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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2010
 OR
 o
    
    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 001-15409
 PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
  Maryland
    
    39-6594066(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)
 PO Box 631209
Houston, Texas 77263
 (440) 283-6319
  Yes þ
    
    No o
  Yes o
    
    No o
  Large accelerated filer o
    
    Accelerated filer oNon-accelerated filer   o
    
    Smaller reporting company þ
 þ o




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FORM 10-Q
INDEX
 PART I. Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets  September 30, 2010 (unaudited) and December 31, 2009
    
    Page - 3 -Consolidated Statements of Operations  Nine months ended 
September 30, 2010 (unaudited) and September 30, 2009 (unaudited)
    
    Page - 4 -Consolidated Statements of Operations  Three months ended 
September 30, 2010 (unaudited) and September 30, 2009 (unaudited)
    
    Page - 5 -Consolidated Statements of Cash Flows  Nine months ended 
September 30, 2010 (unaudited) and September 30, 2009 (unaudited)
    
    Page - 6 -Notes to Consolidated Financial Statements (unaudited)
    
    Page - 7 -Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    Page - 13 -Item 4T. Controls and Procedures
    
    Page - 17 -Part II. Other InformationItem 1. Legal Proceedings
    
    Page - 18 -Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    Page - 18 -Item 3. Defaults upon Senior Securities
    
    Page - 18 -Item 5. Other Information
    
    Page - 18 -Item 6. Exhibits
    
    Page - 18 -Signatures
    
    Page - 19 -EX  10.1 Form of Third Amendment to Restricted Share Agreement for Trustees dated September
28, 2010EX  10.2 Third Amendment to Stock Subscription Agreement between James C. Mastandrea and the
Company dated September 28, 2010EX  31.1 Section 302 Certification of Chief Executive OfficerEX  31.2 Section 302 Certification of Chief Financial OfficerEX  32.1 CEO/CFO Certification Under 906 of Sarbanes-Oxley ActEX-10.1EX-10.2EX-31.1EX-31.2EX-32.1
  - 2 -




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Paragon Real Estate Equity and Investment Trust and Subsidiary
Consolidated Balance Sheets
September 30, 2010 and December 31, 2009
 September 30,
    
    December 31,2010
    
    2009(unaudited)AssetsInvestments in equipment:Furniture, fixtures and equipment
    
    $
    5,370
    
    
    $
    5,370Accumulated depreciation
    
    
    (5,370
    )
    
    
    (5,217
    )Net investments in equipment
    
    
    --
    
    
    
    153Cash
    
    
    52,662
    
    
    
    94,198Marketable securities
    
    
    207,016
    
    
    
    178,520Other assets
    
    
    2,825
    
    
    
    10,662Total Assets
    
    $
    262,503
    
    
    $
    283,533Liabilities and Shareholders EquityLiabilities:Accounts payable and accrued expenses
    
    
    4,545
    
    
    
    1,595Total liabilities
    
    
    4,545
    
    
    
    1,595Commitments and ContingenciesShareholders equity:Preferred A Shares  $0.01 par value,
10,000,000 authorized: 258,236 Class A
cumulative convertible shares issued and
outstanding, $10.00 per share liquidation
preference
    
    
    2,583
    
    
    
    2,583Preferred C Shares  $0.01 par value,
300,000 authorized: 244,444 Class C
cumulative convertible shares issued and
outstanding, $10.00 per share liquidation
preference
    
    
    2,444
    
    
    
    2,444Common Shares  $0.01 par value,
100,000,000 authorized: 443,226 shares
issued and outstanding.
    
    
    4,432
    
    
    
    4,432Additional paid-in capital
    
    
    28,146,590
    
    
    
    28,146,590Accumulated deficit
    
    
    (27,154,859
    )
    
    
    (27,108,003
    )Accumulated other comprehensive income,
net unrealized gain on marketable
securities
    
    
    57,503
    
    
    
    34,627Treasury stock, at cost, 38,130 shares
    
    
    (800,735
    )
    
    
    (800,735
    )Total shareholders equity
    
    
    257,958
    
    
    
    281,938Total Liabilities and Shareholders Equity
    
    $
    262,503
    
    
    $
    283,533
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Paragon Real Estate Equity and Investment Trust and Subsidiary
Consolidated Statements of Operations
(unaudited)
 For the nine months ended September 30,2010
    
    2009RevenuesInterest/dividend income
    
    $
    5,336
    
    
    $
    7,420Other income
    
    
    252
    
    
    
    --Total revenues
    
    
    5,588
    
    
    
    7,420ExpensesDepreciation
    
    
    154
    
    
    
    806General and administrative
    
    
    52,290
    
    
    
    69,910Total expenses
    
    
    52,444
    
    
    
    70,716Loss from operations
    
    
    (46,856
    )
    
    
    (63,296
    )Gain (loss) on sale of marketable securities
    
    
    --
    
    
    
    (11,408
    )Net loss attributable to Common Shareholders
    
    
    (46,856
    )
    
    
    (74,704
    )Net loss attributable to Common Shareholders per
Common Share: Basic and Diluted
    
    $
    (.11
    )
    
    $
    (.17
    )Weighted average number of Common Shares
outstanding: Basic and Diluted
    
    
    443,226
    
    
    
    442,748Comprehensive loss:Net loss
    
    $
    (46,856
    )
    
    $
    (74,704
    )Other comprehensive income (loss):Unrealized gain on marketable securities
    
    
    22,875
    
    
    
    61,522Comprehensive loss
    
    $
    (23,981
    )
    
    $
    (13,182
    )
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Paragon Real Estate Equity and Investment Trust and Subsidiary
Consolidated Statements of Operations
(unaudited)
 For the three months ended September 30,2010
    
    2009RevenuesInterest/dividend income
    
    $
    1,931
    
    
    $
    2,525Other income
    
    
    252
    
    
    
    --Total revenues
    
    
    2,183
    
    
    
    2,525ExpensesDepreciation
    
    
    --
    
    
    
    269General and administrative
    
    
    16,574
    
    
    
    17,464Total expenses
    
    
    16,574
    
    
    
    17,733Loss from operations
    
    
    (14,391
    )
    
    
    (15,208
    )Gain (loss) on sale of marketable securities
    
    
    --
    
    
    
    (6,702
    )Net loss attributable to Common Shareholders
    
    
    (14,391
    )
    
    
    (21,910
    )Net loss attributable to Common Shareholders per 
Common Share: Basic and Diluted
    
    $
    (.03
    )
    
    $
    (.05
    )Weighted average number of Common Shares 
outstanding: Basic and Diluted
    
    
    443,226
    
    
    
    443,164Comprehensive gain:Net loss
    
    $
    (14,391
    )
    
    $
    (21,910
    )Other comprehensive income (loss):Unrealized gain on marketable securities
    
    
    22,351
    
    
    
    49,006Comprehensive gain
    
    $
    7,960
    
    
    $
    27,096
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Paragon Real Estate Equity and Investment Trust and Subsidiary
Consolidated Statements of Cash Flows
(unaudited)
 For the nine months ended September 30,2010
    
    2009Cash flows from operating activities:Net loss
    
    $
    (46,856
    )
    
    $
    (74,704
    )Adjustments to reconcile net loss to net cash used in 
continuing operations:Compensation costs paid through amortization of 
restricted common shares
    
    
    --
    
    
    
    50Depreciation
    
    
    154
    
    
    
    806Loss (gain) on sale of marketable securities
    
    
    --
    
    
    
    11,408Net change in assets and liabilities:Other assets
    
    
    7,836
    
    
    
    6,688Accounts payable and accrued expenses
    
    
    2,950
    
    
    
    5,162Net cash used in continuing operations
    
    
    (35,916
    )
    
    
    (50,590
    )Cash flows from investing activities:Cash used for the purchase of marketable securities
    
    
    (5,620
    )
    
    
    (118,252
    )Proceeds from the sale of marketable securities
    
    
    --
    
    
    
    112,376Net cash used for investing activities
    
    
    (5,620
    )
    
    
    (5,876
    )Cash flows from financing activities:Net cash from financing activities
    
    
    --
    
    
    
    --Net decrease in cash
    
    
    (41,536
    )
    
    
    (56,466
    )CashBeginning of period
    
    
    94,198
    
    
    
    182,373End of period
    
    $
    52,662
    
    
    $
    125,907
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Paragon Real Estate Equity and Investment Trust and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
 Note 1  Organization
  Note 2  Basis of Presentation
 Consolidated Financial Statement Presentation
   Going Concern
   - 7 -




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Note 3  Summary of Significant Accounting Policies
 Use of Estimates in the Preparation of Financial Statements
  Investments in Equipment
   YearsFurniture, fixtures and equipment
    
    3-7
 Cash
  Marketable Securities
  Other Assets
  Revenue Recognition
  Stock Based Compensation
 Compensation  Stock Compensation
 - 8 -




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Income Taxes
    Note 4  Marketable Securities
    Note 5  Equity
   - 9 -




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Note 6  Loss Per Share
  For the nine months ended September 30,2010

    
    2009NumeratorNet loss attributable to Common Shareholders
    
    $
    (46,856)
    
    
    $
    (74,704)DenominatorWeighted average Common Shares outstanding at
September 30, 2010 and September 30, 2009,
respectively: Basic and Diluted
    
    
    443,226
    
    
    
    442,748Basic and Diluted EPSNet loss from continuing operations
    
    $
    (0.11)
    
    
    $
    (0.17)Net loss attributable to Common Shareholders:Basic and Diluted
    
    $
    (0.11)
    
    
    $
    (0.17)
 - 10 -




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Note 7  Commitments and Contingencies
 Liquidity
    Legal Proceedings
  Note 8  Fair Value Measurements
 Fair Value
Measurements and Disclosures, Financial Instruments
   - 11 -




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Carrying Amountin ConsolidatedBalance Sheet
    
    Fair Value
    
    Fair Value Measurement UsingSeptember 30, 2010
    
    September 30, 2010
    
    Level 1
    
    Level 2
    
    Level 3Marketable Securities
    
    $
    207,016
    
    
    $
    207,016
    
    
    $
    207,016
    
    
    $
    -
    
    
    $
    -
  - 12 -




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
 Overview
   Brief History
  Forward-Looking Information
  - 13 -




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
    
    Explanation of changes in the results of operations in the Consolidated Statements of
Operations for the nine month period ended September 30, 2010 compared to the nine month
period ended September 30, 2009.
    
    Explanation of changes in the results of operations in the Consolidated Statements of
Operations for the three month period ended September 30, 2010 compared to the three month
period ended September 30, 2009.
    
    Our critical accounting policies and estimates that require our subjective judgment and
are important to the presentation of our financial condition and results of operations.
    
    Our primary sources and uses of cash for the nine month period ended September 30, 2010,
and how we intend to generate cash for long-term capital needs.
    
    Our current income tax status.
  Results of Operations
 Comparison of the Nine Month Periods Ended September 30, 2010 and 2009
 Revenues from Operations
  Expenses from Operations
  Loss from Operations
  Gain/Loss on Sale of Marketable Securities
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Net Loss Attributable to Common Shareholders
  Comparison of the Three Month Periods Ended September 30, 2010 and 2009
 Revenues from Operations
  Expenses from Operations
  Loss from Operations
  Gain/Loss on Sale of Marketable Securities
   Net Loss Attributable to Common Shareholders
  Critical Accounting Policies and Estimates
  - 15 -




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Investments in Shares of Publicly Traded Companies
  Valuation Allowance of Deferred Tax Asset
  Liquidity and Capital Resources
  Cash Flows
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Future Obligations
  Long Term Liquidity and Operating Strategies
  Current Tax Status
   Interest Rates and Inflation
   Off-Balance Sheet Arrangements
  
 ITEM 4T. CONTROLS AND PROCEDURES
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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 Exhibits
 ExhibitNumber
    
    Exhibit Description10.1
    
    Form of Third Amendment to Restricted Share Agreement for Trustees dated
September 28, 201010.2
    
    Third Amendment to Stock Subscription Agreement between James C. Mastandrea
and the Company dated September 28, 201031.1
    
    Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002  Chief
Executive Officer31.2
    
    Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002  Chief
Financial Officer32.1
    
    CEO/CFO Certification under Section 906 of Sarbanes-Oxley Act of 2002.
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SIGNATURES
  Paragon real estate equity and investment trustBy:
    
    /s/ James C. MastandreaDate: October 22, 2010
    
    
    James C. MastandreaChief Executive Officer
(Principal executive officer) Paragon real estate equity and investment trustBy:
    
    /s/ John J. DeeDate: October 22, 2010
    
    
    John J. DeeChief Financial Officer
(Principal financial and accounting officer) - 19 -