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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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



FOR THE QUARTERLY PERIOD ENDED June 30, 2005



OR



| ̈ | 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 000-27437



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PARAGON FINANCIAL CORPORATION

(Exact name of registrant as specified in its
charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 94-3227733                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



2207 Sawgrass
Village Drive, Ponte Vedra Beach, FL 32082

(Address of principal executive offices and zip code)



(904) 285-0000

(Registrants telephone number, including area code)





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



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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 an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).    Yes ̈No  x



The total number of shares of the registrants common stock outstanding as of August 12,
2005: 86,706,250



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##### Table of Contents

INDEX



PART I  FINANCIAL INFORMATION



|                            |  |                                                                                                                     |  |   
|--------------------------- |  | ------------------------------------------------------------------------------------------------------------------- |  | --
|Item 1.                     |  | Financial Statements                                                                                                |  | 3 
|                            |  | Unaudited Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004                           |  | 3 
|                            |  |                                                                                                                    
|                            |  | Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2004 |  | 4 
|                            |  |                                                                                                                    
|                            |  | Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004           |  | 5 
|                            |  |                                                                                                                    
|                            |  | Notes to the Unaudited Condensed Consolidated Financial Statements                                                  |  | 6 
|                            |  |                                                                                                                    
|Item 2.                     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                               |  | 17
|                            |  |                                                                                                                    
|Item 3.                     |  | Quantitative and Qualitative Disclosures About Market Risk                                                          |  | 25
|                            |  |                                                                                                                    
|Item 4.                     |  | Controls and Procedures                                                                                             |  | 26
|                            | 
|PART II  OTHER INFORMATION |  |                                                                                                                    
|                            |  |                                                                                                                    
|Item 1.                     |  | Legal Proceedings                                                                                                   |  | 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



2



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##### Table of Contents

PART I  FINANCIAL INFORMATION



Item 1. Financial Statements.



PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2005 AND DECEMBER 31, 2004

(Dollars in thousands, except share data)



|                                                                                                                                                                            |  |      |        |   |      |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                                                                                                                            |  | 2005 |        |   | 2004 |  
|                                                                                                                                                                            |  |      |        |   | *    |  
|ASSETS                                                                                                                                                                      |  |      |        |   |      |   |        |  
|Current assets:                                                                                                                                                             |  |      |        |   |      |   |        |  
|Cash and cash equivalents                                                                                                                                                   |  | $    | 100    |   |      | $ | 135    |  
|Fees receivable                                                                                                                                                             |  |      | 66     |   |      |   | 46     |  
|Prepaid and other current assets                                                                                                                                            |  |      | 1      |   |      |   | 9      |  
|                                                                                                                                                                            |  |      |        |   |      |   |        |  
|Total current assets                                                                                                                                                        |  |      | 167    |   |      |   | 190    |  
|                                                                                                                                                                            |  |     
|Office property and equipment, net of accumulated depreciation of $56 and $43                                                                                               |  |      | 83     |   |      |   | 64     |  
|Goodwill                                                                                                                                                                    |  |      | 992    |   |      |   | 822    |  
|Other assets                                                                                                                                                                |  |      | 419    |   |      |   | 416    |  
|                                                                                                                                                                            |  |      |        |   |      |   |        |  
|TOTAL ASSETS                                                                                                                                                                |  | $    | 1,661  |   |      | $ | 1,492  |  
|                                                                                                                                                                            |  |      |        |   |      |   |        |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                                       |  |      |        |   |      |   |        |  
|Current liabilities:                                                                                                                                                        |  |      |        |   |      |   |        |  
|Current portion of long-term debt                                                                                                                                           |  | $    | 580    |   |      | $ | 100    |  
|Short-term debt                                                                                                                                                             |  |      | 205    |   |      |   | 221    |  
|Notes payable                                                                                                                                                               |  |      | 25     |   |      |   | 528    |  
|Notes payable  related parties                                                                                                                                             |  |      | 25     |   |      |   | 25     |  
|Convertible debentures payable                                                                                                                                              |  |      | 349    |   |      |   | 379    |  
|Accounts payable                                                                                                                                                            |  |      | 399    |   |      |   | 371    |  
|Accrued expenses  related parties                                                                                                                                          |  |      | 59     |   |      |   | 59     |  
|Income taxes payable                                                                                                                                                        |  |      | 10     |   |      |   | 10     |  
|Accrued expenses  other                                                                                                                                                    |  |      | 464    |   |      |   | 382    |  
|Stock subscription proceeds received                                                                                                                                        |  |      |       |   |      |   | 178    |  
|                                                                                                                                                                            |  |      |        |   |      |   |        |  
|Total current liabilities                                                                                                                                                   |  |      | 2,116  |   |      |   | 2,253  |  
|                                                                                                                                                                            |  |     
|Long-term debt:                                                                                                                                                             |  |      |        |   |      |   |        |  
|Liabilities to formerly related parties, less current portion                                                                                                               |  |      | 951    |   |      |   | 951    |  
|                                                                                                                                                                            |  |      |        |   |      |   |        |  
|Total liabilities                                                                                                                                                           |  |      | 3,067  |   |      |   | 3,204  |  
|                                                                                                                                                                            |  |      |        |   |      |   |        |  
|                                                                                                                                                                            |  |     
|Stockholders deficit:                                                                                                                                                      |  |      |        |   |      |   |        |  
|Preferred stock: Issuable in series, $0.0001 par value; 5,000,000 shares authorized: Series E, $1,000 stated value; 659 and 659 shares issued
and outstanding, respectively |  |      |       |   |      |   |       |  
|Common stock, $0.0001 par value; 400,000,000 shares authorized: 86,706,250 and 65,212,744 shares issued and outstanding                                                     |  |      | 8      |   |      |   | 6      |  
|Additional paid-in capital                                                                                                                                                  |  |      | 7,614  |   |      |   | 6,914  |  
|Retained deficit                                                                                                                                                            |  |      | (9,028 | ) |      |   | (8,625 | )
|Cumulative comprehensive income:                                                                                                                                            |  |      |        |   |      |   |        |  
|Unearned stock-based compensation                                                                                                                                           |  |      |       |   |      |   | (7     | )
|                                                                                                                                                                            |  |      |        |   |      |   |        |  
|Total stockholders deficit                                                                                                                                                 |  |      | (1,406 | ) |      |   | (1,712 | )
|                                                                                                                                                                            |  |      |        |   |      |   |        |  
|TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                                 |  | $    | 1,661  |   |      | $ | 1,492  |  
|                                                                                                                                                                            |  |      |        |   |      |   |        |  

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|* | Derived from audited consolidated financial statements filed in the Companys 2004 Annual Report on Form 10-K.
|- | --------------------------------------------------------------------------------------------------------------



See Notes to Unaudited Consolidated Financial Statements



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##### Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004

(Dollars in thousands, except share data)



|                                                                              |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|----------------------------------------------------------------------------- |  | ------------------ | ------ | - | ---------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                              |  | Three Months Ended |        |   | Six Months Ended |  
|                                                                              |  | 2005               |        |   | 2004             |   |        | 2005 |  |   | 2004   |  
|Revenue:                                                                      |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|Loan origination fees                                                         |  | $                  | 482    |   |                  | $ | 637    |      |  | $ | 780    |   |  | $ | 1,219   |  
|                                                                              |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|Expenses:                                                                     |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|Salaries, commissions, benefits, and stock-based compensation                 |  |                    | 341    |   |                  |   | 571    |      |  |   | 632    |   |  |   | 1,369   |  
|Loan production costs                                                         |  |                    | 4      |   |                  |   | 38     |      |  |   | 17     |   |  |   | 47      |  
|General and administrative expenses                                           |  |                    | 250    |   |                  |   | 207    |      |  |   | 440    |   |  |   | 443     |  
|                                                                              |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|Total expenses                                                                |  |                    | 595    |   |                  |   | 816    |      |  |   | 1,089  |   |  |   | 1,859   |  
|                                                                              |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|Operating loss                                                                |  |                    | (113   | ) |                  |   | (179   | )    |  |   | (309   | ) |  |   | (640    | )
|                                                                              |  |                    |        |  
|Interest expense, net                                                         |  |                    | 46     |   |                  |   | 25     |      |  |   | 94     |   |  |   | 43      |  
|Loss on disposal of segment                                                   |  |                    |       |   |                  |   | 102    |      |  |   |       |   |  |   | 102     |  
|                                                                              |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|Loss from continuing operations                                               |  |                    | (159   | ) |                  |   | (306   | )    |  |   | (403   | ) |  |   | (785    | )
|                                                                              |  |                    |        |  
|Discontinued operations (Note 2):                                             |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|Loss from discontinued operations before provision (benefit) for income taxes |  |                    |       |   |                  |   | (666   | )    |  |   |       |   |  |   | (3,538  | )
|                                                                              |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|Net loss                                                                      |  | $                  | (159   | ) |                  | $ | (972   | )    |  |   | (403   | ) |  | $ | (4,323  | )
|                                                                              |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|Net Income Per Common Share - Basic and Diluted:                              |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|                                                                              |  |                    |        |  
|Loss from continuing operations                                               |  | $                  | (0.00  | ) |                  | $ | (0.00  | )    |  | $ | (0.00  | ) |  | $ | (0.01   | )
|                                                                              |  |                    |        |  
|Loss from discontinued operations                                             |  |                    |       |   |                  | $ | (0.01  | )    |  |   |       |   |  | $ | (0.03   | )
|                                                                              |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|Basic and diluted loss per share                                              |  | $                  | (0.00  | ) |                  | $ | (0.01  | )    |  | $ | (0.00  | ) |  | $ | (0.04   | )
|                                                                              |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  
|Weighted average shares outstanding  basic and diluted                       |  |                    | 86,706 |   |                  |   | 99,037 |      |  |   | 80,613 |   |  |   | 107,642 |  
|                                                                              |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |         |  



See Notes to
Unaudited Consolidated Financial Statements



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PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004

(Dollars in thousands)



|                                                                             |  |      |      |   |      |   |      |  
|---------------------------------------------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|                                                                             |  | 2005 |      |   | 2004 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                        |  |      |      |   |      |   |      |  
|Net loss from continuing operations                                          |  | $    | (403 | ) |      | $ | (785 | )
|                                                                             |  |     
|Adjustments to reconcile net loss to cash used by operating activities:      |  |      |      |   |      |   |      |  
|Depreciation                                                                 |  |      | 13   |   |      |   | 22   |  
|Loss on disposal of segment                                                  |  |      |     |   |      |   | 102  |  
|Stock-based compensation                                                     |  |      | 7    |   |      |   | 52   |  
|Changes in operating assets and liabilities, net of acquisitions:            |  |      |      |   |      |   |      |  
|Increase in fees receivable                                                  |  |      | (20  | ) |      |   | (4   | )
|Decrease in prepaids and other assets                                        |  |      | 6    |   |      |   | 16   |  
|Increase in accounts payable, accrued expenses and other current Liabilities |  |      | 92   |   |      |   | 45   |  
|                                                                             |  |      |      |   |      |   |      |  
|Cash used by operating activities                                            |  |      | (305 | ) |      |   | (552 | )
|                                                                             |  |      |      |   |      |   |      |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                        |  |      |      |   |      |   |      |  
|Purchases of property and equipment                                          |  |      | (5   | ) |      |   | (2   | )
|Cash acquired from purchases of business                                     |  |      | 6    |   |      |   |     |  
|Proceeds from the sale of websites                                           |  |      |     |   |      |   | 30   |  
|                                                                             |  |      |      |   |      |   |      |  
|Cash provided by investing activities                                        |  |      | 1    |   |      |   | 28   |  
|                                                                             |  |      |      |   |      |   |      |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                        |  |      |      |   |      |   |      |  
|Proceeds from the issuance of common stock                                   |  |      | 338  |   |      |   |     |  
|Repayment of convertible debentures                                          |  |      | (30  | ) |      |   |     |  
|Repayments of promissory notes                                               |  |      | (39  | ) |      |   | (20  | )
|                                                                             |  |      |      |   |      |   |      |  
|Cash provided (used) by financing activities                                 |  |      | 269  |   |      |   | (20  | )
|                                                                             |  |      |      |   |      |   |      |  
|Net cash provided by discontinued operations                                 |  |      |     |   |      |   | 626  |  
|                                                                             |  |     
|Net (decrease) increase in cash and cash equivalents                         |  |      | (35  | ) |      |   | 82   |  
|                                                                             |  |     
|Cash and cash equivalents, beginning of period                               |  |      | 135  |   |      |   | 70   |  
|                                                                             |  |      |      |   |      |   |      |  
|Cash and cash equivalents, end of period                                     |  | $    | 100  |   |      | $ | 152  |  
|                                                                             |  |      |      |   |      |   |      |  



See Notes to
Unaudited Consolidated Financial Statements



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##### Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(Dollars in thousands, except share and per share amounts)



NOTE 1. PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING
POLICIES



BASIS OF PRESENTATION  Paragon Financial
Corporation (the Company) was incorporated in Delaware on August 27, 1999. The unaudited condensed consolidated financial statements include the accounts of Paragon Financial Corporation and its wholly owned subsidiaries, Paragon
Homefunding, Inc. and First Charleston Mortgage, L.L.C. (collectively referred to as the Company, we, or us). The accompanying unaudited condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three and six
months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. All intercompany balances and transactions are eliminated in consolidation. The unaudited consolidated financial
statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2004.



USE OF ESTIMATES  In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make estimates and assumptions that materially affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the
financial statements, and revenues and expenses during the reporting period. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of goodwill and loss on disposal of our discontinued
segment. Actual results could differ from those estimates.



FINANCIAL
STATEMENT PRESENTATION  The condensed consolidated financial statements and notes are representations of the Companys management. The Companys management is responsible for the integrity and objectivity of these financial
statements.



ACQUISITIONS  On January 19, 2005, the Company
completed its acquisition of First Charleston Mortgage, L.L.C. (FCM). As consideration for the acquisition, the Company issued 4,285,714 shares of its $0.0001 par value common stock valued at $185 (or $0.043 per share). FCM has been in
the business of originating residential mortgage loans since 2002. The acquisition is effective February 1, 2005 and was accounted for as an acquisition pursuant to SFAS No. 141, Accounting for Business Combinations (SFAS 141).
Accordingly, the Companys results of operations include the operating results of FCM from the effective date of the acquisition.



The Companys unaudited condensed consolidated results of operations on a pro forma basis for the six months ended June 30, 2005 and 2004 as if it had consummated
the acquisition of FCM and disposed of



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##### Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)



NOTE 1. PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES  (continued)



PGNF Home Lending Corp. (see Note 2) on January 1, 2004 are as follows:



|                                                        |  |      |        |   |      |   |        |  
|------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                        |  | 2005 |        |   | 2004 |  
|Revenue                                                 |  | $    | 791    |   |      | $ | 1,290  |  
|Net loss                                                |  | $    | (414   | ) |      | $ | (806   | )
|Basic and diluted loss per share                        |  | $    | (0.00  | ) |      | $ | (0.01  | )
|Weighted average shares outstanding  basic and diluted |  |      | 81,518 |   |      |   | 68,203 |  



CASH AND CASH EQUIVALENTS - For
purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with original maturities of three months or less on their acquisition date to be cash equivalents. Cash and cash equivalents include cash on hand
and funds held in checking, money market, and savings accounts.



FEES
RECEIVABLE- Fees receivable consist of fees due on loans closed prior to the balance sheet date. Fees receivable are typically collected within 30 days.



OFFICE PROPERTY AND EQUIPMENT, NET - Office property and equipment, net, are stated at cost less accumulated depreciation. Depreciation is computed using
the straight-line method over the estimated useful lives of the asset as follows:



|                       |  |                                
|---------------------- |  | -------------------------------
|Computer hardware      |  | Five years                     
|Furniture and fixtures |  | Five to seven years            
|Computer software      |  | Three years                    
|Leasehold improvements |  | Lower of life of lease or asset



DERIVATIVE FINANCIAL INSTRUMENTS- The Company does not purchase, sell, or utilize off-balance sheet derivative financial instruments or derivative commodity instruments.



GOODWILL - Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a purchase business combination. Goodwill and
other intangible assets are stated on the basis of cost. See also Impairment which follows.



IMPAIRMENT - Long-lived assets, including certain identifiable intangibles and goodwill, are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of
the asset in question may not be recoverable including, but not limited to, a deterioration of profits for a business segment that has long-lived assets, and when other changes occur which might impair recovery of long-lived assets.



ORIGINATION FEES - Origination fees are comprised of points and other fees charged on
mortgage loans originated by the retail segment of the Company. Points and fees are primarily a function of the volume of mortgage loans originated by our retail segment. Origination fees on loans originated by the Company that are subsequently sold
are deferred and recognized as part of the gain on sale of loans.



7



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##### Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)



NOTE 1. PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES  (continued)



INCOME TAXES - The Company accounts for income taxes pursuant to Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes. Under the asset and liability method specified thereunder, deferred taxes are determined based on the difference between the financial reporting and tax bases of assets and liabilities. Deferred tax liabilities are offset by
deferred tax assets relating to net operating loss carryforwards and deductible temporary differences.



ADVERTISING - The Companys advertising costs are expensed as incurred.



FAIR VALUE OF FINANCIAL INSTRUMENTS - Financial instruments of the Company consist of cash and cash equivalents, receivables for fees, accounts payable, notes
payable, and convertible debentures payable. The carrying amount of financial instruments approximates fair value.



CONCENTRATIONS OF RISKS - The Company is required by Statement of Financial Accounting Standards No. 105 to disclose concentrations of credit risk regardless of
the degree of such risk. The Companys operations are concentrated in single-family first mortgage residential real estate market. The Company operates in a heavily regulated environment. The operations of the Company are subject to changes in
laws, administrative directives and rules and regulations of federal, state, and local governments and regulatory agencies. Such changes may occur with little notice of time for compliance. Further, the Company performs credit evaluations of its
customers financial condition, performs its operations under contracts and requires deposits when deemed necessary. Historically, the Company has not incurred any significant credit losses.



STOCK-BASED COMPENSATION  The Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations, in accounting for employee stock options rather than the alternative fair value accounting allowed by FASB
Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123). APB 25 provides that compensation expense relative to the Companys employee stock options is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price. Under SFAS 123, the fair value of stock options at the date of grant is recognized in earnings over the vesting period of the options. In December 2002, FASB issued SFAS No. 148,
Accounting for Stock-Based CompensationTransition and Disclosure (SFAS 148), which amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee
compensation and the effect of the method on reported results. The Company will continue to report stock based compensation under APB 25 but has adopted the interim reporting requirements of SFAS 148.



8



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##### Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)



NOTE 1. PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES  (continued)



As of June 30, 2005, there were stock options outstanding for the purchase of 36,961,750 shares of the Companys common stock. There were 1,750,000 and 2,550,000
stock options granted during the three and six months ended June 30, 2005, respectively.



The following table shows the pro forma net loss as if the fair value method of SFAS No. 123 had been used to account for stock-based compensation expense for the six months ended June 30, 2005 and 2004 (dollars in
thousands, except per share amounts):



|                                                                                                                        |  |      |       |   |      |   |        |  
|----------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ------ | -
|                                                                                                                        |  | 2005 |       |   | 2004 |  
|Net loss                                                                                                                |  | $    | (403  | ) |      | $ | (785   | )
|Stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects |  |      | 249   |   |      |   | 797    |  
|                                                                                                                        |  |      |       |   |      |   |        |  
|Pro forma net loss                                                                                                      |  | $    | (652  | ) |      | $ | (1,582 | )
|                                                                                                                        |  |      |       |   |      |   |        |  
|Net loss per share:                                                                                                     |  |      |       |   |      |   |        |  
|Basic and diluted, as reported                                                                                          |  | $    | (0.00 | ) |      | $ | (0.03  | )
|                                                                                                                        |  |      |       |   |      |   |        |  
|Pro forma basic and diluted                                                                                             |  | $    | (0.01 | ) |      | $ | (0.03  | )
|                                                                                                                        |  |      |       |   |      |   |        |  



RECENT ACCOUNTING DEVELOPMENTS
- In December 2004, the Financial Accounting Standards Board issued a revision of SFAS No. 123, Accounting for Stock-Based Compensation, which also supersedes APB 25, Accounting for Stock Issued to Employees. The revised standard eliminates the
alternative to use Opinion 25s intrinsic value method of accounting and eliminates the disclosure only provisions of SFAS No. 123. The compliance date for the revised standard was extended by the Securities and Exchange Commission (the
SEC) in April 2005. The revision, as extended by the SEC, applies to all awards granted after December 31, 2005 and requires the recognition of the cost of employee services received in exchange for awards of equity instruments based on
the grant-date fair value of those awards and applies to all stock options and awards granted after December 31, 2005 and requires the recognition of compensation expense in the financial statements for all share-based payment transactions
subsequent to that date. The revision also requires the prospective recognition of compensation expense in the financial statements for all unvested options as of January 1, 2006. Adoption of this standard on January 1, 2006 will have a slightly
negative impact on our earnings based on the pro forma data in the table above.



In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections, which replaces APB Opinion No. 20, Accounting Changes, and SFAS 3, Reporting Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion No.
28 . SFAS 154 changes the requirements for the accounting and reporting of a change in accounting principle. It applies to all voluntary changes in accounting principle as well as to changes required by an accounting pronouncement that does not
include specific transition provisions. SFAS 154 eliminates the requirement in APB Opinion No. 20 to



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##### Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)



NOTE 1. PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES  (continued)



include the cumulative effect changes in accounting principle in the income statement in the period of change. Instead, to enhance comparability of prior period financial
statements, SFAS 154 requires that changes in accounting principle be retrospectively applied. Under retrospective application, the new accounting principle is applied as of the beginning of the first period presented as if that principle had always
been used. The cumulative effect of the change is reflected in the carrying value of assets and liabilities as of the first period presented and the offsetting adjustments are recorded to opening retained earnings. Each period presented is adjusted
to reflect the period specific effects of applying the change. Although retrospective application is similar to restating prior periods, SFAS 154 gives the treatment a new name to differentiate it from restatement for correction of an error. Only
direct effects of the change will be included in the retrospective application; all indirect effects will be recognized in the period of change. If it is impracticable to determine the cumulative effect for all periods, the new accounting principle
should be applied as if it were adopted prospectively from the earliest date practicable. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after the date SFAS 154 was issued. The changes required
by SFAS 154 are not expected to have a material impact on the financial condition, results of operations, or liquidity of the Company.



NOTE 2. DISCONTINUED OPERATIONS



On June 30, 2004, we sold our PGNF Home Lending Corp. (PGNF) subsidiary effective May 31, 2004. Pursuant to the agreement, the Company exchanged the common
stock of PGNF, as well as the assumption of all of PGNFs liabilities, contingent and otherwise, for 52,329,735 shares of our common stock valued at $3,140 (based upon the closing price of $0.06 on May 31, 2004) and 1,800 shares of our Series E
preferred stock plus accrued dividend valued at $1,813.



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##### Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)



NOTE 2. DISCONTINUED OPERATIONS  (continued)



In accordance with Statement of Financial Accounting Standards No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, the assets and liabilities of the PGNF have been classified as
discontinued operations, with its operating results in the current and prior periods reported in discontinued operations for the three and six-month periods ended June 30, 2004. A summary of the operating results of the discontinued operations for
the three and six months ended June 30, 2004 is as follows:



|                                                              |  |                            |       |   |            |   |        |  
|------------------------------------------------------------- |  | -------------------------- | ----- | - | ---------- | - | ------ | -
|                                                              |  | Period ended June 30, 2004 |      
|                                                              |  | ThreeMonths                |       |   | Six Months |  
|Revenue:                                                      |  |                            |       |   |            |   |        |  
|Gain on sale of loans                                         |  | $                          | 508   |   |            | $ | 1,949  |  
|Loan origination fees                                         |  |                            | 245   |   |            |   | 551    |  
|Interest, dividends, and other income                         |  |                            | 200   |   |            |   | 546    |  
|                                                              |  |                            |       |   |            |   |        |  
|Total revenue                                                 |  |                            | 953   |   |            |   | 3,046  |  
|                                                              |  |                            |       |   |            |   |        |  
|Expenses:                                                     |  |                            |       |   |            |   |        |  
|Salaries, commissions, benefits, and stock-based compensation |  |                            | 801   |   |            |   | 2,151  |  
|Loan production costs                                         |  |                            | 110   |   |            |   | 309    |  
|                                                              |  |                           
|General and administrative expenses                           |  |                            | 561   |   |            |   | 1,306  |  
|Impairment of goodwill                                        |  |                            |      |   |            |   | 2,582  |  
|Non-recurring expense (income)                                |  |                            |      |   |            |   | (198   | )
|Interest expense                                              |  |                            | 162   |   |            |   | 436    |  
|Other (income) expense                                        |  |                            | (15   | ) |            |   | (3     | )
|                                                              |  |                            |       |   |            |   |        |  
|Total expenses                                                |  |                            | 1,619 |   |            |   | 6,584  |  
|                                                              |  |                            |       |   |            |   |        |  
|Loss from continuing operations                               |  | $                          | (666  | ) |            | $ | (3,538 | )
|                                                              |  |                            |       |   |            |   |        |  



NOTE 3. GOING CONCERN



As shown in the accompanying unaudited condensed consolidated financial
statements, we incurred a net loss of $159 and $403 in the three and six months ended June 30, 2005, respectively, and has incurred cumulative losses of $9,028. At June 30, 2005, we had a working capital deficit of $1,949 and a deficit in
stockholders equity of $1,406. These factors raise substantial doubt about the Companys ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of
this uncertainty. The Companys continued existence depends on a number of factors, including but not limited to, the ability to originate loans and improve the operating results of our existing subsidiaries, to secure adequate sources of
capital and to locate and fund acquisitions of suitable companies. However, there can be no assurance that the Company will be successful in these endeavors or able to continue as a going concern.



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##### Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)



NOTE 4. OFFICE PROPERTY AND EQUIPMENT



Office property and equipment from continuing operations as of June 30, 2005 and December 31, 2004 are summarized as follows:



|                         |  |      |     |   |      |   |     |  
|------------------------ |  | ---- | --- | - | ---- | - | --- | -
|                         |  | 2005 |     |   | 2004 |  
|Furniture and fixtures   |  | $    | 25  |   |      | $ | 20  |  
|Leasehold improvements   |  |      | 13  |   |      |   |    |  
|Office equipment         |  |      | 101 |   |      |   | 87  |  
|                         |  |      |     |   |      |   |     |  
|                         |  |      | 139 |   |      |   | 107 |  
|Accumulated depreciation |  |      | (56 | ) |      |   | (43 | )
|                         |  |      |     |   |      |   |     |  
|                         |  | $    | 83  |   |      | $ | 64  |  
|                         |  |      |     |   |      |   |     |  



Depreciation expense for the six
months ended June 30, 2005 and 2004 was $13 and $22, respectively.



NOTE 5.
GOODWILL



Goodwill represents the excess of the merger consideration over
the fair value of the net assets of PHF and FCM on the date they were acquired. A summary of goodwill follows:



|                                                                                                                                                                                                                                                                                                                                       |  |   |    
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ---
|PHF - Consideration for the merger was $876 consisting of $836 in shares of the Companys common stock (1,224,000 shares at approximately $0.6833 per share), $25 in a promissory note issued
by the Company, and $15 in costs associated with the merger. At the time of the merger, the fair value of the net assets of PHF was $54. |  | $ | 822
|                                                                                                                                                                                                                                                                                                                                       | 
|FCM  Consideration for the merger was $185 consisting of $185 in shares of the Companys common stock (4,285,714 shares at approximately $0.043 per share). At the time of the
acquisition, the estimated fair value of the net assets of FCM was $15.                                                                                |  |   | 170
|                                                                                                                                                                                                                                                                                                                                       |  |   |    
|                                                                                                                                                                                                                                                                                                                                       |  | $ | 992
|                                                                                                                                                                                                                                                                                                                                       |  |   |    



NOTE 6. OTHER ASSETS



Other assets from continuing operations at June 30, 2005 and December 31,
2004 were:



|                            |  |      |     |      |   |    
|--------------------------- |  | ---- | --- | ---- | - | ---
|                            |  | 2005 |     | 2004
|Deferred income tax assets  |  | $    | 414 |      | $ | 414
|Security deposits and other |  |      | 5   |      |   | 2  
|                            |  |      |     |      |   |    
|                            |  | $    | 419 |      | $ | 416
|                            |  |      |     |      |   |    





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##### Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)



NOTE 7. SEGMENT DATA



The Company
previously operated in two separate business segments: wholesale and retail. With the disposal of PGNF (Note 2), the Company operates in one business segment: retail mortgage brokering.



NOTE 8. DEBT



The Companys debt from continuing operations as of June 30, 2005 and December 31, 2004 was as follows:



|                                                                                                                                                                                                                                                         |  |      |       |      |   |      
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                                                                                                                                                                                                                                         |  | 2005 |       | 2004
|Revolving line of credit subject to a standstill agreement with a commercial bank secured by certain equipment and furniture of the Company bearing interest at prime rate requiring monthly principal and interest payments of $5, due November 1, 2005 |  | $    | 200   |      | $ | 221  
|Insurance premium finance note bearing an interest rate of 8% with monthly principal and interest payments of $6, due May 1, 2005                                                                                                                        |  |      |      |      |   | 24   
|Promissory note to vendor bearing interest of 8% with monthly principal and interest payments of $4                                                                                                                                                      |  |      | 25    |      |   | 24   
|Promissory note to shareholders of PHF bearing interest at 4.92%, due December 31, 2005                                                                                                                                                                  |  |      | 25    |      |   | 25   
|Promissory note to former members of FCM                                                                                                                                                                                                                 |  |      | 5     |      |   |     
|Convertible debentures bearing interest at 10% due December 31, 2006, currently in default                                                                                                                                                               |  |      | 349   |      |   | 379  
|Subordinated note payable to former stockholder bearing interest at 5%, due November 30, 2005, currently in default for payments due at December 31, 2004                                                                                                |  |      | 480   |      |   | 480  
|Subordinated note payable to former stockholder bearing interest at 5%, due May 31, 2008, currently in default                                                                                                                                           |  |      | 1,051 |      |   | 1,051
|                                                                                                                                                                                                                                                         |  |      |       |      |   |      
|                                                                                                                                                                                                                                                         |  | $    | 2,135 |      | $ | 2,204
|                                                                                                                                                                                                                                                         |  |      |       |      |   |      



NOTE 9. COMMITMENTS AND
CONTINGENCIES



Off-Balance Sheet Risks- The Company enters into
commitments to extend credit in the normal course of business. These commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. Commitments to fund loans are agreements
to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. One-to-four family residential properties, if funded, would
collateralize the commitments. The Company evaluates each customers creditworthiness and obtains appraisals to support the value of the underlying collateral. Also, external market forces affect the probability of commitments being exercised;
therefore, total commitments outstanding do not necessarily represent future cash requirements. The Company quotes interest rates to borrowers, which are generally subject to change by the Company. Although the Company typically honors such interest
rate quotes, the quotes do not constitute interest rate locks, minimizing the potential interest rate risk exposure. The Company had no binding commitments to fund loans at June 30, 2005.



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##### Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)



NOTE 9. COMMITMENTS AND CONTINGENCIES  (continued)



Supervisory Regulation- The Companys mortgage brokering business is subject to the rules and regulations of the Department of Housing and Urban Development (HUD) and various state and federal
agencies with respect to originating, processing, and selling mortgage loans as a nonsupervised correspondent lender. Those rules and regulations require, among other things, that the Companys subsidiary, PHF, maintain a minimum net worth of
$63 each, plus $25 for each branch office. As of June 30, 2005, PHF was in compliance with these requirements. The Company currently does not service loans for other investors or federal agencies.



Minimum Operating Lease Commitments- The Company is party to real estate leases for
its mortgage offices in Florida and South Carolina as well as leases for certain office equipment.



The Company pays taxes, insurance, other operating expenses, and general maintenance for all lease arrangements.



Litigation  On September 24, 2004, the Company defaulted on its promissory note dated June 4, 2003 to Bank of America, N.A. (BoA) being unable to
repay this note in full when demanded to do so by BoA. BoA has commenced legal action against the Company and other guarantors of the indebtedness for repayment. On December 13, 2004, the Company entered into a standstill agreement whereby, for a
principal reduction payment of $25 and the payment of an extension fee and the banks legal fees, the maturity date of the note was extended to December 1, 2005, the interest rate was increased to the banks prime rate plus 4%, and
requires principal reduction payments of $5 per month through November 1, 2005.



On November 23, 2004, we entered into an agreement with our former corporate law firm whereby we would make monthly payments of $17 until we had liquidated the $231 due them. In addition, we executed an affidavit of confession of judgment
waiving notice upon default or breach of the agreement related to this debt. On May 15, 2005, we defaulted on this agreement due to non-payment.



In mid-2001, the Company, and certain of its former directors and officers were named as defendants in class action complaints alleging violations of the federal
securities laws in the United States District Court for the Southern District of New York. In mid-2002, the complaints against the Company were consolidated into a single action.



The essence of the complaint is that in connection with the Companys initial public offering in October 1999 (IPO), the
defendants issued and sold the Companys common stock pursuant to a registration statement which did not disclose to investors that certain underwriters in the offering had solicited and received excessive and undisclosed commissions from
certain investors acquiring the Companys common stock in connection with the IPO. The complaint also alleges that the registration statement failed to disclose that the underwriters allocated Company shares in the IPO to customers of the
underwriters in exchange for the customers promises to purchase additional shares in the aftermarket at pre-determined prices above the IPO price. The action seeks damages in an unspecified amount.



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##### Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)



NOTE 9. COMMITMENTS AND CONTINGENCIES  (continued)



The action is being coordinated with approximately 300 other nearly identical actions filed against other companies that had initial public offerings of securities between 1997 and 2000 same time period.



The Company has approved a Memorandum of Understanding (MOU) and related
agreements which set forth the terms of a settlement between the Company, the plaintiff class and the vast majority of the other approximately 300 issuer defendants. Among other provisions, the settlement contemplated by the MOU provides for a
release of the Company and the individual defendants for the conduct alleged in the action to be wrongful. The Company would agree to undertake certain responsibilities, including agreeing to assign away, not assert, or release certain potential
claims the Company may have against its underwriters.



It is anticipated that
any potential financial obligation of the Company to plaintiffs pursuant to the terms of the MOU and related agreements will be covered by existing insurance. Therefore, the Company does not expect that the settlement will involve any payment by the
Company. The MOU and related agreements are subject to a number of contingencies, including the negotiation of a settlement agreement and its approval by the Court. The Company cannot opine as to whether or when a settlement will occur or be
finalized. Whether or not the settlement is ultimately approved, the Company believes the resolution of this matter will not have a material adverse effect on the Company.



The Company is also a party to various legal proceedings arising out of the ordinary course of the Companys business. Management
believes that any liability with respect to these legal actions, individually or in the aggregate, will not have a material adverse effect on the Companys consolidated financial position and results of operations.



NOTE 10. SUPPLEMENTAL CASH FLOW INFORMATION



|                                                    |  |      |    |      |   |     |  
|--------------------------------------------------- |  | ---- | -- | ---- | - | --- | -
|                                                    |  | 2005 |    | 2004 |  
|SUPPLEMENTAL CASH FLOW DATA:                        |  |      |    |      |   |     |  
|Cash interest paid                                  |  | $    | 31 |      | $ | 29  |  
|Income taxes paid                                   |  | $    |   |      | $ |    |  
|                                                    |  |     
|                                                    |  |      |    | 2005 |  
|ACQUISITIONS OF BUSINESSES, NET OF CASH ACQUIRED    |  |      |    |      |   |     |  
|                                                    |  |      |    |      |   |     |  
|Fair value of assets acquired                       |  |      |    |      | $ | 203 |  
|Liabilities assumed                                 |  |      |    |      |   | (18 | )
|                                                    |  |      |    |      |   |     |  
|Fair value of assets acquired                       |  |      |    |      |   | 185 |  
|                                                    |  |      |    |      |   |     |  
|Stock issued                                        |  |      |    |      |   | 185 |  
|Fair value of assets acquired (other than goodwill) |  |      |    |      |   | (15 | )
|                                                    |  |      |    |      |   |     |  
|Goodwill                                            |  |      |    |      | $ | 170 |  
|                                                    |  |      |    |      |   |     |  
|Cash acquired in purchase of business               |  |      |    |      | $ | 6   |  
|                                                    |  |      |    |      |   |     |  



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##### Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)



NOTE 11. STOCKHOLDERS DEFICIT



PREFERRED STOCK - The Companys certificate of incorporation authorizes a series of 5,000,000 shares of preferred stock with a par value of $0.0001 and with such rights, privileges and preferences, as the board of directors may
determine.



On March 26, 2003, the Companys board of directors authorized
the issuance of 3,000 shares of preferred stock, par value $0.0001 per share, and designated the shares as Series E Preferred Shares (the Series E Preferred). The stated value of each share of the Series E Preferred is $1,000 per share;
has a mandatory dividend of 4% of the stated value, per annum and shall be payable on January 1st of each year and is payable in either shares of the Companys common stock or cash; has no voting rights; and is not convertible. On March 26,
2003, certain of the Companys executive officers converted certain accrued salary and benefits into 659 shares of Series E Preferred.



At June 30, 2005 and December 31, 2004, the Company had 659 shares of Series E Preferred Stock issued and outstanding. The cumulative dividend payable under this Series E
Preferred Stock was $60 and $47 at June 30, 2005 and December 31, 2004, respectively.



STOCK PURCHASE WARRANTS - As part of its convertible notes offering, the Company issued detachable warrants to purchase up to 75,800 shares of common stock at a rate of $0.25 per share. The warrants are exercisable at a rate of $0.25
per share for a period of three years.



As part of its private placement
transaction (discussed more fully below), the Company issued warrants to purchase up to 17,207,791 shares of its common stock for $0.04 per share. These warrants expire on December 31, 2007.



COMMON STOCK - On February 28, 2005, the Company completed a private placement
financing transaction pursuant to which it sold 17,207,791 units (at $0.0308 per unit) to several accredited investors for an aggregate purchase price of $530,000. Each unit consisted of one share of common stock, par value $0.0001 per share (the
Common Stock), and one warrant to purchase one share of Common Stock at $0.04 per share expiring on December 31, 2007.



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##### Table of Contents

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



The following discussion should be reviewed in conjunction with our consolidated financial statements and the related notes and other financial information appearing
elsewhere in this report. In addition to historical information, the following discussion and other parts of this document contain forward-looking information that involves risks and uncertainties. Please refer to the section entitled
Forward-Looking Statements on page 3 of this Form 10-Q. Our actual results could differ materially from those anticipated by such forward-looking information due to factors discussed under the section entitled Risk Factors That May
Affect Future Results and elsewhere in this report.



Forward-Looking
Statements



Certain information contained in this report may include
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and is subject to the safe harbor created by that act. We caution readers that certain important factors may affect our actual results
and could cause such results to differ materially from any forward-looking statements which may be deemed to have been made in this Report or which are otherwise made by or on behalf of us. For this purpose, any statements contained in this Report
that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as may, will, expect, believe,
explore, consider, anticipate, intend, could, estimate, annualized, plan, or continue or the negative variations of those words or comparable
terminology are intended to identify forward-looking statements. Factors that may affect our results include, but are not limited to the risks and uncertainties associated with:



| |  |  | our ability to raise capital necessary to sustain our operations and to implement our business plan,
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | our ability to obtain regulatory permits and approvals to continue operating in the financial services area,
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | our ability to identify and complete acquisitions and successfully integrate the businesses we acquire, if any,
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | changes in the real estate market, interest rates, or the general economy of the markets in which we operate,
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | our ability to employ and retain qualified management and employees,
| | - |  | --------------------------------------------------------------------



| |  |  | changes in government regulations that are applicable to our businesses,
| | - |  | ------------------------------------------------------------------------



| |  |  | general volatility of the capital markets and the maintenance of a market for our shares,
| | - |  | -----------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | changes in the demand for our services,
| | - |  | ---------------------------------------



| |  |  | the degree and nature of our competition,
| | - |  | -----------------------------------------



| |  |  | our ability to generate sufficient cash to pay our creditors, and
| | - |  | -----------------------------------------------------------------



| |  |  | disruption in the economic and financial conditions primarily from the impact of past terrorist attacks in the United States, threats of future attacks, police and military
activities overseas, and other disruptive worldwide political events.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We are also subject to other risks detailed from time to time in our Securities and Exchange Commission filings. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and
whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance, and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation
to publicly update or revise any forward-looking statements, whether from new information, future events, or otherwise.



Overview



We are headquartered in Ponte Vedra Beach, Florida and were incorporated in Delaware in August 1999. We are a retail mortgage broker in the one-to-four family residential mortgage market. We conduct business in the
states of Florida and South Carolina from our 7 offices.



Our business relies
on our ability to originate mortgage loans at a reasonable cost. The mortgage industry is generally subject to seasonal trends, and loan origination volumes in our industry have historically fluctuated from year to year and are affected by such
external factors as home values, the level of consumer debt and the overall condition of the economy. In addition, the premiums we receive from the secondary market for our loans have also fluctuated, also influenced by the overall condition of the
economy and, more importantly, the interest rate environment. As a consequence, the business of originating and selling loans is cyclical.



Loan Originations



As of June 30, 2005, we originated loans through our offices in Florida and South Carolina.



Critical Accounting Policies



We have established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the
preparation of our financial statements. Certain accounting policies require us to make significant estimates and assumptions that may have a material impact on certain assets and liabilities, as well as our operating results, and we consider these
to be critical accounting policies. The estimates and assumptions we use are based on historical experience and other factors which we believe to be reasonable under the circumstances. Actual results, particularly goodwill and loss of our
discontinued segment, could differ materially from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities and our results of operations.



18



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##### Table of Contents

We believe the following are critical accounting policies that require the most significant estimates and assumptions
that are subject to significant change in the preparation of our consolidated financial statements:



Loan Origination Fees



Origination fees are comprised of points and other fees charged on mortgage loans originated by our loan officers and brokered through other banks and financial
institutions. Points and fees are primarily a function of the volume of mortgage loans originated by our loan officers.



Loan Production Costs



We also measure and monitor the cost to originate our loans. Such costs include the costs of credit, appraisals, and other direct costs associated with originating a
mortgage loan, net of fees we receive from borrowers. Commissions paid to our loan officers are included in the salaries, commissions and benefits caption on our statement of operations.



Income Taxes



We file a consolidated federal income and combined state franchise tax returns. We utilize the asset and liability method of accounting for
income taxes, under which deferred income taxes are recognized for the future tax consequences attributable to the differences between the financial statement values of existing assets and liabilities and their respective tax bases. We measure
deferred tax assets and liabilities using enacted tax rates we expect to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize the effect on deferred taxes of a change in tax
rates in income in the period that includes the enactment date.



In determining
the possible realization of deferred tax assets, we consider future taxable income from the following sources: (a) the reversal of taxable temporary differences, (b) future operations exclusive of reversing temporary differences, and (c) tax
planning strategies that, if necessary, would be implemented to accelerate taxable income into periods in which net operating losses might otherwise expire.



Goodwill and Impairment



Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a purchase business combination. Goodwill and other intangible
assets are stated on the basis of cost.



Long-lived assets, including certain
identifiable intangibles and goodwill, are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of the asset in question may not be recoverable including, but not limited to, a
deterioration of profits for a business segment that has long-lived assets, and when other changes occur which might impair recovery of long-lived assets



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Discontinued Operations



In accordance with Statement of Financial Accounting Standards No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets (SFAS 144), a component classified as held for sale is reported in discontinued operations when the following conditions are met: (a) the operations and cash flows of the component have been (or
will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction and (b) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. In a
period in which a component of an entity either has been disposed of or is classified as held for sale, the income statement for current and prior periods reports the results of operations of the component, including any gain or loss recognized in
accordance with SFAS 144 paragraph 37, in discontinued operations. The results of discontinued operations, less applicable income taxes (benefit), is reported as a separate component of income before extraordinary items and the cumulative effect of
accounting changes (if applicable). The assets and liabilities of a disposal group classified as held for sale is presented separately in the asset and liability sections, respectively, of the statement of financial position.



Results of Operations



Three Months Ended June 30, 2005 Compared with Three Months Ended June 30, 2004



Loan Originations. Loan originations decreased $2,523, or 8.8%, to $26,011 for the
three months ended June 30, 2005 compared to $28,534 for the three months ended June 30, 2004. The decrease in loan originations resulted primarily from a reduction of origination volume at our Orlando, Florida location of $10,388 due to a loss of
three loan officers at that location as well as the general reduction in the refinance market. The reduction in loan originations was offset by the addition of offices in Jacksonville, Florida and our acquisition of FCM in 2005 that were not
included in the loan originations for the three months ended June 30, 2004.



Revenues



Loan origination fees. Loan origination fees
decreased $155, or 24.3%, to $482 for the three months ended June 30, 2005 compared to $637 for the three months ended June 30, 2004. This decrease was due primarily to the 11.2% decrease in the number of mortgage loans originated in the three
months ended June 30, 2005 compared to the three months ended June 30, 2004 as well as a reduction of 14.7% in the average fee per loan originated between the periods. The decrease in the number of loans originated in the three months ended June 30,
2005 as compared to the three months ended June 30, 2004 was due to the loss of three loan officers at our Orlando, Florida locations. Expressed as a percentage of loan origination volume, origination fees were 1.86% and 2.23% for the three months
ended June 30, 2005 and 2004, respectively.



Operating Expenses



Salaries, commissions and benefits. Salaries, commissions and
benefits decreased $230, or 40.3%, to $341 for the three months ended June 30, 2005 compared to $571 for the three months ended June 30, 2004. This decrease was due primarily to reductions in commissions paid to our loan officers due to the fewer
number of mortgage loans originated in the three months ended



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June 30, 2005 compared to the three months ended June 30, 2004 as well as a reduction in salaries paid to our corporate
officers in the three months ended June 30, 2005 compared to the three months ended June 30, 2004.



Loan production costs. Loan production costs decreased $34, or 89.5%, to $4 for the three months ended June 30, 2005 compared to $38 for the three months ended June 30, 2004. This decrease was due primarily to
the fewer number of mortgage loans originated between the periods.



General
and administrative expenses. General and administrative expenses increased $43, or 20.8%, to $250 for the three months ended June 30, 2005 compared to $207 for the three months ended June 30, 2004. This increase was primarily due to the
operating expenses incurred at our recently acquired subsidiary, FCM, and the additional operating expenses associated with the opening of three new offices in the three months ended June 30, 2005.



Operating loss. The operating loss decreased by $66, or 36.9%, to $113 for the three
months ended June 30, 2005 compared to $179 for the three months ended June 30, 2004. This decrease was due primarily to factors discussed above.



Interest expense. Interest expense increased $21, or 84.0%, to $46 for the three months ended June 30, 2005 compared to $25 for the three months ended June 30,
2004. This increase was due primarily to interest on the subordinated notes issued to PGNF on May 31, 2004. These subordinated notes were outstanding for only one month during the three months ended June 30, 2004.



Loss on disposal of segment. We incurred a loss of $102 on the disposal of PGNF in the
three months ended June 30, 2004. This represents the non-cash loss incurred in disposing of PGNF.



Net loss from continuing operations. The net loss from continuing operations decreased $147, or 48.0%, to $159 for the three months ended June 30, 2005 compared to $306 for the three months ended June 30, 2004.
This decrease was primarily due to the factors discussed above.



Loss from
discontinued operations. The net loss from discontinued operations was $666 in the three months ended June 30, 2004 and relates to the operations of PGNF which were disposed of June 1, 2004. Revenues of discontinued operations were $953 for the
three months ended June 30, 2004. Total expenses of discontinued operations were $1,619 for the three months ended June 30, 2004.



Net loss. The net loss decreased $813, or 83.6%, to $159 for the three months ended June 30, 2005 compared to $972 for the three months ended June 30, 2004. This
decrease was primarily due to the factors discussed above.



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Six Months Ended June 30, 2005 Compared with Six Months Ended June 30, 2004



Loan Originations. Loan originations decreased $7,258, or 14.1%, to $44,102 for the
six months ended June 30, 2005 compared to $51,359 for the six months ended June 30, 2004. The decrease in loan originations resulted primarily from a reduction of origination volume at our Orlando, Florida location of $19,221 due to a loss of three
loan officers at that location as well as the general reduction in the refinance market. The reduction in loan originations was offset by the addition of offices in Jacksonville, Florida and our acquisition of FCM in 2005 that were not included in
the loan originations for the six months ended June 30, 2004.



Revenues



Loan origination fees. Loan origination fees decreased $439, or
36.0%, to $780 for the six months ended June 30, 2005 compared to $1,219 for the six months ended June 30, 2004. This decrease was due primarily to the 16.7% decrease in the number of mortgage loans originated in the six months ended June 30, 2005
compared to the six months ended June 30, 2004 as well as a reduction of 23.2% in the average fee per loan originated between the periods. The decrease in the number of loans originated in the six months ended June 30, 2005 as compared to the six
months ended June 30, 2004 was due to the loss of three loan officers at our Orlando, Florida locations. Expressed as a percentage of loan origination volume, origination fees were 1.77% and 2.37% for the six months ended June 30, 2005 and 2004,
respectively.



Operating Expenses



Salaries, commissions and benefits. Salaries, commissions and benefits decreased
$737, or 53.8%, to $632 for the six months ended June 30, 2005 compared to $1,369 for the six months ended June 30, 2004. This decrease was due primarily to a reduction of salaries, benefits and non-cash stock based compensation of $418 at our
corporate office as well as reductions in commissions paid to our loan officers due to the fewer number of mortgage loans originated in the six months ended June 30, 2005 compared to the six months ended June 30, 2004.



Loan production costs. Loan production costs decreased $30, or 63.8%, to $17 for the
six months ended June 30, 2005 compared to $47 for the six months ended June 30, 2004. This decrease was due primarily to the fewer number of mortgage loans originated between the periods.



General and administrative expenses. General and administrative expenses decreased $3,
or 0.7%, to $440 for the six months ended June 30, 2005 compared to $443 for the six months ended June 30, 2004. Our corporate expenses decreased $52 in the six months ended June 30, 2005 as compared to the same period in 2004. The decrease in
corporate expenses was offset by an increase in general and administrative expenses at our subsidiaries for the six months ended June 30, 2005 as compared to 2004. The increase in general and administrative expenses at our subsidiaries in the six
month ended June 30, 2005 as compared to 2004 relates to our acquisition of FCM, effective February 1, 2005, and the additional branches opened by both FCM and PHF in the three months ended June 30, 2005.



Operating loss. The operating loss decreased by $331, or 51.7%, to $309 for the six
months ended June 30, 2005 compared to $640 for the six months ended June 30, 2004. This decrease was due primarily to factors discussed above.



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Interest expense. Interest expense increased $51, or 118.6%, to $94 for the six months ended June 30, 2005
compared to $43 for the six months ended June 30, 2004. This increase was due primarily to interest on the subordinated notes issued to PGNF on May 31, 2004 as part of our disposal of that company. These subordinated notes were outstanding for only
one month during the six months ended June 30, 2004.



Loss on disposal of
segment. We incurred a non-cash loss of $102 on the disposal of PGNF in the six months ended June 30, 2004.



Net loss from continuing operations. The net loss from continuing operations decreased $382, or 48.7%, to $403 for the six months ended June 30, 2005 compared to
$785 for the six months ended June 30, 2004. This decrease was primarily due to the factors discussed above.



Loss from discontinued operations. The net loss from discontinued operations was $3,538 in the six months ended June 30, 2004 and relates to the operations of PGNF which were disposed of June 1, 2004. Total
revenues of our discontinued operations were $3,046 for the six months ended June 30, 2004. Total expenses of our discontinued operations were $6,584 for the six months ended June 30, 2004. Total expenses of our discontinued operations include an
impairment charge of $2,582 in the six months ended June 30, 2004.



Net
loss. The net loss decreased $3,920, or 90.7%, to $403 for the six months ended June 30, 2005 compared to $4,323 for the six months ended June 30, 2004. This decrease was primarily due to the factors discussed above.



Liquidity and Capital Resources



Our primary source of liquidity is from fees earned by originating mortgage loans. Our
mortgage origination operations require continued access to cash to fund ongoing administrative, operating, and tax expenses as well as providing cash to fund our corporate operations. Our corporate operations require access to cash to fund ongoing
administrative expenses, our acquisition program, tax expenses as well as interest and principal payments under our existing indebtedness.



At June 30, 2005, we had cash and cash equivalents of approximately $100 and fees receivable of $66 with which to satisfy our on-going mortgage and corporate
operations current liabilities of $2,116. We continue seeking ways to improve our liquidity to a level sufficient to accomplish our goals for 2005 and continue as a going concern.



While the performance of our operating subsidiaries improved in the three month period ended June 30, 2005 as compared to the three month
period ended March 31, 2005, their performance was below expectation for the six months ended June 30, 2005. Due to this poor operating performance, as well as the costs associated with our being publicly traded, we are experiencing difficulty in
meeting the liquidity requirements of our corporate operations as well as servicing its existing obligations. Unless our subsidiaries operating performance improves, or we are able



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to acquire other profitable financial services operations, we will be required to raise additional equity capital the
terms of which might be substantially dilutive to our existing shareholders. We continue reviewing our corporate operating expenses, seeking to acquire profitable financial services operations producing positive cash flow, and renegotiating the
terms of our existing indebtedness with major creditors, but there can be no assurances that we will be able to secure the additional capital, reduce our corporate operating expenses, renegotiate the terms of our existing indebtedness, or acquire
profitable financial services operations required to continue funding our corporate operations and continue as a going concern.



Below is a summary of our actions to date attempting to restructure our debt.



Short-term debt. On June 4, 2003, we entered into a revolving line of credit with a commercial bank in the amount of $250,000. This revolving line of credit had an
interest rate of prime, is secured by a general lien on our assets, and is guaranteed by our current and former subsidiaries. The commercial bank demanded repayment of this credit facility on September 13, 2004. We were not able to meet this demand,
and, as discussed elsewhere, we entered into a standstill agreement with this bank whereby the maturity date of the note was extended to December 1, 2005, the interest rate increased from the banks prime rate to its prime rate plus 4%, and
required principal reduction payments of $5 per month through November 1, 2005.



Convertible debentures. On March 6, 2003, we completed a private offering of 379 units consisting of (i) a $1 convertible promissory note due December 31, 2003 with interest payable quarterly at a stated interest rate of 15% per
annum and (ii) a warrant to purchase shares of common stock, exercisable at $0.25 per share, for each $5.00 in principal of the promissory note issued in the unit. The holder has the right to convert the outstanding principal amount of the
convertible promissory note (or any portion thereof), together with accrued interest thereon, into shares of our common stock at a conversion price of $0.25 per share, subject to standard anti-dilution adjustments as specified in the note. In 2005,
we repaid principal of $30 to certain holders of our 15% convertible notes. The remaining holders have agreed to amend the maturity date of the convertible notes to December 31, 2006 and reduce the interest rate thereon to 10% in consideration for a
reduction in the strike price of the warrants to $0.05 per share. The convertible notes require quarterly interest payments on March 31, June 30, September 30, and December 31 of each year.



Subordinated promissory notes to PGNF (a formerly related party). In July 2005, the
owner of our former subsidiary PGNF did an assignment for the benefit of creditors and closed the business. PGNF is the holder of subordinated promissory notes with a face value of $1,531 and accrued interest of $75. We are currently in default
under the terms of these promissory notes and are attempting to contact the assignee in an effort to discuss the repurchase of these obligations.



In addition to the above, we continue to explore additional ways to enhance our liquidity and reduce our insolvency risk.



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Future Accounting Pronouncements



There are currently no pronouncements issued that are scheduled for implementation during 2005 that are expected to have any significant
impact on the accounting policies of the Company.



Item 3. Quantitative and Qualitative Disclosures About Market Risk.



Impact of Inflation



Inflation affects us most significantly in the area of loan originations and can have a substantial effect on interest rates. Interest rates normally increase during
periods of high inflation and decrease during periods of low inflation. Profitability may be directly affected by the level and fluctuation in interest rates that affect our ability to earn a spread between interest received on its loans and the
costs of its borrowings. Our profitability is likely to be adversely affected during any period of unexpected or rapid changes in interest rates. A substantial and sustained increase in interest rates could adversely affect our ability to originate
loans and affect the mix of first and second-lien mortgage loan products. Generally, first-lien mortgage production increases relative to second-lien mortgage production in response to low interest rates and second-lien mortgage production increases
relative to first-lien mortgage production during periods of high interest rates. Fluctuating interest rates may also affect the net interest income earned by us resulting from the difference between the yield to us on loans held pending sales and
the interest paid by us for funds borrowed.



Off-Balance Sheet Arrangements



We do not have any off-balance sheet arrangements.



Tabular Disclosure of Contractual Obligations



The following table presents our contractual obligations as of June 30, 2005:



|                                                                              |  |       |       |                       |   |           |  |           |       |  |   |  
|----------------------------------------------------------------------------- |  | ----- | ----- | --------------------- | - | --------- |  | --------- | ----- |  | - | -
|                                                                              |  |       |       | Payment Due by Period
|                                                                              |  | Total |       | Less than1 Year       |   | 1-3 Years |  | 3-5 Years
|Subordinated debt due formerly related party                                  |  | $     | 1,531 |                       | $ | 580       |  | $         | 951   |  |   | 
|Convertible debentures                                                        |  |       | 349   |                       |   | 349       |  |           |       |  |   | 
|Short-term debt                                                               |  |       | 205   |                       |   | 205       |  |           |      |  |   | 
|Promissory notes and other contractual obligations                            |  |       | 185   |                       |   | 185       |  |           |      |  |   | 
|Notes payable related party                                                   |  |       | 25    |                       |   | 25        |  |           |      |  |   | 
|Operating leases                                                              |  |       | 125   |                       |   | 52        |  |           | 73    |  |   | 
|                                                                              |  |       |       |                       |   |           |  |           |       |  |   |  
|The fair value of our contractual obligations approximate the carrying value. |  | $     | 2,420 |                       | $ | 1,396     |  | $         | 1,024 |  | $ | 
|                                                                              |  |       |       |                       |   |           |  |           |       |  |   |  





Market Risk



Our market risk is the risk of economic loss resulting from adverse changes in market prices of mortgage loans and interest rates. When interest rates rise, applications
in process with locked-in rates decrease in value. This risk of loss can be reflected in diminished current market values and/or reduced potential income in future periods.



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When interest rates decline, customers may withdraw their mortgage loan applications. In those instances, we may be
required to reduce our interest rates to meet the market demands. When interest rates rise, fallout may occur due to customers that are not locked into a rate withdrawing their applications, and, as a result, we may suffer a reduction in the volume
of loan originations. We may be required to reduce our fees to entice these customers in order to close their loans.



We do not maintain a trading account nor are we subject to currency exchange risk or commodity price risk. Responsibility for monitoring interest rate risk rests with
senior management. Senior management regularly reviews our interest rate risk position and adopts balance sheet strategies that are intended to optimize operating earnings while maintaining market risk within acceptable guidelines.



While we monitor interest rates and may, from time to time, employ a strategy designed to
hedge some of the risks associated with changes in interest rates, no assurance can be given that our results of operations and financial condition will not be adversely affected during periods of fluctuations in interest rates. There were no open
hedging positions at June 30, 2005.



Item 4. Control and Procedures.



We carried out an
evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934). Based upon that evaluation, as of the end of the period covered by this Quarterly Report our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in
ensuring that all material information required to be disclosed in this Quarterly Report has been made known to them in a timely fashion.



There were no changes in our internal controls over financial reporting during the period covered by this Quarterly Report that have materially affected, or are
reasonably likely to materially affect, these internal controls.



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##### Table of Contents

PART II  OTHER INFORMATION



Item 1. Legal Proceedings.



Refer to Part I,
Footnote 9  Commitments and Contingencies for a discussion of our ongoing litigation. In addition to the specific items discussed therein, from time to time, we become involved in a variety of mortgage lending related claims and other matters
incidental to its business in addition to the matters described above. In our opinion, the resolution of any of these matters is not expected to have a material adverse effect on our consolidated financial position and results of operations.



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



None.



Item 3. Defaults Upon Senior Securities.



As we
disclosed in Part I, Footnote 9  Commitments and Contingencies, we are in default under certain of our promissory notes with our creditors. As explained therein, we are attempting to negotiate extensions and other forebearance with these
creditors.



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



We held our annual meeting of stockholders on June 21, 2005. At the meeting, the stockholders re-elected of all four of our existing directors to serve as directors until the next annual meeting of stockholders and
until their successors shall have been duly elected and qualified. Of the 86,706,250 shares of common stock entitled to vote at the meeting, 46,722,365 shares of common stock were present in person or by proxy and entitled to vote. Such number of
shares represented approximately 53.89% of our outstanding shares of common stock.



In connection with such election, the stockholders voted as follows:



|                      |  |            |  |         
|--------------------- |  | ---------- |  | --------
|                      |  | FOR        |  | WITHHELD
|Paul K. Danner        |  | 46,718,406 |  | 3,959   
|George O. Deehan      |  | 46,719,419 |  | 2,946   
|Charles D. Van Sickle |  | 46,720,691 |  | 1,674   
|Stephen Croskrey      |  | 46,718,397 |  | 3,968   



Item 5. Other Information.



On August 14, 2005,
George O. Deehan resigned from our Board of Directors. Mr. Deehan had recently been named as the chief operating officer of Sunset Financial Resources (SFR), a publicly traded real estate investment trust located in Jacksonville,
Florida. SFRs board determined that Mr. Deehans capacity as director of Paragon was in conflict with his acting as an officer of SFR.



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There were no disagreements with Paragon, executive officers, or members of Paragons board of directors on any
matter relating to Paragons operations, policies or practices.



Mr.
Deehan has been furnished with a copy of this statement.



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



| | (a) | Exhibits: The following exhibits are hereby filed as part of this Quarterly Report on Form 10-Q.
| | --- | ------------------------------------------------------------------------------------------------



|              |  |                                                                                                                                                                                                                                                                                       
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                           
|2.1           |  | Agreement and Plan of Merger dated as of October 14, 2002 among PlanetRx.com, Inc. (n/k/a Paragon Financial Corporation), Paragon Homefunding, Inc. a Delaware Corporation and Mortgage
Express, Inc. (n/k/a PGNF Home Lending Corp., et al (the Mortgage Express Plan of Merger).**
|              | 
|2.2           |  | Amendment No. 1 to the Mortgage Express Plan of Merger.***                                                                                                                                                                                                                            
|              | 
|2.3           |  | Agreement and Plan of Merger dated December 9, 2002 among PlanetRx.com, Inc. (n/k/a Paragon Financial Corporation), Paragon Acquisition Corp. II, Paragon Homefunding, Inc., a Florida
corporation, et al. (the Paragon Homefunding Plan of Merger).***                             
|              | 
|2.4           |  | Amendment No. 1 to the Paragon Homefunding Florida Plan of Merger.***                                                                                                                                                                                                                 
|              | 
|2.5           |  | Stock Purchase Agreement between Paragon and Philip Lagori for the sale of PGNF Homelending Corp. +                                                                                                                                                                                   
|              | 
|2.6           |  | Member Purchase Agreement between Paragon and the Members of First Charleston Mortgage LLC dated January 19, 2005. ++                                                                                                                                                                 
|              | 
|3.1           |  | Restated Certificate of Incorporation filed with the Secretary of State of the State of Delaware on October 6, 1999. ****                                                                                                                                                             
|              | 
|3.2           |  | Certificate of Amendment of the Restated Certificate of Incorporation filed with the Secretary of State of the State of Delaware on October 13, 2000. ****                                                                                                                            
|              | 
|3.3           |  | Certificate of Amendment to Restated Certificate of Incorporation filed with the Secretary of State of the State of Delaware on November 30, 2002. ****                                                                                                                               
|              | 
|3.4           |  | Certificate of Amendment of the Restated Certificate of Incorporation filed with the Secretary of State of the State of Delaware on December 26, 2002. ****                                                                                                                           
|              | 
|3.5           |  | Certificate of Designations of Series E Preferred Stock.*****                                                                                                                                                                                                                         
|              | 
|3.6           |  | Amended and Restated By-laws. ****                                                                                                                                                                                                                                                    
|              | 
|4.1           |  | Form of convertible promissory note. ****                                                                                                                                                                                                                                             
|              | 
|4.2           |  | 5% Subordinated promissory note due November 30, 2005 for $480,000 +                                                                                                                                                                                                                  
|              | 
|4.3           |  | 5% Subordinated promissory note due May 31, 2008 for $1,051,225 +                                                                                                                                                                                                                     
|              | 
|10.1          |  | Amended and Restated Employment Agreement, dated as of September 1, 2002 by and between PlanetRx.com, Inc. (now known as Paragon Financial Corporation) and Paul Danner. ****                                                                                                         
|              | 
|10.2          |  | Employment Agreement, dated as of September 4, 2002 by and between PlanetRx.com, Inc. (now known as Paragon Financial Corporation) and Steven A. Burleson. ****                                                                                                                       



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|     |  |                                                                                                                                                                               
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.3 |  | Employment Agreement, dated as of January 31, 2003 by and between Paragon Financial Corporation and Philip Lagori. ****                                                       
|     | 
|10.4 |  | Employment Agreement, dated as of December 30, 2002 by and between Paragon Financial Corporation and Scott Vining. ****                                                       
|     | 
|10.5 |  | Lease dated January 1, 2003 between Ponte Vedra Management Group, Ltd. and Paragon Financial Corporation. ****                                                                
|     | 
|10.6 |  | Lease dated September 1, 2000 between 820 West Lake, LLC and Mortgage Express, Inc. (n/k/a PGNF Home Lending Corp.). ****                                                     
|     | 
|10.7 |  | Employment Agreement, dated October 16, 2003, by and between Paragon Financial Corporation and George O. Deehan *****                                                         
|     | 
|10.8 |  | Employment Agreement, dated June 17, 2003, by and between Paragon Financial Corporation and Joseph P. Bryant, Jr. *****                                                       
|     | 
|10.9 |  | Employment Agreement, dated May 6, 2003, by and between Paragon Financial Corporation and Steven L. Barnett. *****                                                            
|     | 
|31.1 |  | Certification of Principal Executive Officer pursuant to Form of Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 15, 2005 *
|     | 
|31.2 |  | Certification of Principal Financial Officer pursuant to Form of Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 15, 2005 *
|     | 
|32.1 |  | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 15, 2005 *

---

|* | Filed herewith
|- | --------------

|+ | Filed as an exhibit to Paragons Current Report on From 8-K/A, as amended, for an even dated June 30, 2004
|- | ----------------------------------------------------------------------------------------------------------

|@ | This exhibit represents a management contract
|- | ---------------------------------------------

|** | This exhibit represents a compensatory plan
|-- | -------------------------------------------

|*** | Filed as an exhibit to Paragons Current Report on Form 8 for an event dated January 31, 2003
|--- | ---------------------------------------------------------------------------------------------

|**** | Filed as an exhibit to Paragons Annual Report on Form 10-K for the year ended December 31, 2002
|---- | ------------------------------------------------------------------------------------------------

|***** | Filed as an exhibit to Paragons Quarterly Report for the period ended March 31, 2004, as amended
|----- | -------------------------------------------------------------------------------------------------

|++ | Filed as an exhibit to Paragons Current Report on Form 8-K for an event dated January 19, 2005.
|-- | ------------------------------------------------------------------------------------------------



(b) Reports of Forms 8-K



None.



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.



|                             
|-----------------------------
|PARAGON FINANCIAL CORPORATION
|                             
|BY:                          
|                             
|/s/ SCOTT L. VINING          
|Scott L. Vining              
|Chief Financial Officer      
|Dated: August 15, 2005       



30