UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED ~~March~~June 3130, 2004

¨	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

PARAGON FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

94-3227733

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

5000 Sawgrass Village Circle, 3rd Floor, 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)

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 ~~March~~August 3116, 2004: ~~116~~64,~~396~~066,~~478~~743.

INDEX

~~PART I – FINANCIAL INFORMATION~~	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003	3
	Unaudited Condensed Consolidated Balance Sheets at June 30, 2004 and December 31, 2003	2
	Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003	4
	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 three months ended March 31, 2004 and 2003	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003	4
	Notes to the Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	25
Item 4.	Controls and Procedures	28
	PART II – OTHER INFORMATION
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 1.	Legal Proceedings	29
Item 2.	Changes in Securities and Use of Proceeds	26
Item 2.	Changes in Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	26
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Submission of Matters to a Vote of Security Holders	26
Item 4.	Submission of Matters to a Vote of Security Holders	29
Item 5.	Other Information	26
Item 5.	Other Information	29
Item 6.	Exhibits and Reports on Form 8-K	26
Item 6.	Exhibits and Reports on Form 8-K	29
Signatures		33

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF ~~MARCH~~JUNE 3130, 2004 AND DECEMBER 31, 2003

(Dollars in thousands, except share data)

	2004			2003 *
ASSETS:
ASSETS
Cash and cash equivalents	$	912		$	552
Current assets:
Fees receivable		181			174
Cash and cash equivalents	$	152		$	70
Mortgage loans receivable held-for-sale, net		13,716			23,245
Fees receivable		84			80
Office property and equipment, net of accumulated depreciation of $344 and $285		1,072			1,153
Prepaid and other current assets		19			37
Other notes and mortgages receivable		84			136
Total current assets		255			187
Available-for-sale securities		13			995
Office property and equipment, net of accumulated depreciation of $49 and $27		112			132
Goodwill		~~6,054~~822			~~8,636~~822
Prepaid and other assets		835			771
Other assets		478			475
TOTAL ASSETS	$	22,867		$	35,662
Assets of discontinued operations		—			34,046
LIABILITIES AND STOCKHOLDERS’ EQUITY:
TOTAL ASSETS	$	1,667		$	35,662
Warehouse lines of credit	$	13,700		$	22,711
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Notes payable		1,629			1,846
Current liabilities:
Subordinated note payable – related party		668			776
Short-term debt		245			245
Notes payable		23			20
Notes payable – related parties		25			25
Convertible debentures payable		379			379
Accounts payable		~~883~~465			~~831~~290
Accrued expenses – related parties		59			59
Accrued expenses – other		~~895~~361			~~856~~514
Derivative liability		175			203
Total current liabilities		1,557			1,532
Total liabilities		18,413			27,686
Long-term debt:
Stockholders’ equity:
Liabilities to formerly related parties, less current portion		1,531			—
Preferred stock: Issuable in series, $0.0001 par value; 5,000,000 shares authorized: Series E, $1,000 stated value; 2,459 and no shares issued and outstanding, respectively		—			—
Liabilities of discontinued operations					26,154
Common stock, $0.0001 par value. 400,000,000 shares authorized: 116,396,478 shares issued and outstanding		11			11
Total liabilities		3,088			27,686
Additional paid-in capital		11,779			11,779
Stockholders’ deficit:
Retained deficit		(7,315	)		(3,964	)
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		—			—
Unearned stock-based compensation		(21	)		(52	)
Common stock, $0.0001 par value. 400,000,000 shares authorized: 64,066,743 and 116,396,478 shares issued and outstanding		5			11
Accumulated other comprehensive income		—			202
Additional paid-in capital		6,861			11,779
Total stockholders’ equity		4,454			7,976
Retained deficit		(8,287	)		(3,964	)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	22,867		$	35,662
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

*	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.

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED ~~MARCH~~JUNE 3130, 2004 AND 2003

(Dollars in thousands, except share data)

	2004			2003
	Three Months Ended						Six Months Ended
Revenue:
	2004			2003			2004			2003
Gain on sale of loans	$	1,441		$	699
Revenue:
Loan origination fees	$	~~888~~637		$	~~876~~545		$	1,219		$	815
Interest, dividends, and other income		~~346~~—			~~271~~—			—			—
Total revenue		~~2,675~~637			~~1,846~~545			1,219			815
Expenses:
Salaries, commissions, benefits, and stock-based compensation		~~2,148~~571			~~1,585~~466			1,369			993
Loan production costs		~~208~~38			~~247~~48			47			59
General and administrative expenses		~~982~~207			~~670~~558			443			591
Impairment charge		2,582			—
Total expenses		816			1,072			1,859			1,643
Interest expense		293			259
Operating loss		(179	)		(527	)		(640	)		(828	)
Realized loss on derivative		40			25
Interest expense, net		25			100			43			209
Unrealized gain on derivative		(28	)		(17	)
Loss on disposal of segment (Note 2)		102			—			102			—
Total expenses		6,225			2,769
Loss from continuing operations		(306	)		(627	)		(785	)		(1,037	)
Operating income		(3,550	)		(923	)
Discontinued operations (Note 2): (Loss) income from discontinued operations before provision (benefit) for income taxes		(666	)		346			(3,538	)		(167	)
Other income		198			—
Net loss	$	(972	)	$	(281	)	$	(4,323	)	$	(1,204	)
Net loss	$	(3,352	)	$	(923	)
Net Income Per Common Share - Basic and Diluted:
Basic and diluted loss per share	$	(0.03	)	$	(0.01	)
Loss from continuing operations	$	(0.00	)	$	(0.01	)	$	(0.01	)	$	(0.01	)
Weighted average shares outstanding – basic and diluted		116,247			97,673
(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.

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE ~~THREE~~SIX MONTHS ENDED ~~MARCH~~JUNE 3130, 2004 AND 2003

(Dollars in thousands)

	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(3,352	)	$	(923	)
Net loss from continuing operations	$	(785	)	$	(1,037	)
Adjustments to reconcile net loss to cash provided by operating activities:
Impairment charge		2,582			—
Depreciation		22			9
Depreciation		74			47
Loss on disposal of segment		102			—
Gain on sale of assets		(198	)		—
Non-cash interest expense converted into preferred stock		—			13
Provision for loan repurchases and premium recapture		42			36
Stock-based compensation		52			10
Stock-based compensation		31			—
Changes in operating assets and liabilities, net of acquisitions:
Funding of mortgage loans held-for-sale or as other notes and mortgages		(66,790	)		(35,281	)
Increase in fees receivable		(4	)		(60	)
Proceeds from sale of mortgage loans held-for-sale		76,330			45,828
Increases in prepaids and other assets		16			12
Decrease in credit facility financing		(9,011	)		(9,584	)
Decrease in accounts payable, accrued expenses and other current liabilities		45			263
Decrease in derivative liability		(28	)		—
Cash used by operating activities		(552	)		(790	)
(Increases) decrease in other assets		16			(89	)
Increases in other liabilities		5			(171	)
Cash used by operating activities		(299	)		(137	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(152	)		(~~149~~98	)
Cash acquired in purchases of business		—			343
Cash acquired from purchases of business		—			43
Proceeds from sale of assets		999			13
Proceeds from sale of websites		30			48
Purchases of marketable securities		—			(83	)
Cash used by investing activities		28			(7	)
Cash provided by investing activities		984			124
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of warrants		—			13
Proceeds from the issuance of debentures		—			231
Repayments of loans from related party		(108	)		—
(Repayments of) proceeds from promissory notes		(20	)		160
Repayments of promissory notes		(217	)		(87	)
Cash provided by financing activities		(20	)		404
Cash provided (used) by financing activities		(325	)		157
Net cash provided by discontinued operations		626			353
Net increase in cash and cash equivalents		~~360~~82			~~144~~(40	)
Cash and cash equivalents, beginning of period		~~552~~70			91
Cash and cash equivalents, end of period	$	~~912~~152		$	~~235~~51

See accompanying notes to condensed consolidated financial statements.

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

~~PRINCIPLES~~THE OFCOMPANY ~~CONSOLIDATION~~ – ~~The~~Paragon ~~accompanying~~Financial ~~condensed~~Corporation ~~consolidated~~(the ~~financial~~“Company”) ~~statements~~was ~~include~~incorporated ~~the~~in ~~financial~~Delaware ~~statements~~on ofAugust ~~our wholly-owned subsidiaries~~27, ~~PGNF~~ ~~Home~~1999 ~~Lending~~under ~~Corp.~~the ~~(formerly~~name ~~known~~PRx ~~as Mortgage Express~~Holdings, Inc. and operated ~~referred~~as toan asonline ~~“PGNF”~~healthcare indestination ~~this~~for ~~Form~~commerce, ~~10-Q)~~content and ~~Paragon~~community. ~~Homefunding,~~The ~~Inc.~~Company ~~(referred~~closed toits asonline ~~“PHF”~~health store in ~~this~~March ~~Form 10-Q)~~2001. ~~All~~Shortly ~~material~~thereafter, ~~intercompany~~the ~~balances~~Company ~~and transactions~~began ~~are~~the ~~eliminated~~process inof ~~consolidation.~~liquidating ~~The~~its ~~consolidated~~online ~~financial~~health ~~statements~~store ~~have~~and ~~been~~seeking ~~prepared~~a inmerger partner ~~conformity~~as ~~with~~an ~~accounting~~alternative ~~principles~~to ~~generally~~complete ~~accepted in the United States of America~~liquidation.

~~BASIS OF PRESENTATION – The accompanying condensed consolidated financial statements of~~ Paragon ~~Financial~~Homefunding, ~~Corporation and subsidiaries~~ Inc. (~~sometimes referred to herein as~~ “weParagon Delaware”), ~~“our”~~a orprivately ~~the~~held, ~~“Company”)~~development-stage ~~are~~company ~~prepared~~based in ~~accordance~~Ponte ~~with~~Vedra ~~the~~Beach, ~~Securities~~Florida, ~~and~~was ~~Exchange~~incorporated ~~Commission’s~~in ~~rules~~Delaware ~~regarding interim~~on ~~financial~~August ~~statements~~3, ~~and~~2001, ~~therefore~~for ~~do not contain all disclosures required by accounting principles generally accepted in~~ the ~~United~~purpose ~~States~~ of ~~America~~entering ~~for annual financial statements. Reference is made to~~ the financial ~~statements~~services ~~included in~~market ~~our~~through ~~Annual~~acquisitions. ~~Report~~On ~~on Form 10-K for the year ended December~~ May 31, ~~2003.~~2002, ~~Certain previously reported amounts have been reclassified to conform to~~ the ~~current~~Company ~~period’s~~merged ~~presentation.~~with ~~Such~~Paragon ~~reclassifications had no effect on net loss or stockholders’ equity~~Delaware.

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 ~~January~~February 312, 2003, the Company completed its merger with ~~PGNF~~Paragon ~~Home~~Homefunding, ~~Lending Corp~~Inc. (“~~PGNF~~PHF”) ~~(f/k/a Mortgage Express, Inc~~.), ~~and~~PHF ~~as a result of the merger, PGNF became a wholly-owned subsidiary. PGNF~~ 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 ~~PGNF~~PHF’s common stock converted into 521,~~329~~224,~~735~~000 of shares of the Company’s common stock valued at $~~6.4 million~~ 836 (or approximately $0.~~122~~ 6833 per share)~~, or approximately 45~~.5% ~~of the then outstanding common stock after the consummation of the merger.~~ Additionally, the Company issued a promissory ~~note~~notes into the ~~amount~~shareholders of ~~$1.8~~PHF ~~million~~in ~~to an entity wholly-owned by~~ the ~~sole~~aggregate ~~shareholder~~principal amount of ~~PGNF~~$25. The promissory ~~note~~notes ~~accrued~~accrue interest at 4.92% ~~and was payable on July 31, 2004~~. On March 26, 2003, the holder of this note agreed to convert the note and accrued interest into 1,800 shares of our Series E preferred stock with a face value of $1,000 per share, and a 4% stated dividend payable in cash or shares of common stock, at the Company’s option. This series of preferred stock does not provide for redemption and is non-voting.

OnThe ~~February~~merger 2,was ~~2003~~accounted ~~the~~for ~~Company~~as ~~completed~~acquisitions ~~its~~pursuant ~~merger~~to ~~with~~SFAS ~~Paragon~~No. ~~Homefunding~~141, ~~Inc.~~Accounting for Business Combinations (“~~PHF~~SFAS 141”). ~~PHF~~Accordingly, ~~has been in~~ the ~~business~~Company’s results of ~~originating~~operations ~~residential~~include ~~mortgage loans since 1998. Subject to~~ the ~~terms~~operating results of ~~the~~these ~~merger~~companies ~~agreement,~~from ~~at closing, all of~~ the ~~outstanding~~effective ~~shares~~date of ~~PHF’s~~these ~~common~~mergers, ~~stock~~February ~~converted into~~ 1,~~224,000~~ ~~of shares~~2003. ~~of the Company’s common stock valued at~~

6The Company’s unaudited condensed consolidated results of operations on a pro forma basis for the six

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~~continued)

~~$836~~months ~~(approximately~~ended ~~$0.6833~~June ~~per share). Additionally~~30, ~~the~~2003 ~~Company~~as ~~issued~~if ~~promissory~~it ~~notes~~had toconsummated the ~~shareholders~~merger ofwith PHF inand ~~the~~disposed ~~aggregate principal amount~~ of ~~$25.~~PGNF ~~The promissory~~Home ~~notes~~Lending ~~accrue interest at 4~~Corp.~~92%~~ ~~and~~(see ~~were~~Note ~~payable~~2) on ~~February~~January 21, ~~2004.~~2003 ~~The~~are ~~former~~as ~~shareholders~~follows of(in thousands ~~PHF~~except ~~have~~per ~~agreed~~share todata): ~~extend the due date to June 30, 2004.~~

Both of these mergers were 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.


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

~~FINANCIAL~~PRINCIPLES ~~STATEMENT~~OF ~~PRESENTATION~~CONSOLIDATION - The accompanying condensed consolidated financial statements ~~and~~include ~~notes~~the ~~are~~accounts ~~representations~~ of the Company~~’s management~~ and its wholly owned subsidiaries. ~~The~~In ~~Company’s~~consolidation, ~~management~~all ismaterial ~~responsible~~intercompany balances and transactions have been eliminated. Results of operations of companies acquired in transactions accounted for under the ~~integrity~~purchase ~~and~~method ~~objectivity~~ of ~~these~~accounting are included in the financial statements. ~~The~~from ~~Company~~the ~~prepares~~date ~~its~~of the acquisition. The consolidated financial statements ~~using~~have anbeen ~~unclassified~~prepared ~~balance~~in ~~sheet~~conformity ~~presentation~~with accounting asprinciples isgenerally ~~customary~~accepted in the ~~mortgage banking~~United ~~industry~~States of America.

~~USE~~BASIS OF ~~ESTIMATES~~PRESENTATION - InThe ~~preparing~~accompanying condensed consolidated financial statements of Paragon Financial Corporation and subsidiaries (sometimes referred to herein as “we”, “our” or the “Company”) are prepared in ~~conformity~~accordance with ~~generally~~the ~~accepted~~Securities ~~accounting~~and ~~principles,~~Exchange ~~management~~Commission’s isrules ~~required~~regarding tointerim ~~make~~financial ~~estimates~~statements, and ~~assumptions~~therefore ~~that~~do ~~materially~~not ~~affect~~contain ~~the~~all ~~reported~~disclosures ~~amounts~~required ofby ~~assets~~accounting ~~and~~principles ~~liabilities,~~generally accepted in the ~~disclosure~~United States of ~~contingent~~America for ~~assets~~annual ~~and~~financial ~~liabilities~~statements. atReference ~~the date~~is ofmade to the financial statements, ~~and~~included ~~revenues~~in ~~and~~our ~~expenses~~Annual ~~during~~Report ~~the~~on ~~reporting~~Form ~~period.~~10-K ~~Material~~for ~~estimates~~the ~~that~~year ~~are~~ended ~~particularly~~December ~~susceptible~~31, to2003. ~~significant~~Certain ~~change~~previously inreported ~~the~~amounts ~~near~~have ~~term~~been ~~relate~~reclassified to ~~the~~conform ~~determination~~to of the ~~allowance~~current period’s ~~for~~presentation. ~~loan~~Such ~~repurchases and~~reclassifications ~~premium~~had ~~recapture.~~no ~~Actual~~effect ~~results~~on ~~could~~net ~~differ~~loss ~~from~~or ~~those~~stockholders’ ~~estimates~~equity.

7FINANCIAL 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.

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~~continued)

CASH AND CASH EQUIVALENTS - For purposes of the statements 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 to 60 days.

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:

8Computer hardware Five years Furniture and fixtures Five to seven years Computer software Three years Leasehold improvements Lower of life of lease or asset

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE 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)

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.

~~IMPAIRMENT~~7 - 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.

Recently, the residential mortgage market began experiencing increasing interest rates. During this increase in mortgage rates, large competitors in the subprime wholesale business have held the coupon rate constant on home mortgages they offer. The Company has determined that it must maintain the interest rate charged on its loans at similar levels. This has eroded the margin the Company receives upon the subsequent sale of loans thereby significantly eroding the profitability of the Company’s PGNF subsidiary. These large competitors have distribution channels other than loan sales that are not currently available to the Company. Further, these competitors have significant amounts of capital to offset any lost profitability on loan sales. Given the amount of capital these large competitors have, management has viewed this reduction in profitability as other than temporary.

Based upon this, management has reviewed the Company’s long-lived assets and has taken an impairment charge of $2,582 in the three months ended March 31, 2004, to reduce the carrying value of PGNF to estimated realizable value. The method used to determine the existence of an impairment would be generally measured by discounting operating cash flows over the remaining useful lives of the related long-lived assets. Impairment is measured as the difference between fair value and unamortized cost at the date impairment is determined.

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.

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~~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, ~~mortgage loans, notes receivable, securities,~~ accounts payable, notes payable, and convertible debentures payable~~, warehouse lines of credit, and derivatives~~. The carrying amount of financial instruments approximates fair value.

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

~~The~~8 Company’s ability to continue to originate loans is dependent, in part, upon the ability to sell loans in the secondary market in order to generate cash proceeds for new originations. The value of and market for our loans is dependent upon a number of factors, including general economic conditions, interest rates, and governmental regulations. Adverse changes in such factors may affect the Company’s ability to sell loans for acceptable prices within reasonable periods of time.

The Company maintains its cash in bank deposit accounts at high credit-quality financial institutions. At times during the period ended March 31, 2004, the Company’s cash balances exceeded the federally-insured limit. Management believes this policy will not adversely affect the Company.

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~~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 ~~March~~June 3130, 2004, there were stock options outstanding for the purchase of 44 30,~~573~~029,~~750~~250 shares of the Company’s common stock. There were ~~3,835,000~~no stock options granted and ~~none~~14,544,500 forfeited during the quarter ended ~~March~~June 3130, 2004. 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 three months ended March 31, 2004 and 2003 (dollars in thousands, except per share amounts):

	2004			2003
Net loss, as reported	$	(3,352	)	$	(923	)
Stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		697			324
Pro forma net loss	$	(4,049	)	$	(1,247	)
Net loss per share:
Basic and diluted, as reported	$	(0.03	)	$	(0.01	)
Pro forma basic and diluted	$	(0.03	)	$	(0.01	)

RECENT ACCOUNTING PRONOUNCEMENT – In December 2003, the FASB revised FASB Interpretation No. 46 (originally issued in January 2003), “Consolidation of Variable Interest Entities” (“FIN 46R”), 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. This Interpretation became effective January 1, 2004, for special-purpose entities. The Company currently has no entities considered to be special-purpose entities. The Company will be required to apply FIN 46R to all other entities subject to this Interpretation no later than the end of the first reporting period that ends after December 15, 2004.

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~~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 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.

1210

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 21. ~~GOING~~PRINCIPLES ~~CONCERN~~OF CONSOLIDATION, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES (continued)

AsDecember ~~shown in the accompanying unaudited consolidated financial statements~~15, ~~the Company incurred net losses of $3,352 in the three months ended March 31,~~ 2004, ~~and~~although ~~cumulative~~earlier ~~losses~~adoption ofis ~~$7,315~~encouraged. At March 31, 2004, stockholders’ equity was $4,454 due primarily to the issuance of equity securities as a result of the acquisitions of PGNF and PHF, which resulted in recognition of $6,054, net of impairment of $2,582, in goodwill. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ~~accompanying~~adoption ~~financial statements do not include any adjustments that might result from the outcome~~ of this ~~uncertainty.~~new ~~The~~statement ~~Company’s continued existence depends on a number~~ of ~~factors,~~position ~~including~~is ~~but~~ not ~~limited~~expected to, ~~the ability~~have toa ~~fund~~material ~~loans,~~impact toon ~~sell~~ the ~~funded~~consolidated financial ~~loans,~~position toor ~~secure~~results ~~adequate sources~~ of ~~capital~~operations ~~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~~.

AsNOTE ~~explained in Note 8 – Warehouse Lines of Credit, the Company was in violation of certain covenants under its warehouse credit facilities and its agreements with investors that purchase its loans~~2. ~~Management is seeking waivers of these covenant violations from its lenders and investors; however, there is no assurance~~ ~~that~~DISCONTINUED ~~one~~OPERATIONS or more of the lenders or investors will not terminate their agreements prior to maturity, or that additional credits lines will be negotiated when existing lines terminate or additional investors will be found to purchase its loans. Either occurrence would adversely affect the Company’s wholesale operations.

13On 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.

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

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

~~NOTE 3~~2. ~~MORTGAGE~~DISCONTINUED ~~LOANS~~OPERATIONS ~~RECEIVABLE~~(continued) ~~HELD-FOR-SALE~~

~~Mortgage~~A ~~loans~~summary ~~receivable~~of ~~held-for-sale includes loan production costs which, pursuant to SFAS No. 91, have been deferred and added to~~ the operating ~~basis~~results of ~~mortgage~~the ~~loans~~discontinued ~~receivable~~operations ~~held-~~for~~-sale.~~ ~~These~~the ~~capitalized~~three ~~costs~~and ~~are~~six ~~offset~~months ~~against~~ended ~~net gains~~June on30, ~~mortgage~~2004 ~~loan sales~~ and ~~fees~~2003 ~~when~~is ~~the loans are sold or amortized~~ as ~~a yield adjustment in the case of loans held for investment~~follows.

A summary of mortgage loans receivable held-for-sale, at the lower of cost or market at March 31, 2004 and December 31, 2003, 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	)

	2004			2003
Mortgage loans receivable held-for-sale	$	14,005		$	23,452
Allowance for loan repurchases and premium recapture		(526	)		(484	)
Net deferred origination costs		237			277
	$	13,716		$	23,245

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

The Company has entered into loan sale agreements with investors in the normal course of business that include representations and warranties customary to the mortgage banking industry. Violations of these representations and warranties may require the Company to repurchase loans previously sold or to reimburse investors for losses incurred. In the opinion of management, the potential exposure related to the Company’s loan sale agreements is adequately provided for in the allowance for loan repurchases and premium recapture. The activity in the allowance for loan repurchases and premium recapture for the three months ended March 31, 2004, follows:


	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

Beginning balance, January 1, 2004	$	484
Provision charged to operations		144
Losses charged against reserve		(102	)
Ending balance, March 31, 2004	$	526

During the three months ended March 31, 2004, mortgage loans held-for-sale on which the accrual of interest had been discontinued were not material.

NOTE 4. OFFICE PROPERTY AND EQUIPMENT

Office property and equipment as of March 31, 2004 and December 31, 2003 are summarized as follows:

	2004			2003
Furniture and fixtures	$	107		$	107
Vehicles		19			19
Leasehold improvements		170			170
Office equipment		1,120			1,142
		1,416			1,438
Accumulated depreciation		(344	)		(285	)
		1,072		$	1,153

Depreciation expense for the three months ended March 31, 2004 and 2003 was $74 and $47, respectively.

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 53. ~~AVAILABLE-FOR-SALE~~GOING ~~SECURITIES~~CONCERN

~~The~~As shown in the accompanying unaudited condensed consolidated financial statements, the Company ~~has~~incurred ~~investments~~net losses of $4,323 in ~~certain~~the ~~marketable~~six ~~securities~~months ~~and~~ended ~~partnership~~June ~~interests.~~30, ~~During~~2004, ~~the~~and ~~first~~cumulative ~~quarter~~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 ~~sold~~ability ~~substantially~~to ~~all~~continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of ~~its~~this ~~investments,~~uncertainty. ~~which~~The Company’s ~~yielded~~continued aexistence ~~gain~~depends on a number of factors, including but not limited to, the ~~sale~~ability to originate loans, to secure adequate sources of ~~securities~~capital and to locate and fund acquisitions of ~~$203~~suitable companies. AtHowever, there can be ~~March~~no ~~31,~~assurance ~~2004,~~that the Company’s ~~investments~~will inbe aable ~~partnership~~to ~~totaled~~continue ~~$13~~as a going concern.

NOTE 64. ~~GOODWILL~~OFFICE PROPERTY AND EQUIPMENT

~~Goodwill~~Office ~~represents~~property ~~the excess of the merger~~and ~~consideration~~equipment ~~over~~from ~~the~~continuing ~~fair~~operations ~~value~~as of ~~the~~June ~~net~~30, ~~assets~~2004 ~~of PGNF~~ and ~~PHF~~December ~~on January~~ 31, 2003. Aare ~~summary~~summarized ofas ~~goodwill recognized~~ follows:

PGNF - Consideration for the merger was $8,270 consisting of $6,367 in shares of the Company’s common stock (52,329,735 shares at approximately $0.1217 per share), $1,800 in a promissory note issued by the Company, and $103 in costs associated with the merger. At the time of the merger, the fair value of the net assets of PGNF was $456. During the first quarter of 2004, the Company has subsequently recorded an impairment charge of $2,582 associated with this acquisition.	$	5,232
	2004			2003
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
Furniture and fixtures	$	66		$	66
	$	6,054
Office equipment		95			93
		161			159
Accumulated depreciation		(49	)		(27	)
	$	112		$	132

15Depreciation expense for the six months ended June 30, 2004 and 2003 was $22 and $9, respectively.

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 75. ~~PREPAID~~GOODWILL ~~AND OTHER ASSETS~~

~~Other~~Goodwill represents ~~assets~~the atexcess ~~March~~of ~~31,~~the ~~2004~~merger ~~and~~consideration ~~December~~over the fair value of the net assets of PHF on January 31, 2003. A summary of goodwill recognized from continuing operations follows:

	2004		2003
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
Prepaid expenses	$	131	$	185
	$	822
Deferred income tax assets		637		555
Security deposits and other		67		31
	$	835	$	771

NOTE 86. ~~WAREHOUSE~~OTHER ~~LINES OF CREDIT~~ASSETS

~~The~~Other ~~Company~~assets ~~has~~from ~~mortgage~~continuing ~~warehouse~~operations ~~facilities~~at ~~with~~June ~~commercial banks of $~~30 ~~million in the aggregate. These warehouse credit facilities are used to fund mortgage loans~~, ~~are~~2004 ~~collateralized by the mortgage loans funded,~~ and doDecember ~~not require material compensating balances. warehouse lines of credit consisted of the following at March~~ 31, ~~2004~~ 2003:

$5 million mortgage warehouse credit facility at a commercial bank; interest at greater of LIBOR or Fed Funds plus 4%. This credit facility expires on June 30, 2004.	$	4,382
	2004		2003
$5 million mortgage warehouse credit facility at a commercial bank; interest at Prime plus 1.5%. This credit facility expires on July 31, 2004.		3,381
Deferred income tax assets	$	446	$	446
$5 million mortgage warehouse credit facility at a commercial bank; interest at Prime plus 0.5%. This credit facility expires on June 30, 2004.		530
Security deposits and other		32		29
$15 million mortgage warehouse credit facility at a commercial bank; interest at Prime plus 1%. This credit facility expires February 28, 2005.		5,407
	$	478	$	475
	$	13,700

~~The~~NOTE ~~Company’s warehouse lines contain provisions whereby the lender can unilaterally terminate the agreement without cause with certain notice requirements~~7. ~~Also,~~SEGMENT ~~certain restrictive financial and other covenants exist that require the Company to, among other requirements,~~DATA restrict dividends, maintain certain levels of net worth, liquidity, available borrowing capacity, and debt-to-net worth ratios and to comply with regulatory and investor requirements. At March 31, 2004, the Company was in violation of certain of these restrictive covenants. Management is seeking waivers of these covenant violations from lenders; however, there is no assurance that one or more of the lenders will not terminate their agreements prior to maturity, or that additional lines will be negotiated when existing lines terminate. Either occurrence would adversely affect the Company’s wholesale operations.

16The 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

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 9. ~~SEGMENT~~COMMITMENTS ~~DATA~~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 ~~provides~~recognized in the balance sheet. Commitments to fund loans are agreements to lend to a ~~broad~~customer ~~range~~as long as there is no violation of ~~mortgage~~any ~~products~~condition ~~through~~established ~~its~~in ~~wholesale~~the ~~and~~contract. ~~retail~~Commitments ~~segments~~generally have fixed expiration dates or other termination clauses. ~~Management~~One-to-four ~~measures~~family residential properties, if funded, would collateralize the ~~revenue~~commitments. ~~streams~~The ofCompany evaluates each customer’s creditworthiness and obtains appraisals to support the value of ~~its~~the ~~lending~~underlying ~~segments~~collateral. ~~separately~~Also, external market forces affect the probability of commitments being exercised; therefore, total commitments outstanding do not necessarily represent future cash requirements. The ~~table~~Company ~~below~~quotes ~~provides~~interest ~~revenue~~rates ~~and~~to ~~expense~~borrowers, ~~data~~which are generally subject to change by ~~business~~the ~~segment~~Company. ~~for~~Although the ~~three~~ ~~months~~Company ~~ended~~typically ~~March~~honors 31such interest rate quotes, ~~2004~~the ~~and~~quotes ~~2003~~do ~~(dollars~~not inconstitute ~~thousands):~~interest rate locks, minimizing the potential interest rate risk exposure. The Company had no binding commitments to fund loans at June 30, 2004.

2004
	Wholesale			Retail			Corporate			Total
Revenues:
Gain on sale of loans	$	1,262		$	179		$	—		$	1,441
Loan origination fees		—			888			—			888
Interest income		327			19			—			346
Total revenues		1,589			1,086			—			2,675
Expenses:
Salaries, benefits and related		916			917			315			2,148
Loan production costs		94			114			—			208
General, administrative, and other expenses		550			257			187			994
Interest expense		259			16			18			293
Total expenses		1,819			1,304			520			3,643
Segment income (loss)		(230	)		(218	)		(520	)		(968	)
Impairment charge		—			—			2,582			2,582
Operating income	$	(230	)	$	(218	)	$	(3,102	)	$	(3,550	)
2003
	Wholesale			Retail			Corporate			Total
Revenues:
Gain on sale of loans	$	699		$	—		$	—		$	699
Loan origination fees		—			876			—			876
Interest income		262			9			—			271
Total revenues		961			885			—			1,846
Expenses:
Salaries, benefits and related		726			681			178			1,585
Loan production costs		80			167			—			247
General administrative, and other expenses		334			168			176			678
Interest expense		137			13			109			259
Total expenses		1,277			1,029			463			2,769
Operating income (loss)	$	(316	)	$	(144	)	$	(463	)	$	(923	)

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.

17Minimum 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.

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 10. 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 March 31, 2004.

Supervisory Regulation - The Company’s mortgage banking 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 maintain a minimum net worth. As of March 31, 2004, the Company was not 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 other wholesale locations as well as leases for certain office equipment. The Company pays taxes, insurance, other operating expenses, and general maintenance for all lease arrangements.

Letter Of Credit - On October 1, 2003, PGNF entered into a letter of credit with a commercial bank in the amount of $100. At March 31, 2004, no amounts were outstanding under this letter of credit.

Deferred Compensation - PGNF has a nonqualified deferred compensation plan for a former employee. This plan is non-funded.

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.

1815

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

~~offering~~NOTE ~~had solicited and received excessive and undisclosed commissions from certain investors acquiring the Company’s common stock in connection with the IPO~~9. ~~The~~COMMITMENT ~~complaint~~AND ~~also~~CONTINGENCIES ~~alleges~~(continued) 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.

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 1110. SUPPLEMENTAL CASH FLOW INFORMATION

	2004		2003
Supplemental Cash Flow Data From Continuing Operations:	2004		2003
Supplemental Cash Flow Data:
Interest income	$	—	$	—
Interest income		346		271
Cash interest paid	$	29	$	38
Cash interest paid		293		164
Income taxes paid	$	—	$	—
Income taxes paid		38		—
Acquisition of Businesses:
Fair value of assets acquired	$	—	$	26,931
Goodwill	$	—	$	8,636
Liabilities assumed	$	—	$	(26,761	)
Note issued	$	—	$	(1,800	)
Stock issued	$	—	$	(7,203	)
Cash acquired in purchases of businesses	$	—	$	197

~~NOTE~~16 ~~12. COMPREHENSIVE INCOME~~

The components of comprehensive income (loss) for the three months ended March 31, 2004 and 2003 are listed below (dollars in thousands):

	2004			2003
Net loss as reported	$	(3,352	)	$	(923	)
Other comprehensive income (loss)
Unrealized holding gains (losses) on securities arising during the period		1			(1	)
Reclassification adjustment for gains realized in income		(203	)		—
Net unrealized holding gains (losses) on securities arising during the period		(202	)		(1	)
Total comprehensive income (loss)	$	(3,554	)	$	(924	)

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~~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.

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 ~~mortgage~~retail ~~banker and~~ mortgage broker in the one-to-four family residential mortgage market. We conduct business ~~in 24 states and~~ the ~~District~~state of ~~Columbia~~Florida.

Overview

Our business relies on our ability to originate mortgage loans at a reasonable cost,. ~~and~~The ~~our~~mortgage ~~ability~~industry is generally subject to ~~sell~~seasonal ~~those~~trends, ~~loans~~and inloan ~~the~~origination ~~secondary~~volumes ~~mortgage~~in ~~market~~our atindustry ~~prices~~have ~~allowing~~historically usfluctuated from year to ~~earn~~year aand ~~gain~~are onaffected ~~sale.~~by Wesuch ~~measure~~external factors as home values, the ~~gain~~level onof consumer ~~sale~~debt asand the ~~sum~~overall condition of the ~~price~~economy. In addition, the premiums we receive from the secondary market for our loans, ~~plus~~have ~~the~~also ~~interest~~fluctuated, wealso ~~earn~~influenced ~~for~~by the ~~period~~overall condition of ~~time~~the weeconomy ~~hold~~and, ~~the~~more ~~loans~~importantly, ~~less~~ the ~~cost~~interest rate toenvironment. ~~originate~~As a consequence, the business of originating and selling loans is cyclical.

The mortgage banking 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 fluctuated, 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.

Gain on Sale of Loans

Gain on sale of loans is affected by the condition of the secondary market for our loans. This market has been very strong in the past year, partly as a result of the interest rate environment characterized by low short-term rates relative to long-term rates, also known as a steep yield curve. The strength of the secondary market has also been enhanced by an increase in the number of buyers of our loan products.

In March, the residential mortgage market began experiencing an increase in interest rates. While the general market for interest rates increased, 2004 large competitors in the subprime wholesale business have held the coupon rates on home mortgages they offer constant. This has eroded the

margin the Company receives on the subsequent sale of loans thereby significantly eroding the profitability of our wholesale operations.

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 ~~our retail channel. Origination fees on loans~~ ~~originated by our retail channel which are subsequently sold are deferred and recognized as part of the gain on sale of loans~~us.

Interest Income and Interest Expense

We typically hold our mortgage loans held-for-sale for a period of 30 to 45 days before they are sold in the secondary market. During that time, we earn the coupon rate of interest paid by the borrower, and we pay interest to the lenders that provide our warehouse credit facilities. During the three months ended March 31, 2004, the difference between these interest rates was typically in excess of 2%. During the three months ended March 31, 2004, the difference between the interest rate on our mortgage loans and the interest rate on our warehouse facilities was typically in excess of 2%. The interest rate on our warehouse facilities have not been impacted by the general market increase in interest rates as they are primarily based on rates which have not increased during this period.

Loan Origination Costs

We also measure and monitor the cost to originate our loans. Such costs include the ~~points and~~ fees we may pay to ~~brokers~~appraisers, credit bureaus and are net of fees we receive from borrowers~~, plus our operating expenses associated with the origination business~~.

Loan Originations

As of ~~March~~June 3130, 2004, ~~our~~we ~~wholesale division~~ originated loans through ~~our~~one ~~office~~location in ~~Westmont, Illinois, and our retail division originated loans through our locations in Westmont, Illinois and~~ 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.

We17 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:

Provision For Loan Repurchases And Premium Recapture

For mortgage loans sold, we provide for an allowance for loan repurchases and premium recapture based on our estimate of 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.~~ We ~~purchase~~ ~~fraud~~believe ~~insurance on~~ the ~~loans~~following ~~originated~~are bycritical ~~our~~accounting ~~wholesale~~policies ~~segment~~that torequire ~~mitigate this risk. The allowance represents our estimate of~~ the ~~total~~most ~~uninsured~~significant ~~losses~~estimates ~~expected to occur~~ and isassumptions that ~~considered~~are subject to besignificant ~~adequate.~~change ~~Provisions~~in ~~for~~the ~~losses~~preparation ~~are charged to gain on sale~~ of ~~loans~~our ~~and~~consolidated ~~credited~~financial tostatements: ~~mortgage loans receivable held-for-sale.~~

Gain On Sale Of Loans

We recognize gains or losses resulting from sales at the date of settlement based on the difference between the selling price for sales and the carrying value of the related loans sold. Such gains and losses may be increased or decreased by the amount of any servicing-released premiums received. We defer recognition of non-refundable fees and direct costs associated with the origination of mortgage loans until the loans are sold.

Impairment of Goodwill

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. We test impairment on an annual basis or more frequently if circumstances indicate a potential impairment. At the beginning of 2004, management believed that the projected operating results of the Company’s subsidiaries would validate the amount of goodwill on the financial statements.

As discussed elsewhere in this Form 10-Q, in March 2004, management observed deteriorations in the marketplace for loan sales as a result of the general increase in interest rates. These movements were thought to be temporary. This deterioration has continued into May, and given competitive pressures within the residential mortgage market, may continue for an extended period of time adversely impacting the profitability of our wholesale operations.

Based upon the view that these changes, management determined that an interim impairment test was necessary. Based upon its review of the Company’s long-lived assets, management determined that impairment has occurred and recorded an impairment charge of $2,582 in the three months ended March 31, 2004 to reduce the carrying value of the PGNF to estimated realizable value. The method used to determine the existence of an impairment would be generally measured by discounting operating cash flows over the remaining useful lives of the related long-lived assets. Impairment is measured as the difference between fair value and unamortized cost at the date impairment is determined.

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.

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.

~~Results~~Discontinued of Operations

~~Three~~In ~~Months~~accordance with Statement of Financial Accounting Standards No. 144, “Accounting for ~~Ended~~the ~~March~~Impairment 31or Disposal of Long-Lived Assets” (SFAS 144), ~~2004~~a ~~Compared~~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 ~~Three~~SFAS ~~Months~~144 ~~Ended~~paragraph ~~March~~37, 31in discontinued operations. The results of discontinued operations, ~~2003~~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.

~~The discussion~~18 below should be read in conjunction with the Paragon Financial Corporation and Subsidiaries (the “Company”, “we”, “our” or “us”) Unaudited Condensed Consolidated Financial Statements and Notes appearing elsewhere in this report. The results of operations for PGNF and PHF are included since February 1, 2003, the effective date of our mergers with them.

LoanTable originations. We originated $104,167 in loans for the three months ended March 31, 2004 compared to $85,896 for the three months ended March 31, 2003. The increase in our loan originations was due to our acquisitions of PGNF and PHF in 2003 being effective February 1, 2003 and included in our operating results only for two months in period ended March 31, 2003. Wholesale loan originations were $63,063, or 60.5%, of total originations for the three months ended March 31, 2004 compared to $35,281, or 41.1%, of total originations for the three months ended March 31, 2003. Retail loan originations were $41,104, or 39.5%, of total originations for the three months ended March 31, 2004 compared to $50,615, or 58.9%, of total originations for the three months ended March 31, 2003. Contents

~~Loan~~Results sales. We sold loans totaling $76,834 and $43,475 for the three months ended March 31, 2004 and 2003, respectively. The increase in loan sales for the three months ended March 31, 2004 compared to 2003 was primarily due to the effective date of ~~our~~Operations ~~acquisition~~From ofContinuing ~~PGNF~~Operations ~~being~~Unless ~~February~~Otherwise 1,Noted ~~2003 and included in our operating results only for two months in period ended March 31, 2003.~~

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

~~Gain~~Loan onorigination ~~sale~~fees. ~~Gain~~Loan onorigination ~~sale~~fees ~~of loans~~ increased $~~742~~92, or ~~106~~16.29%, to $~~1,441~~637 for the three months ended ~~March~~June 3130, 2004 compared to ~~$699~~ $545 for the three months ended ~~March~~June 3130, 2003. This increase was due to ~~the~~increased ~~effective~~yield ~~date~~spread ofpremium ~~our~~for ~~acquisition~~the ofthree ~~PGNF~~months ended June 30, ~~February~~2004 1compared to the three months ended June 30, 2003,. These fees represent points and itother ~~being~~fees ~~included~~charged inon mortgage ~~our~~loans ~~operating~~we ~~results~~originate. ~~only~~Expressed ~~for~~as ~~two~~a ~~months~~percentage inof ~~period~~loan origination volume, origination fees were 2.23% and 2.65% of loan originations for the three months ended ~~March~~June 3130, 2004 and 2003, respectively.

24Operating 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.

~~Loan~~Net ~~origination~~loss ~~fees~~from continuing operations. ~~Loan~~The ~~origination~~net ~~fees~~loss ~~increased~~from continuing operations decreased $12321, or 151.42%, to $~~888~~306 for the three months ended ~~March~~June 3130, 2004 compared to $~~876~~627 for the three months ended ~~March~~June 3130, 2003. This ~~increase~~decrease was primarily due to the ~~effective~~factors ~~dates~~discussed ~~of our acquisitions of PGNF and PHF, February 1, 2003, and their being included in our operating results only for two months in period ended March 31, 2003~~above. These fees represent points and other fees charged on mortgage loans originated by our retail channel. Expressed as a percentage of retail loan origination volume, origination fees were 2.16% and 1.73% of retail loan originations for the three months ended March 31, 2004 and 2003, respectively.

~~Interest~~Loss ~~income.~~from ~~For~~discontinued ~~the~~operations. ~~three~~The ~~months~~net ~~ended~~loss ~~March~~from ~~31,~~discontinued ~~2004,~~operations ~~interest income~~ increased $751,012, or 27292.75%, to $~~346~~666 ~~compared to $271~~ for the three months ended ~~March~~compared ~~31, 2003. This increase was due~~ to ~~the~~net income ~~effective~~from ~~date~~discontinued ofoperations ~~our acquisition~~ of ~~PGNF,~~$346 ~~February 1, 2003, and it being included in our operating results only~~ for ~~two~~the three months ~~in period~~ ended ~~March~~June 3130, 2003.~~The~~ ~~interest income relates primarily to the interest income we earn on the mortgage loans funded prior to their sale in the secondary market.~~

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.

Operating Expenses

Salaries, commissions and benefits. Salaries, commissions and benefits increased $~~563~~376, or 3537.59%, to $21,~~148~~369 for the ~~three~~six months ended ~~March~~June 3130, 2004 compared to $~~1,585~~ 993 for the ~~three~~six months ended ~~March~~June 3130, 2003. This increase was ~~due~~ primarily due to ~~the~~higher ~~effective~~commissions ~~dates~~paid ofby ~~our~~PHF ~~acquisitions~~for ofloans ~~PGNF~~originated ~~and~~in ~~PHF,~~the ~~February~~six 1,months ~~2003,~~ended ~~and~~June ~~their being~~30, ~~included~~2004 incompared ~~our~~to ~~operating~~the ~~results~~six ~~only for two~~ months ~~in period~~ ended ~~March~~June 3130, 2003.

Loan production costs. Loan production costs decreased $3912, or 1520.83%, to $~~208~~47 for the six ~~three~~ months ended ~~March~~June 3130, 2004 compared to $~~247~~59 for the ~~three~~six months ended ~~March~~June 3130, 2003. This decrease was due primarily to athe ~~reduction~~higher inpull ~~our~~through ~~retail~~rate ~~origination volume~~ at ~~PGNF and~~ our ~~closing~~PHF asubsidiary ~~higher percentage of the loan applications at PGNF~~ in the ~~three~~six months ended ~~March~~June 3130, 2004 compared to ~~the~~June ~~three months ended March 31~~30, 2003.

General and administrative expenses. General and administrative expenses ~~increased~~decreased $~~312~~148, or 4625.60%, to $~~982~~443 for the ~~three~~six months ended ~~March~~June 3130, 2004 compared to $~~670~~591 for the ~~three~~six months ended ~~March~~June 3130, 2003. This ~~increase~~decrease was ~~due~~ primarily due to ~~the~~reductions ~~effective dates~~ of ~~our~~expenses ~~acquisitions~~at ~~of PGNF and PHF, February 1, 2003, and their being included in~~ our ~~operating~~corporate ~~results only for two months in period ended March 31, 2003~~headquarters.

~~Impairment~~Operating ~~charge~~loss. The ~~impairment~~operating ~~charge~~loss ofdecreased by $2188,~~582~~ ~~reflects~~or ~~management’s~~22.7%, ~~assessment~~to ~~that~~$640 for the ~~reduction~~six months inended ~~profits~~June at30, ~~our~~2004 ~~PGNF~~compared ~~subsidiary~~to is$828 ~~other~~for ~~than~~the ~~temporary~~six months ended June 30, 2003. This decrease was due primarily to factors discussed above.

Interest expense. Interest expense ~~increased~~decreased $34166, or 1379.14%, to $~~293~~43 for the ~~three~~ six months ended ~~March~~June 3130, 2004 compared to $~~259~~209 for the ~~three~~six months ended ~~March~~June 3130, 2003. This ~~increase~~decrease was due primarily to the ~~effective~~beneficial ~~dates~~conversion feature of our ~~acquisitions~~convertible ofdebentures ~~PGNF~~being ~~and~~amortized ~~PHF,~~into ~~February~~interest 1,expense ~~2003, and their being included~~ in ~~our~~the ~~operating~~six ~~results only for two~~ months ~~in period~~ ended ~~March~~June 3130, 2003.

25Loss 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.

~~Realized~~Net loss ~~on derivative~~. ~~The~~Net ~~realized~~ loss ~~on derivative~~ increased $153,119, or 60259.1%, to $404,323 for the ~~three~~six months ended ~~March~~June 3130, 2004 compared to $251,204 infor the ~~three~~six months ended ~~March~~June 3130, 2003. This increase was due ~~primarily~~ to the ~~effective~~factors ~~dates~~discussed ~~of our acquisitions of PGNF and PHF, February 1, 2003, and their being included in our operating results only for two months in period ended March 31, 2003~~above.

Unrealized gain on derivative. The unrealized gain on derivative increased $11, or 64.7%, to $28 for the three months ended March 31, 2004 compared to $17 for the three months ended March 31, 2003. This increase was due primarily to the effective dates of our acquisitions of PGNF and PHF, February 1, 2003, and their being included in our operating results only for two months in period ended March 31, 2003.

Operating loss. The operating loss increased by $2,627, or 284.6%, to $3,550 for the three months ended March 31, 2004 compared to $923 for the three months ended March 31, 2003. This decrease was due primarily to factors discussed above.

Other income. Other income was $198 for the three months ended March 31, 2004. This other income relates to the realization of a gain on the sale of marketable securities. There was no other income for the three months ended March 31, 2003.

Net loss. The net loss increased $2,429, or 263.2%, to $3,352 for the three months ended March 31, 2004 compared to $923 for the three months ended March 31, 2003. This increase was primarily due to the factors discussed above.

Liquidity and Capital Resources

Our primary sources of liquidity are:

• borrowings under ~~revolving warehouse facilities and other~~ lines of credit,

• sale of mortgage loans and related servicing rights, and

•

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:

• funding of mortgage loan originations prior to their sale,

•

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

•

ongoing administrative, operating, and tax expenses, and

• interest and principal payments under our ~~revolving warehouse facilities and other~~ existing indebtedness.

We had cash and cash equivalents of approximately $~~912~~152 at ~~March~~June 3130, 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.

~~The Sale of Mortgage Loans. As a fundamental part of our business and financing strategy, we sell mortgage loans~~ toItem ~~third party investors in the secondary markets as market conditions allow~~3. ~~Generally,~~Quantitative we seek to dispose of all of our loan production within 30 to 45 days. We apply the net proceeds of the loan sales to pay down our warehouse facilities in order to make capacity available for future funding of mortgage loans. We sell the loans under agreements with third party investors. These agreements are standard for the industry and ~~contain~~Qualitative ~~indemnification~~Disclosures ~~provisions~~About ~~requiring~~Market ~~the repurchase of loans under certain circumstances~~Risk. In addition, these agreements have certain financial covenants related to the maintenance of tangible net worth. We are currently in violation of certain financial covenants under these agreements and are seeking waivers from these investors. No assurances can be made that we will be successful in our efforts to obtain waivers from these investors or that the investors will continue to purchase our loans. Our ability to sell loans in the secondary market on acceptable terms is essential for the continuation of our wholesale loan origination operations and our ability to continue as a going concern.

Warehouse Credit Facilities. We rely on our revolving warehouse facilities to originate mortgage loans and hold them prior to sale. At March 31, 2004, we had committed revolving warehouse facilities in the amount of $30 million (subject to certain lender restrictions on the aggregate extensions to all warehouse lenders). Generally, our revolving warehouse facilities have 364-day terms and are renewed on an annual basis. No assurances can be made that we will be successful in our efforts to continue to renew our warehouse facilities upon their expiration.

Certain of our warehouse facility lenders advance less than 100% of the principal balance of the mortgage loans, requiring us to use working capital to fund the remaining portion of the principal balance of the mortgage loans. All of the our revolving warehouse facilities contain provisions requiring we meet certain periodic financial covenants, which establish, among other things, liquidity, stockholders’ equity, leverage, and net income levels.

At March 31, 2004, we were in violation of certain financial covenants under our warehouse credit facilities related principally to the maintenance of tangible net worth. We are currently seeking waivers of these financial covenants with our lenders. If we are unable to meet these financial covenants going forward, and are unable to obtain subsequent amendments or waivers, if required, or for any other reason are unable to maintain existing warehouse lines or renew them when they expire, we would have to cease our wholesale operations which would jeopardize our ability to continue to operate as a going concern.

Other 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 subsidiaries, and requires monthly interest payments. This line of credit is due on demand. Currently, we have drawn $245 on this line of credit.

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.

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 ~~March~~June 3130, 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.

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.

See Note 8 to the Condensed Consolidated Financial Statements.

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

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.

(b) Reports on Form 8-K.

We filed a Current Report on Form 8-K for an event dated February 2, 2004, in which we issued a press release announcing that the holders of the Company’s outstanding Convertible Notes agreed to amend the maturity date of the Convertible Notes to December 31, 2004.

EXHIBIT NO. DESCRIPTION

Exhibit Number
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.***
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”).***

3026

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 *****
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.*****
10.8		Employment Agreement, dated June 17, 2003, by and between Paragon Financial Corporation and Joseph P. Bryant, Jr. *****
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*
10.9		Employment Agreement, dated May 6, 2003, by and between Paragon Financial Corporation and Steven L. Barnett. *****
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*
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 *
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*
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 *
32.2		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*
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 ~~Reportfor~~Report for the period ended ~~March~~June 3130, 2003, as amended

32b. Reports on Form 8-K

None

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 O. DEEHAN George O. Deehan President, Chief Executive Officer and Director Dated: May 25, 2004 /s/ SCOTT L. VINING Scott L. Vining Chief Financial Officer Dated: May 25, 2004


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

3329

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.

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