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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, 2004



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.)



5000 Sawgrass
Village Circle, 3rdFloor, 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 16, 2004: 64,066,743.



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##### Table of Contents

INDEX



|        |  |                                                                                                                     |  |   
|------- |  | ------------------------------------------------------------------------------------------------------------------- |  | --
|        |  | PART I  FINANCIAL INFORMATION                                                                                      |  |   
|        |  |                                                                                                                    
|Item 1. |  | Financial Statements                                                                                                |  |   
|        |  |                                                                                                                    
|        |  | Unaudited Condensed Consolidated Balance Sheets at June 30, 2004 and December 31, 2003                              |  | 2 
|        |  |                                                                                                                    
|        |  | Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003 |  | 3 
|        |  |                                                                                                                    
|        |  | Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003           |  | 4 
|        |  |                                                                                                                    
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                               |  | 17
|        |  |                                                                                                                    
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk.                                                         |  | 24
|        |  |                                                                                                                    
|Item 4. |  | Controls and Procedures                                                                                             |  | 25
|        |  |                                                                                                                    
|        |  | PART II  OTHER INFORMATION                                                                                         |  |   
|        |  |                                                                                                                    
|Item 1. |  | Legal Proceedings                                                                                                   |  | 26
|        |  |                                                                                                                    
|Item 2. |  | Changes in Securities and Use of Proceeds                                                                           |  | 26
|        |  |                                                                                                                    
|Item 3. |  | Defaults Upon Senior Securities                                                                                     |  | 26
|        |  |                                                                                                                    
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                                                 |  | 26
|        |  |                                                                                                                    
|Item 5. |  | Other Information                                                                                                   |  | 26
|        |  |                                                                                                                    
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                                    |  | 26



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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, 2004 AND DECEMBER 31, 2003

(Dollars in thousands, except share data)



|                                                                                                                                                                              |  |      |        |   |        |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ------ | - | ------ | -
|                                                                                                                                                                              |  | 2004 |        |   | 2003 * |  
|ASSETS                                                                                                                                                                        |  |      |        |   |        |   |        |  
|Current assets:                                                                                                                                                               |  |      |        |   |        |   |        |  
|Cash and cash equivalents                                                                                                                                                     |  | $    | 152    |   |        | $ | 70     |  
|Fees receivable                                                                                                                                                               |  |      | 84     |   |        |   | 80     |  
|Prepaid and other current assets                                                                                                                                              |  |      | 19     |   |        |   | 37     |  
|                                                                                                                                                                              |  |      |        |   |        |   |        |  
|Total current assets                                                                                                                                                          |  |      | 255    |   |        |   | 187    |  
|                                                                                                                                                                              |  |     
|Office property and equipment, net of accumulated depreciation of $49 and $27                                                                                                 |  |      | 112    |   |        |   | 132    |  
|Goodwill                                                                                                                                                                      |  |      | 822    |   |        |   | 822    |  
|Other assets                                                                                                                                                                  |  |      | 478    |   |        |   | 475    |  
|Assets of discontinued operations                                                                                                                                             |  |      |       |   |        |   | 34,046 |  
|                                                                                                                                                                              |  |      |        |   |        |   |        |  
|TOTAL ASSETS                                                                                                                                                                  |  | $    | 1,667  |   |        | $ | 35,662 |  
|                                                                                                                                                                              |  |      |        |   |        |   |        |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                                         |  |      |        |   |        |   |        |  
|Current liabilities:                                                                                                                                                          |  |      |        |   |        |   |        |  
|Short-term debt                                                                                                                                                               |  |      | 245    |   |        |   | 245    |  
|Notes payable                                                                                                                                                                 |  |      | 23     |   |        |   | 20     |  
|Notes payable  related parties                                                                                                                                               |  |      | 25     |   |        |   | 25     |  
|Convertible debentures payable                                                                                                                                                |  |      | 379    |   |        |   | 379    |  
|Accounts payable                                                                                                                                                              |  |      | 465    |   |        |   | 290    |  
|Accrued expenses  related parties                                                                                                                                            |  |      | 59     |   |        |   | 59     |  
|Accrued expenses  other                                                                                                                                                      |  |      | 361    |   |        |   | 514    |  
|                                                                                                                                                                              |  |      |        |   |        |   |        |  
|Total current liabilities                                                                                                                                                     |  |      | 1,557  |   |        |   | 1,532  |  
|                                                                                                                                                                              |  |     
|Long-term debt:                                                                                                                                                               |  |      |        |   |        |   |        |  
|Liabilities to formerly related parties, less current portion                                                                                                                 |  |      | 1,531  |   |        |   |       |  
|Liabilities of discontinued operations                                                                                                                                        |  |      |        |   |        |   | 26,154 |  
|                                                                                                                                                                              |  |      |        |   |        |   |        |  
|Total liabilities                                                                                                                                                             |  |      | 3,088  |   |        |   | 27,686 |  
|                                                                                                                                                                              |  |     
|Stockholders deficit:                                                                                                                                                        |  |      |        |   |        |   |        |  
|Preferred stock: Issuable in series, $0.0001 par value; 5,000,000 shares authorized: Series E, $1,000 stated value; 659 and 2,459 shares
issued and outstanding, respectively |  |      |       |   |        |   |       |  
|Common stock, $0.0001 par value. 400,000,000 shares authorized: 64,066,743 and 116,396,478 shares issued and outstanding                                                      |  |      | 5      |   |        |   | 11     |  
|Additional paid-in capital                                                                                                                                                    |  |      | 6,861  |   |        |   | 11,779 |  
|Retained deficit                                                                                                                                                              |  |      | (8,287 | ) |        |   | (3,964 | )
|Cumulative comprehensive income                                                                                                                                               |  |      |       |   |        |   | 202    |  
|Unearned stock-based compensation                                                                                                                                             |  |      |       |   |        |   | (52    | )
|                                                                                                                                                                              |  |      |        |   |        |   |        |  
|Total stockholders deficit                                                                                                                                                   |  |      | (1,421 | ) |        |   | 7,976  |  
|                                                                                                                                                                              |  |      |        |   |        |   |        |  
|TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                                   |  | $    | 1,667  |   |        | $ | 35,662 |  
|                                                                                                                                                                              |  |      |        |   |        |   |        |  

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|* | Derived from audited consolidated financial statements filed in the Companys 2003 Annual Report on Form 10-K.
|- | --------------------------------------------------------------------------------------------------------------



See accompanying notes to condensed consolidated financial statements.



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PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(Dollars in thousands, except share data)



|                                                                                                                         |  |                    |        |   |                  |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------ | - | ---------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                         |  | Three Months Ended |        |   | Six Months Ended |  
|                                                                                                                         |  | 2004               |        |   | 2003             |   |         | 2004 |  |   | 2003    |  
|Revenue:                                                                                                                 |  |                    |        |   |                  |   |         |      |  |   |         |   |  |   |         |  
|Loan origination fees                                                                                                    |  | $                  | 637    |   |                  | $ | 545     |      |  | $ | 1,219   |   |  | $ | 815     |  
|Interest, dividends, and other income                                                                                    |  |                    |       |   |                  |   |        |      |  |   |        |   |  |   |        |  
|                                                                                                                         |  |                    |        |   |                  |   |         |      |  |   |         |   |  |   |         |  
|Total revenue                                                                                                            |  |                    | 637    |   |                  |   | 545     |      |  |   | 1,219   |   |  |   | 815     |  
|                                                                                                                         |  |                    |        |   |                  |   |         |      |  |   |         |   |  |   |         |  
|Expenses:                                                                                                                |  |                    |        |   |                  |   |         |      |  |   |         |   |  |   |         |  
|Salaries, commissions, benefits, and stock-based compensation                                                            |  |                    | 571    |   |                  |   | 466     |      |  |   | 1,369   |   |  |   | 993     |  
|Loan production costs                                                                                                    |  |                    | 38     |   |                  |   | 48      |      |  |   | 47      |   |  |   | 59      |  
|General and administrative expenses                                                                                      |  |                    | 207    |   |                  |   | 558     |      |  |   | 443     |   |  |   | 591     |  
|                                                                                                                         |  |                    |        |   |                  |   |         |      |  |   |         |   |  |   |         |  
|Total expenses                                                                                                           |  |                    | 816    |   |                  |   | 1,072   |      |  |   | 1,859   |   |  |   | 1,643   |  
|                                                                                                                         |  |                    |        |   |                  |   |         |      |  |   |         |   |  |   |         |  
|Operating loss                                                                                                           |  |                    | (179   | ) |                  |   | (527    | )    |  |   | (640    | ) |  |   | (828    | )
|Interest expense, net                                                                                                    |  |                    | 25     |   |                  |   | 100     |      |  |   | 43      |   |  |   | 209     |  
|Loss on disposal of segment (Note 2)                                                                                     |  |                    | 102    |   |                  |   |        |      |  |   | 102     |   |  |   |        |  
|                                                                                                                         |  |                    |        |  
|Loss from continuing operations                                                                                          |  |                    | (306   | ) |                  |   | (627    | )    |  |   | (785    | ) |  |   | (1,037  | )
|                                                                                                                         |  |                    |        |  
|Discontinued operations (Note 2): (Loss) income from discontinued operations before provision (benefit) for income
taxes |  |                    | (666   | ) |                  |   | 346     |      |  |   | (3,538  | ) |  |   | (167    | )
|                                                                                                                         |  |                    |        |   |                  |   |         |      |  |   |         |   |  |   |         |  
|Net loss                                                                                                                 |  | $                  | (972   | ) |                  | $ | (281    | )    |  | $ | (4,323  | ) |  | $ | (1,204  | )
|                                                                                                                         |  |                    |        |   |                  |   |         |      |  |   |         |   |  |   |         |  
|Net Income Per Common Share - Basic and Diluted:                                                                         |  |                    |        |   |                  |   |         |      |  |   |         |   |  |   |         |  
|                                                                                                                         |  |                    |        |  
|Loss from continuing operations                                                                                          |  | $                  | (0.00  | ) |                  | $ | (0.01   | )    |  | $ | (0.01   | ) |  | $ | (0.01   | )
|                                                                                                                         |  |                    |        |  
|(Loss) income from discontinued operations                                                                               |  | $                  | (0.01  | ) |                  | $ | 0.00    |      |  | $ | (0.03   | ) |  | $ | (0.00   | )
|                                                                                                                         |  |                    |        |   |                  |   |         |      |  |   |         |   |  |   |         |  
|Basic earnings per share                                                                                                 |  | $                  | (0.01  | ) |                  | $ | (0.00   | )    |  | $ | (0.04   | ) |  | $ | (0.01   | )
|                                                                                                                         |  |                    |        |   |                  |   |         |      |  |   |         |   |  |   |         |  
|Weighted average shares outstanding  basic and diluted                                                                  |  |                    | 99,037 |   |                  |   | 116,146 |      |  |   | 107,642 |   |  |   | 106,961 |  
|                                                                                                                         |  |                    |        |   |                  |   |         |      |  |   |         |   |  |   |         |  



See accompanying
notes to condensed 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, 2004 AND 2003

(Dollars in thousands)



|                                                                             |  |      |      |   |      |   |        |  
|---------------------------------------------------------------------------- |  | ---- | ---- | - | ---- | - | ------ | -
|                                                                             |  | 2004 |      |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                        |  |      |      |   |      |   |        |  
|Net loss from continuing operations                                          |  | $    | (785 | ) |      | $ | (1,037 | )
|                                                                             |  |     
|Adjustments to reconcile net loss to cash provided by operating activities:  |  |      |      |   |      |   |        |  
|Depreciation                                                                 |  |      | 22   |   |      |   | 9      |  
|Loss on disposal of segment                                                  |  |      | 102  |   |      |   |       |  
|Non-cash interest expense converted into preferred stock                     |  |      |     |   |      |   | 13     |  
|Stock-based compensation                                                     |  |      | 52   |   |      |   | 10     |  
|Changes in operating assets and liabilities, net of acquisitions:            |  |      |      |   |      |   |        |  
|Increase in fees receivable                                                  |  |      | (4   | ) |      |   | (60    | )
|Increases in prepaids and other assets                                       |  |      | 16   |   |      |   | 12     |  
|Decrease in accounts payable, accrued expenses and other current liabilities |  |      | 45   |   |      |   | 263    |  
|                                                                             |  |      |      |   |      |   |        |  
|Cash used by operating activities                                            |  |      | (552 | ) |      |   | (790   | )
|                                                                             |  |      |      |   |      |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                        |  |      |      |   |      |   |        |  
|Purchases of property and equipment                                          |  |      | (2   | ) |      |   | (98    | )
|Cash acquired from purchases of business                                     |  |      |     |   |      |   | 43     |  
|Proceeds from sale of websites                                               |  |      | 30   |   |      |   | 48     |  
|                                                                             |  |      |      |   |      |   |        |  
|Cash used by investing activities                                            |  |      | 28   |   |      |   | (7     | )
|                                                                             |  |      |      |   |      |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                        |  |      |      |   |      |   |        |  
|Proceeds from the issuance of warrants                                       |  |      |     |   |      |   | 13     |  
|Proceeds from the issuance of debentures                                     |  |      |     |   |      |   | 231    |  
|(Repayments of) proceeds from promissory notes                               |  |      | (20  | ) |      |   | 160    |  
|                                                                             |  |      |      |   |      |   |        |  
|Cash provided by financing activities                                        |  |      | (20  | ) |      |   | 404    |  
|                                                                             |  |      |      |   |      |   |        |  
|                                                                             |  |     
|Net cash provided by discontinued operations                                 |  |      | 626  |   |      |   | 353    |  
|                                                                             |  |     
|Net increase in cash and cash equivalents                                    |  |      | 82   |   |      |   | (40    | )
|                                                                             |  |     
|Cash and cash equivalents, beginning of period                               |  |      | 70   |   |      |   | 91     |  
|                                                                             |  |      |      |   |      |   |        |  
|Cash and cash equivalents, end of period                                     |  | $    | 152  |   |      | $ | 51     |  
|                                                                             |  |      |      |   |      |   |        |  



See accompanying
notes to condensed consolidated financial statements.



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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



THE COMPANY  Paragon Financial Corporation (the Company) was incorporated in Delaware on August 27, 1999 under the name PRx Holdings, Inc. and
operated as an online healthcare destination for commerce, content and community. The Company closed its online health store in March 2001. Shortly thereafter, the Company began the process of liquidating its online health store and seeking a merger
partner as an alternative to complete liquidation.



Paragon Homefunding, Inc.
(Paragon Delaware), a privately held, development-stage company based in Ponte Vedra Beach, Florida, was incorporated in Delaware on August 3, 2001, for the purpose of entering the financial services market through acquisitions. On May
31, 2002, the Company merged with Paragon Delaware.



Pursuant to the merger,
the Company merged with and into Paragon Delaware, and issued 55,560,616 shares of common stock to the Paragon Delawares stockholders constituting 90% of the total shares of the Companys common stock outstanding immediately after the
merger. As a result of the merger, Paragon Delaware also assumed approximately $72 of the Companys accrued liabilities, principally for legal services.



For financial reporting purposes, the merger has been accounted for as a recapitalization of Paragon Delaware with Paragon Delaware viewed as the accounting acquiror in
what is commonly called a reverse acquisition. Accordingly, the financial statements presented before the merger are those of Paragon Delaware.



ACQUISITIONS - On February 2, 2003 the Company completed its merger with Paragon Homefunding, Inc. (PHF). PHF has been in the business of originating
residential mortgage loans since 1998. Subject to the terms of the merger agreement, at closing, all of the outstanding shares of PHFs common stock converted into 1,224,000 of shares of the Companys common stock valued at $836
(approximately $0.6833 per share). Additionally, the Company issued promissory notes to the shareholders of PHF in the aggregate principal amount of $25. The promissory notes accrue interest at 4.92%.



The merger was accounted for as acquisitions pursuant to SFAS No. 141, Accounting for
Business Combinations (SFAS 141). Accordingly, the Companys results of operations include the operating results of these companies from the effective date of these mergers, February 1, 2003.



The Companys unaudited condensed consolidated results of operations on a pro forma
basis for the six



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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)



months ended June 30, 2003 as if it had consummated the merger with PHF and disposed of PGNF Home Lending Corp. (see Note 2) on January 1, 2003 are as follows (in
thousands except per share data):



|                                                        |  |      |        |  
|------------------------------------------------------- |  | ---- | ------ | -
|                                                        |  | 2003 |       
|Revenue                                                 |  | $    | 986    |  
|Net income                                              |  | $    | (987   | )
|Basic and diluted loss per share                        |  | $    | (0.02  | )
|Weighted average shares outstanding  basic and diluted |  |      | 63,495 |  



PRINCIPLES OF CONSOLIDATION -
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. In consolidation, all material intercompany balances and transactions have been eliminated. Results of operations of
companies acquired in transactions accounted for under the purchase method of accounting are included in the financial statements from the date of the acquisition. The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America.



BASIS OF PRESENTATION - The accompanying condensed consolidated financial statements of Paragon Financial Corporation and subsidiaries (sometimes referred to herein as we, our or the Company) are
prepared in accordance with the Securities and Exchange Commissions rules regarding interim financial statements, and therefore do not contain all disclosures required by accounting principles generally accepted in the United States of America
for annual financial statements. Reference is made to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2003. Certain previously reported amounts have been reclassified to conform to the current
periods presentation. Such reclassifications had no effect on net loss or stockholders equity.



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.



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 the
allowance for loan repurchases and premium recapture, goodwill, and loss on disposal of our discontinued segment. Actual results could differ from those estimates.



The determination of the adequacy of the allowance for loan repurchases and premium recapture losses is based on estimates that may be
affected by significant changes in the economic environment and market conditions. The Company has obtained insurance to mitigate some of this risk.



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.



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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)



MORTGAGE LOANS RECEIVABLE HELD-FOR-SALE - Mortgage loans receivable held-for-sale consist of loans made to individuals that are primarily collateralized by
residential one to four unit family dwellings. Mortgage loans are recorded at the principal amount outstanding net of deferred origination costs and fees and any premium or discounts. These loans are carried at the lower of amortized cost or fair
value as determined by outstanding commitments from investors or current investor-yield requirements, calculated on an aggregate basis. Interest on loans receivable held-for-sale is credited to income as earned. Interest is accrued only if deemed
collectible.



ALLOWANCE FOR LOAN REPURCHASES AND PREMIUM RECAPTURE - The
allowance for loan repurchases and premium recapture relates to expenses incurred due to the potential repurchase of loans or indemnification of losses based on alleged violations of representations and warranties which are customary to the mortgage
banking industry. Provisions for losses are charged to gain on sale of loans and credited to the allowance. The allowance represents the Companys estimate of the total losses expected to occur and is considered to be adequate by management
based upon the Companys evaluation of the potential exposure related to the loan sale agreements over the life of the associated loans sold. The Company has purchased insurance to cover third party broker fraud, which mitigates some of the
risks.



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



AVAILABLE-FOR-SALE SECURITIES AND
COMPREHENSIVE LOSS- Securities available-for-sale are carried at fair value with unrealized gains and losses reported in other comprehensive income. Realized gains (losses) on securities available-for-sale are included in other income and, when
applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Gains and losses on sales of securities are determined on the specific-identification method.



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.



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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)



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.



GAIN ON SALES OF LOANS - Gains or
losses resulting from sales of mortgage loans are recognized at the date of settlement and are based on the difference between the selling price of the mortgage loans sold and the carrying value of the related loans sold. Nonrefundable fees and
direct costs associated with the origination of mortgage loans are deferred and recognized when the loans are sold. Loan sales are accounted for as sales when control of the loans is surrendered, to the extent that consideration other than
beneficial interests in the loans transferred is received in the exchange.



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.



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.



RECLASSIFICATIONS - Certain reclassifications have been made to the 2003 financial statements in order to conform to the presentation
adopted for 2004. These reclassifications had no effect on net income or retained earnings.



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



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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)



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.



The Company maintains its cash in bank deposit accounts at a high credit-quality financial institution. At times during the period ended June 30, 2004, the Companys cash balances exceeded the federally-insured limit. Management
believes this policy will not adversely affect the Company.



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.



As of June 30, 2004, there were stock options outstanding for the purchase of
30,029,250 shares of the Companys common stock. There were no stock options granted and 14,544,500 forfeited during the quarter ended June 30, 2004.



9



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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)



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, 2004 and 2003 (dollars in thousands, except per share amounts):



|                                                                                                                        |  |      |        |   |      |   |        |  
|----------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                                                                        |  | 2004 |        |   | 2003 |  
|Net loss from continuing operations, as reported                                                                        |  | $    | (785   | ) |      | $ | (1,037 | )
|Stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects |  |      | 797    |   |      |   | 1,380  |  
|                                                                                                                        |  |      |        |   |      |   |        |  
|Pro forma net loss                                                                                                      |  | $    | (1,582 | ) |      | $ | (2,417 | )
|                                                                                                                        |  |      |        |   |      |   |        |  
|Net loss per share:                                                                                                     |  |      |        |   |      |   |        |  
|Basic and diluted, as reported                                                                                          |  | $    | (0.04  | ) |      | $ | (0.01  | )
|                                                                                                                        |  |      |        |   |      |   |        |  
|Pro forma basic and diluted                                                                                             |  | $    | (0.01  | ) |      | $ | (0.02  | )
|                                                                                                                        |  |      |        |   |      |   |        |  



RECENT ACCOUNTING DEVELOPMENTS
- On March 9, 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 105. Application of Accounting Principles of Loan Commitments (SAB 105). SAB 105 requires that when a company is recognizing and valuing a
loan commitment at fair value, only differences between the guaranteed interest rate in the loan commitment and a market interest rate should be included. Any expected cash flows related to the consumer relationships or loan commitment and a market
interest rate should be included. Any expected cash flows related to the consumer relationships or loan servicing should be excluded from the fair value measurement. The expected future cash flows that are excluded from the fair value determination
include anticipated fees for servicing the funded loan, late payment charges, other ancilliary fees, or other cash flows from servicing rights. The guidance in SAB 105 is effective for mortgage loan commitments that are accounted for as derivatives
and are entered into after March 31, 2004, and is not expected to have a material impact on the results of future operations.



In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, which addresses how a business
enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, which was issued in January 2003. The Company will be required to apply FIN 46R to all entities subject to this Interpretation no later than the end of the first reporting period that ends after December 15, 2004. This
interpretation must be applied to those entities that are considered to be special-purpose entities no later than as of the end of the first reporting period that ends after December 15, 2003.



For any variable interest entities (VIEs) that must be consolidated under FIN 46R that were
created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized
interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling
interest of the VIE. The application of this Interpretation is not expected to have a material effect on the Companys financial statements.



In December 2003, the Accounting Standards Executive Committee issued Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer
(SOP 03-3). SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investors initial investment in loans or debt securities (loans) acquired in a transfer if
those differences are attributable, at least in part, to credit quality. SOP 03-3 includes loans acquired in purchase business combinations, but does not apply to loans originated by the entity. SOP 03-3 is effective for loans acquired in fiscal
years beginning after



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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)



December 15, 2004, although earlier adoption is encouraged. The adoption of this new statement of position is not expected to have a material impact on the consolidated
financial position or results of operations of the Company.



NOTE 2.
DISCONTINUED OPERATIONS



On June 30, 2004, we closed the sale of 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. 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-month and six-month periods ended June 30, 2004 and 2003.



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##### Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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



2. DISCONTINUED OPERATIONS (continued)



A summary of the
operating results of the discontinued operations for the three and six months ended June 30, 2004 and 2003 is as follows.



|                                                              |  |                    |       |                  |      |   |       |  |   |        |   |  |   |       |  
|------------------------------------------------------------- |  | ------------------ | ----- | ---------------- | ---- | - | ----- |  | - | ------ | - |  | - | ----- | -
|                                                              |  | Three Months Ended |       | Six Months Ended |     
|                                                              |  | 2004               |       |                  | 2003 |   | 2004  |  |   | 2003   |  
|Revenue:                                                      |  |                    |       |                  |      |   |       |  |   |        |   |  |   |       |  
|Gain on sale of loans                                         |  | $                  | 508   |                  |      | $ | 2,246 |  |   | 1,949  |   |  | $ | 2,945 |  
|Loan origination fees                                         |  |                    | 245   |                  |      |   | 1,125 |  |   | 551    |   |  |   | 1,731 |  
|Interest, dividends, and other income                         |  |                    | 200   |                  |      |   | 398   |  |   | 546    |   |  |   | 669   |  
|                                                              |  |                    |       |                  |      |   |       |  |   |        |   |  |   |       |  
|Total revenue                                                 |  |                    | 953   |                  |      |   | 3,769 |  |   | 3,046  |   |  |   | 5,345 |  
|                                                              |  |                    |       |                  |      |   |       |  |   |        |   |  |   |       |  
|Expenses:                                                     |  |                    |       |                  |      |   |       |  |   |        |   |  |   |       |  
|Salaries, commissions, benefits, and stock-based compensation |  |                    | 801   |                  |      |   | 1,997 |  |   | 2,151  |   |  |   | 3,055 |  
|Loan production costs                                         |  |                    | 110   |                  |      |   | 422   |  |   | 309    |   |  |   | 658   |  
|General and administrative expenses                           |  |                    | 561   |                  |      |   | 646   |  |   | 1,306  |   |  |   | 1,283 |  
|Impairment of goodwill                                        |  |                    |      |                  |      |   |      |  |   | 2,582  |   |  |   |      |  
|Non-recurring expense (income)                                |  |                    |      |                  |      |   |       |  |   | (198   | ) |  |   |       |  
|Interest expense                                              |  |                    | 162   |                  |      |   | 323   |  |   | 436    |   |  |   | 473   |  
|Other (income) expense                                        |  |                    | (14   | )                |      |   | 35    |  |   | (3     | ) |  |   | 43    |  
|                                                              |  |                    |       |                  |      |   |       |  |   |        |   |  |   |       |  
|Total expenses                                                |  |                    | 1,619 |                  |      |   | 3,423 |  |   | 6,584  |   |  |   | 5,512 |  
|                                                              |  |                    |       |                  |      |   |       |  |   |        |   |  |   |       |  
|(Loss) income from continuing operations                      |  | $                  | (666  | )                |      | $ | 346   |  | $ | (3,538 | ) |  | $ | (167  | )
|                                                              |  |                    |       |                  |      |   |       |  |   |        |   |  |   |       |  



The following is a summary of the
assets and liabilities of our discontinued operations as of December 31, 2003:



|                                                                       |  |      |       
|---------------------------------------------------------------------- |  | ---- | ------
|                                                                       |  | 2003
|ASSETS:                                                                |  |      |       
|Cash and cash equivalents                                              |  | $    | 482   
|Fees receivable                                                        |  |      | 93    
|Mortgage loans receivable held-for-sale, net                           |  |      | 23,245
|Office property and equipment, net of accumulated depreciation of $259 |  |      | 1,021 
|Other notes and mortgages receivable                                   |  |      | 136   
|Available-for-sale securities                                          |  |      | 995   
|Goodwill                                                               |  |      | 7,814 
|Prepaid and other assets                                               |  |      | 260   
|                                                                       |  |      |       
|Total assets of discontinued operations                                |  | $    | 34,046
|                                                                       |  |      |       
|LIABILITIES:                                                           |  |      |       
|Warehouse lines of credit                                              |  |      | 22,711
|Notes payable                                                          |  |      | 1,581 
|Subordinated note payable  related party                              |  |      | 776   
|Accounts payable                                                       |  |      | 541   
|Accrued expenses  other                                               |  |      | 342   
|Derivative liability                                                   |  |      | 203   
|Related party debt subsequently converted to preferred stock           |  |      |      
|                                                                       |  |      |       
|Total liabilities of discontinued operations                           |  |      | 26,154



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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 3. GOING CONCERN



As shown in the
accompanying unaudited condensed consolidated financial statements, the Company incurred net losses of $4,323 in the six months ended June 30, 2004, and cumulative losses of $8,287. At June 30, 2004, we had a deficit in stockholders equity of
$1,421. 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, 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 able to continue as a going concern.



NOTE 4. OFFICE PROPERTY AND EQUIPMENT



Office property and
equipment from continuing operations as of June 30, 2004 and December 31, 2003 are summarized as follows:



|                         |  |      |     |   |      |   |     |  
|------------------------ |  | ---- | --- | - | ---- | - | --- | -
|                         |  | 2004 |     |   | 2003 |  
|Furniture and fixtures   |  | $    | 66  |   |      | $ | 66  |  
|Office equipment         |  |      | 95  |   |      |   | 93  |  
|                         |  |      |     |   |      |   |     |  
|                         |  |      | 161 |   |      |   | 159 |  
|Accumulated depreciation |  |      | (49 | ) |      |   | (27 | )
|                         |  |      |     |   |      |   |     |  
|                         |  | $    | 112 |   |      | $ | 132 |  
|                         |  |      |     |   |      |   |     |  



Depreciation expense for the six
months ended June 30, 2004 and 2003 was $22 and $9, respectively.



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PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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



NOTE 5. GOODWILL



Goodwill represents
the excess of the merger consideration over the fair value of the net assets of PHF on January 31, 2003. A summary of goodwill recognized from continuing operations 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
|                                                                                                                                                                                                                                                                                                                                       |  |   |    
|                                                                                                                                                                                                                                                                                                                                       |  | $ | 822
|                                                                                                                                                                                                                                                                                                                                       |  |   |    



NOTE 6. OTHER ASSETS



Other assets from continuing operations at June 30, 2004 and December 31,
2003:



|                            |  |      |     |      |   |    
|--------------------------- |  | ---- | --- | ---- | - | ---
|                            |  | 2004 |     | 2003
|Deferred income tax assets  |  | $    | 446 |      | $ | 446
|Security deposits and other |  |      | 32  |      |   | 29 
|                            |  |      |     |      |   |    
|                            |  | $    | 478 |      | $ | 475
|                            |  |      |     |      |   |    



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 is currently operating in one business segment: retail mortgage brokering.



NOTE 8. DEBT



The Companys debt from continuing operations as of June 30, 2004 and December 31, 2003 was as follows:



|                                                                                                                                         |  |      |       |      |   |    
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ---
|                                                                                                                                         |  | 2004 |       | 2003
|Revolving line of credit with a commercial bank secured by certain equipment and furniture of the Company bearing interest at prime
rate |  | $    | 245   |      | $ | 245
|Insurance premium finance note bearing an interest rate of 8% with monthly principal and interest payments of $7                         |  |      | 23    |      |   | 20 
|Promissory note to shareholders of PHF bearing interest at 4.92%, due December 31, 2004                                                  |  |      | 25    |      |   | 25 
|Convertible debentures bearing interest at 15%, due December 31, 2004                                                                    |  |      | 379   |      |   | 379
|Subordinated note payable to former stockholder bearing interest at 5%, due November 30, 2005                                            |  |      | 480   |      |   |   
|Subordinated note payable to former stockholder bearing interest at 5%, due May 31, 2008                                                 |  |      | 1,051 |      |   |   
|                                                                                                                                         |  |      |       |      |   |    
|                                                                                                                                         |  | $    | 2,203 |      | $ | 669
|                                                                                                                                         |  |      |       |      |   |    



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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



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, 2004.



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. As of June 30, 2004, 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 corporate headquarters and its Orlando location as well as leases for certain office equipment. The Company pays taxes, insurance, other
operating expenses, and general maintenance for all lease arrangements.



Litigation - 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. COMMITMENT 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 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



|                                                        |  |      |    |      |   |   
|------------------------------------------------------- |  | ---- | -- | ---- | - | --
|Supplemental Cash Flow Data From Continuing Operations: |  | 2004 |    | 2003
|Interest income                                         |  | $    |   |      | $ |  
|Cash interest paid                                      |  | $    | 29 |      | $ | 38
|Income taxes paid                                       |  | $    |   |      | $ |  





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##### Table of Contents

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



Special Note Regarding Forward-Looking Information



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,
| | - | -----------------------------------------------------------------------------------------



| |  | 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.

The following discussion and
analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes contained elsewhere herein.



General



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 the state of Florida.



Overview



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.



Origination Fees



Origination fees are
comprised of points and other fees charged on mortgage loans originated by our retail channel and brokered through other banks and financial institutions. Retail points and fees are primarily a function of the volume of mortgage loans originated by
us.



Loan Origination Costs



We also measure and monitor the cost to originate our loans. Such costs include the fees we
may pay to appraisers, credit bureaus and are net of fees we receive from borrowers.



Loan Originations



As of June 30, 2004, we originated loans
through one location in Orlando, Florida.



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.



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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:



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.



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.



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##### Table of Contents

Results of Operations From Continuing Operations Unless Otherwise Noted



Three Months Ended June 30, 2004 Compared with Three Months Ended June 30, 2003



Loan Originations. Loan originations increased $7,931, or 38.5%,
to $28,534 for the three months ended June 30, 2004 compared to $20,603 for the three months ended June 30, 2003. This increase was due to the internal growth of our Orlando, Florida office.



Revenues



Loan origination fees. Loan origination fees increased $92, or 16.9%, to $637 for the three months ended June 30, 2004 compared to
$545 for the three months ended June 30, 2003. This increase was due to increased yield spread premium for the three months ended June 30, 2004 compared to the three months ended June 30, 2003. These fees represent points and other fees charged on
mortgage loans we originate. Expressed as a percentage of loan origination volume, origination fees were 2.23% and 2.65% of loan originations for the three months ended June 30, 2004 and 2003, respectively.



Operating Expenses



Salaries, commissions and benefits. Salaries, commissions and benefits increased $105, or 22.5%, to $571 for the three months ended
June 30, 2004 compared to $466 for the three months ended June 30, 2003. This increase was primarily due to increases in the commission paid on increased loan originations in the three months ended June 30, 2004 compared to the three months ended
June 30, 2003.



Loan production costs. Loan production costs decreased
$10, or 20.8%, to $38 for the three months ended June 30, 2004 compared to $48 for the three months ended June 30, 2003. This decrease was due primarily to the higher pull through rate at our PHF subsidiary in the three months ended June 30, 2004
compared to the three months ended June 30, 2003.



General and
administrative expenses. General and administrative expenses decreased $351, or 62.9%, to $207 for the three months ended June 30, 2004 compared to $558 for the three months ended June 30, 2003. This decrease was primarily due to reductions of
expenses at our corporate headquarters.



Operating loss. The operating
loss decreased by $348, or 66.0%, to $179 for the three months ended June 30, 2004 compared to $527 for the three months ended June 30, 2003. This decrease was due primarily to factors discussed above.



Interest expense. Interest expense decreased $75, or 75.0%, to $25 for the three
months ended June 30, 2004 compared to $100 for the three months ended June 30, 2003. This decrease was due primarily to the beneficial conversion feature of our convertible debentures being amortized into interest expense in the three months ended
June 30, 2003.



Loss on disposal of segment. Loss on the disposal of
PGNF was $102 for the three months ended June 30, 2004. This represents the non-cash loss we incurred in disposing of PGNF. There was no such loss in the three months ended June 30, 2003.



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Net loss from continuing operations. The net loss from continuing operations decreased $321, or 51.2%, to $306 for
the three months ended June 30, 2004 compared to $627 for the three months ended June 30, 2003. This decrease was primarily due to the factors discussed above.



Loss from discontinued operations. The net loss from discontinued operations increased $1,012, or 292.5%, to $666 for the three months ended compared to net
income from discontinued operations of $346 for the three months ended June 30, 2003.



Total revenues from discontinued operations decreased $2,816, or 74.7%, to $953 compared to $3,769 for the three months ended June 30, 2003. The decrease in revenues was due to reductions in premiums received on loan sales due to increasing
mortgage interest rates and reductions in the fees received from retail mortgage loan closings resulting from a significant decrease in the number of mortgage loan refinances because of the increasing rate environment. Total expenses from
discontinued operations decreased $1,804, or 52.7%, to $1,619 for the three months ended June 30, 2004 compared to $3,423 in the three months ended June 30, 2003. This decrease was due primarily to reductions of salaries, commissions, and benefits
attributable to reductions in the number of employees at our former location in Westmont, Illinois.



Net loss. Net loss increased $691, or 245.9%, to $972 for the three months ended June 30, 2004 compared to $281 for the three months ended June 30, 2003. This increase was due to the factors discussed above.



Six Months Ended June 30, 2004 Compared with Six Months Ended June 30, 2003



Loan Originations. Loan originations increased $19,195, or 59.7%,
to $51,359 for the six months ended June 30, 2004 compared to $32,164 for the six months ended June 30, 2003. This increase was primarily due to the internal growth of our Orlando, Florida office as well as our acquisition of PHF being included in
our operating results only for five months in period ended June 30, 2003.



Revenues



Loan origination fees. Loan origination fees
increased $404, or 49.6%, to $1,219 for the six months ended June 30, 2004 compared to $815 for the six months ended June 30, 2003. This increase was primarily due to the increased number of loan originations in the six months ended June 30, 2004
compared to June 30, 2003 and due to the effective date of our acquisition of PHF, February 1, 2003. These fees represent points and other fees charged on mortgage loans we originate. Expressed as a percentage of loan origination volume, origination
fees were 2.37% and 2.53% of loan originations for the six months ended June 30, 2004 and 2003, respectively.



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##### Table of Contents

Operating Expenses



Salaries, commissions and benefits. Salaries, commissions and benefits increased $376, or 37.9%, to $1,369 for the six months ended June 30, 2004 compared to $993
for the six months ended June 30, 2003. This increase was primarily due to higher commissions paid by PHF for loans originated in the six months ended June 30, 2004 compared to the six months ended June 30, 2003.



Loan production costs. Loan production costs decreased $12, or 20.3%, to $47 for the
six months ended June 30, 2004 compared to $59 for the six months ended June 30, 2003. This decrease was due primarily to the higher pull through rate at our PHF subsidiary in the six months ended June 30, 2004 compared to June 30, 2003.



General and administrative expenses. General and administrative expenses decreased
$148, or 25.0%, to $443 for the six months ended June 30, 2004 compared to $591 for the six months ended June 30, 2003. This decrease was primarily due to reductions of expenses at our corporate headquarters.



Operating loss. The operating loss decreased by $188, or 22.7%, to $640 for the six
months ended June 30, 2004 compared to $828 for the six months ended June 30, 2003. This decrease was due primarily to factors discussed above.



Interest expense. Interest expense decreased $166, or 79.4%, to $43 for the six months ended June 30, 2004 compared to $209 for the six months ended June 30, 2003.
This decrease was due primarily to the beneficial conversion feature of our convertible debentures being amortized into interest expense in the six months ended June 30, 2003.



Loss on disposal of segment. Loss on the disposal of PGNF was $102 for the six months ended June 30, 2004. This represents the
non-cash loss we incurred in disposing of PGNF. There was no such loss in the six months ended June 30, 2003.



Net loss from continuing operations. The net loss from continuing operations decreased $252, or 24.3%, to $785 for the three months ended June 30, 2004 compared to $1,037 for the three months ended June 30,
2003. This decrease was primarily due to the factors discussed above.



Loss
from discontinued operations. The net loss from discontinued operations increased $3,371, or 2,018.6%, to $3,538 for the six months ended compared to $167 for the six months ended June 30, 2003.



Total revenues from discontinued operations decreased $2,299, or 43.0%, to $3,046 for the six
months ended June 30, 2004 compared to $5,345 for the six months ended June 30, 2003. The decrease in revenues was due to reductions in premiums received on loan sales due to increasing mortgage interest rates, decreases in the number of wholesale
loan originations and reductions in the fees received from retail mortgage loan originations resulting from a significant decrease in the number of mortgage loan refinances because of the increasing rate environment.



Total expenses from discontinued operations increased $1,071, or 19.4%, to $6,583 for the six
months ended June 30, 2004 compared to $5,512 in the six months ended June 30, 2003. This increase was due primarily to an impairment charge of $2,582 in the six months ended June 30, 2004.



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##### Table of Contents

Net loss. Net loss increased $3,119, or 259.1%, to $4,323 for the six months ended June 30, 2004 compared to
$1,204 for the six months ended June 30, 2003. This increase was due to the factors discussed above.



Liquidity and Capital Resources



Our
primary sources of liquidity are:



| |  | borrowings under lines of credit,
| | - | ---------------------------------



| |  | fees earned from originating retail mortgage loans.
| | - | ---------------------------------------------------



Our operations require continued access to short-term and long-term sources of cash. Our primary operating cash requirements include:



| |  | fees and expenses incurred in connection with the sale of loans,
| | - | ----------------------------------------------------------------



| |  | ongoing administrative, operating, and tax expenses, and
| | - | --------------------------------------------------------



| |  | interest and principal payments under our existing indebtedness.
| | - | ----------------------------------------------------------------



We had cash and cash equivalents of approximately $152 at June 30, 2004.



Credit Facilities. On June 13, 2003, we entered into a revolving line of credit with a commercial bank in the amount of $250. This revolving line of credit has an
interest rate of prime, is secured by a general lien on our assets, is guaranteed by our subsidiary and PGNF, and requires monthly interest payments. This line of credit is due on demand. Currently, we have drawn $245 on this line of credit.



Subordinated notes payable: On May 31, 2004, we executed two
subordinated promissory notes with PGNF in the amounts of $1,051 and $480, respectively. These promissory notes reflect the amounts advanced by PGNF to fund corporate expenses and are subordinated to all creditor claims. Under these notes, interest
is deferred to December 31, 2004.



FUTURE ACCOUNTING PRONOUNCEMENTS



There are currently no pronouncements issued that are scheduled for
implementation during 2004 that are expected to have any significant impact on the accounting policies of the Company.



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##### Table of Contents

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 under our warehouse lines of credit.



Market Risk



Our market risk is the risk of economic loss resulting from adverse changes in market prices of mortgage loans and interest rates. We rely
heavily on borrowings under our warehouse credit facilities to conduct our wholesale origination business. Borrowings under these credit facilities are done at variable rates that will increase as interest rates rise. Additionally, when interest
rates rise, loans held-for-sale and any 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 net interest income in future periods.



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. Our wholesale segment operates primarily in the subprime credit market. This market is less sensitive than the prime credit markets are to
the daily fluctuations in mortgage rates.



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##### Table of Contents

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 interest rates 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, 2004.



Item 4. Control and Procedures.



As of the end of
the period covered by this report, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance that the information that we
must disclose in our reports filed under the Securities and Exchange Act is communicated and processed in a timely manner. George Deehan, Chairman and Chief Executive Officer, and Scott Vining, Chief Financial Officer and Treasurer, participated in
this evaluation.



Based on such evaluation, Mr. Deehan and Mr. Vining concluded
that, as of the date of such evaluation, our disclosure controls and procedures were effective. During the most recent fiscal quarter, there have not been any significant changes in our internal controls or in other factors that could significantly
affect those controls.



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##### Table of Contents

PART II  OTHER INFORMATION



Item 1. Legal Proceedings.



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. Changes in Securities and Use of Proceeds.



None.



Item 3. Defaults Upon Senior Securities.



None.



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



On June 30, 2004, we received consent from holders of 97,647,656 shares (or 83.89%) of our common stock on a pre-PGNF Transaction basis to sell our PGNF subsidiary and completed this sale. After affecting the number
of outstanding shares resulting from the PGNF Transaction, we received consent from holders of 45,317,921 shares (or 70.74%) of our common stock.



Item 5. Other Information.



None.



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.
| | --- | ------------------------------------------------------------------------------------------------



EXHIBIT NO. DESCRIPTION



|              |  |                                                                                                                                                                                                                                                                                       
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  |                                                                                                                                                                                                                                                                                       
|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.***                                                                                                                                                                                                                            



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##### Table of Contents

|     |  |                                                                                                                                                                                                                                                          
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|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.***                                                                                                                                                                                    
|     | 
|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. ****                                                                                                                                                                                                                
|     | 
|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. ****                                                                                          
|     | 
|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 *****                                                                                                                                    



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##### Table of Contents

|     |  |                                                                                                                                                                         
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|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 Chief Executive Officer pursuant to Form of Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated April 1, 2004 *
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Form of Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated April 1, 2004 *
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated April 1, 2004 *
|     | 
|32.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated April 1, 2004 *

---

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

|+ | Incorporated herein by reference
|- | --------------------------------

|@ | 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 June 30, 2003, as amended
|----- | ------------------------------------------------------------------------------------------------



|b. | Reports on Form 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/ GEORGE DEEHAN                   
|                              |  | George Deehan                       
|                              |  | Director and Chief Executive Officer
|                              |  | Dated: August 23, 2004              
|                              | 
|                              |  | /s/ SCOTT L. VINING                 
|                              |  | Scott L. Vining                     
|                              |  | Chief Financial Officer             
|                              |  | Dated: August 23, 2004              



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For any variable interest entities (VIEs) that must be consolidated under FIN 46R that were created before January 1,
2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized
as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. The
application of this Interpretation is not expected to have a material effect on the Companys financial statements.



In December 2003, the Accounting Standards Executive Committee issued Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer
(SOP 03-3). SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investors initial investment in loans or debt securities (loans) acquired in a transfer if
those differences are attributable, at least in part, to credit quality. SOP 03-3 includes loans acquired in purchase business combinations, but does not apply to loans originated by the entity. SOP 03-3 is effective for loans acquired in fiscal
years beginning after December 15, 2004, although earlier adoption is encouraged. The adoption of this new statement of position is not expected to have a material impact on the consolidated financial position or results of operations of the
Company.



In May 2003, the FASB issued FASB Statement No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. The provisions of this Statement are effective for
financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this new standard is not expected to have an impact on the
consolidated financial position or results of operations of the Company.



In
April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under Statement 133. The amendments set forth in Statement 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, this
Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in Statement 133. In addition, it clarifies when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. Statement 149 amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded
derivatives that warrant separate accounting. Generally, this Statement is effective for contracts entered into or modified after June 30, 2003. Since the Company does not currently have any material derivatives or hedging activities, the adoption
of SFAS 149 is not expected to materially affect the financial statements.



23