other indebtedness, bankruptcy and insolvency events, change of control
and material judgments. Upon occurrence of an event of default, Chevy Chase Bank
is entitled to, among other things, accelerate all obligations of the Company
and sell the Company's assets to satisfy the Company's obligations under the
Loan and Security Agreement.

In the event the Company requires additional funds, whether for acquisitions or
otherwise, it may seek additional equity or debt financing. Such financing may
not be available to the Company on terms that are acceptable to it, if at all,
and any equity financing may be dilutive to its stockholders. To the extent that
the Company obtains additional debt financing, its debt service obligations will
increase and the relevant debt instruments may, among other things, impose
additional restrictions on its operations, require it to comply with additional
financial covenants or require it to pledge assets to secure its borrowings.

In the event cash flows are not sufficient to fund operations at the present
level and the Company is unable to obtain additional financing, it would attempt
to take appropriate actions to tailor its activities to its available financing,
including revising its business strategy and future growth plans to accommodate
the amount of financing available to it.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's exposure to market risk relates to changes in interest rates for
borrowing under its revolving credit facility. These borrowings bear interest at
a fixed rate plus LIBOR, a variable rate. The Company does not use derivative
financial instruments for speculative or trading purposes. The Company invests
its excess cash in short-term, investment grade, interest-bearing securities.

ITEM 4: CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as of the quarter ended September 30, 2006. Based
on such evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that, as of September 30, 2006, the Company's disclosure
controls and procedures are effective in ensuring that information required to
be disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified by the SEC's rules and forms, and accumulated and communicated
to the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

In connection with the evaluation required by paragraph (d) of Rule 13a-15 under
the Exchange Act, there was no change identified in the Company's internal
control over financial reporting that occurred during the three months ended
September 30, 2006 that has materially affected, or is reasonably likely to
materially affect, the Company's control over financial reporting.

PART II: OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

The Company is involved in legal actions arising in the normal course of
business. The Company believes the claims are without merit and intends to
vigorously defend its position; however, the Company has accrued $165,000 to
settle a matter over disputed compensation that a former employee claims are
due. In the opinion of management, the outcome of these matters will not have a
material adverse effect on these financial statements.

ITEM 1A: RISK FACTORS

There were no material changes to the risk factors set forth in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2005, which
was filed on March 31, 2006.

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Effective as of September 1, 2006, the Board of Directors of Paradigm issued
common stock shares, par value $0.01 per share to the below listed individuals.
The market value was $1.39 per share on September 1, 2006. On November 1, 2006,
the Board of Directors of Paradigm issued additional common stock shares, par
value $0.01 per share to the same individuals.

NUMBER OF NUMBER OF
COMMON STOCK COMMON STOCK
INDIVIDUAL TITLE (September 1) (November 1)
---------------- ---------------------------- ------------ ------------

Thomas Kristofco Senior Vice President 77,777 77,778
Robert Duffy Director, Strategic Accounts 19,444 19,444

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

On August 11, 2006, the Company received a letter with respect to non-compliance
of covenants specified in its Loan and Security Agreement with Chevy Chase Bank
which was classified as a default per the Loan and Security Agreement with Chevy
Chase Bank. In the same letter, the Lender, Chevy Chase Bank, agreed to waive
the non-compliance provided that the Company be in compliance with its loan
covenants by September 30, 2006. On November 14, 2006, Chevy Chase Bank provided
the Company with a verbal confirmation of its covenant compliance for the period
ended September 30, 2006. Chevy Chase waived its right to declare default per
the Loan and Security Agreement until December 15, 2006. The Company will file
the written notice on Form 8-K when received.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The 2006 Annual Meetings of Shareholders of Paradigm Holdings, Inc. was held on
August 3, 2006. At the Annual Meeting, our stockholders elected five persons to
serve as directors until the 2007 annual meeting of stockholders. The following
table states the votes cast for or withheld with respect to the election of
directors.

DIRECTOR NAME FOR WITHHELD NON-VOTE
------------------- ---------- ---------- ----------
Raymond A. Huger 18,004,839 116,336 2,382,311
Francis X. Ryan 18,004,839 116,336 2,382,311
John A. Moore 18,004,839 116,336 2,382,311
Edwin M. Avery 18,004,839 116,336 2,382,311
Peter B. LaMontagne 18,004,839 116,336 2,382,311

At the Annual Meeting, our stockholders also approved the adoption of our 2006
Stock Option Plan. The following table states the votes cast for and against the
approval of the adoption of our 2006 Stock Option Plan, as well as the number of
abstentions with respect to the approval of the adoption of our 2006 Stock
Option Plan.

FOR WITHHELD ABSTAIN NON-VOTE
----------- ---------- ----------- ----------
16,435,809 9,783 1,578,223 2,479,671

ITEM 5: OTHER INFORMATION

None.

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

EXHIBIT NO. DESCRIPTION LOCATION
- ----------------- -------------------------------------------------- -------------------------------------------------

2.1 Agreement and Plan of Reorganization, dated Incorporated by reference to Exhibit 99.1 to the
November 3, 2004, by and among Paradigm Registrant's Current Report on Form 8-K filed
Holdings, Inc., a Wyoming corporation, Paradigm with the Commission on November 10, 2004
Solutions Merger Corp., a Delaware corporation
and wholly-owned subsidiary of Paradigm Holdings,
Inc., Paradigm Solutions Corporation, a Maryland
corporation and the shareholders of Paradigm
Solutions Corporation

3.1 Articles of Incorporation Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q as filed with the Commission
on May 15, 2006

3.2 By-laws Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q as filed with the Commission
on May 15, 2006

10.1 Change in Registrant's certifying accountant Incorporated by reference to the Registrant's
from Aronson &Company to BDO Seidman, LLP Current Report on Form 8-K as filed with the
Commission on April 17, 2006

10.2 Material Contract - Department of Treasury LTMCC Incorporated by reference to Exhibit 99.1 of the
Registrant's Current Report on Form 8-K as filed
with the Commission on April 18, 2006

10.3 Material Contract - Department of Treasury CSM/MIA Incorporated by reference to Exhibit 99.2 of the
Registrant's Current Report on Form 8-K as filed
with the Commission on April 18, 2006

10.4 Announcement of the resignation of Frank Jakovac Incorporated by reference to the Registrant's
as President and Chief Operating Officer, effective Current Report on Form 8-K as filed with the
April 28, 2006 Commission on May 1, 2006

10.5 Letter Agreement, signed May 2, 2006 entered into Incorporated by reference to Exhibit 99.1 of the
between Paradigm Holdings, Inc. and Noble Registrant's Current Report on Form 8-K as filed
International Investments with the Commission on May 8, 2006

10.6 Announcement of the appointment of Peter LaMontagne Incorporated by reference to the Registrant's
as President and Chief Operating Officer, effective Current Report on Form 8-K as filed with the
May 15, 2006 Commission on May 8, 2006

10.7 Announcement of the granting of 500,000 options Incorporated by reference to the Registrant's
with an exercise price of $2.50 per share and a Current Report on Form 8-K as filed with the
three year vesting period Commission on May 23, 2006

10.8 Covenant waiver to Loan and Security Agreement, Incorporated by reference to Exhibit 10.1 of
dated August 11, 2006, between Paradigm Holdings, the Registrant's Quarterly Report on Form 10-Q
Inc. and Chevy Chase Bank as filed with the Commission on August 14, 2006

10.9 Agreement, dated August 16, 2006, by and among Incorporated by reference to Exhibit 99.1 of
Paradigm Holdings, Inc., Paradigm Solutions the Registrant's Current Report on Form 8-K as
International, Inc., Thomas Kristofco and filed with the Commission on August 24, 2006
Robert Duffy

10.10 Amendment to employee agreement, dated August 16, Incorporated by reference to Exhibit 99.2 of
2006, by and between Paradigm Solutions the Registrant's Current Report on Form 8-K as
International, Inc. and Thomas Kristofco filed with the Commission on August 24, 2006

10.11 Amendment to employee agreement, dated August 16, Incorporated by reference to Exhibit 99.3 of
2006, by and between Paradigm Solutions the Registrant's Current Report on Form 8-K as
International, Inc. and Robert Duffy filed with the Commission on August 24, 2006

10.12 Announcement of the presentation to be discussed Incorporated by reference to the Registrant's
At the Noble Financial Group investor conference Current Report on Form 8-K as filed with the
On September 26, 2006 Commission on September 26, 2006

31.1 Certification of CEO pursuant to Rule 13a-14(a)/ Provided herewith
15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002

31.2 Certification of CFO pursuant to Rule 13a-14(a)/ Provided herewith
15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002

EXHIBIT NO. DESCRIPTION LOCATION
- ----------------- -------------------------------------------------- -------------------------------------------------

32.1 Certification of CEO pursuant to 18 U.S.C. Section Provided herewith
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

32.2 Certification of CFO pursuant to 18 U.S.C. Section Provided herewith
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

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.

PARADIGM HOLDINGS, INC.
(Registrant)

By: /S/ RAYMOND A. HUGER By: /S/ RICHARD SAWCHAK
----------------------- -----------------------
Raymond A. Huger Richard Sawchak
Chief Executive Officer Chief Financial Officer