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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, 2009
 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
(State or other jurisdiction of 
incorporation or organization)
    
    39-6594066
(IRS Employer
Identification No.)
 PO Box 631209
Houston, Texas 77263
 (440) 283-6319
  þ o
  o o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company þ  þ o




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FORM 10-Q
INDEX
 PART I. Financial InformationItem 1. Financial StatementsConsolidated Balance Sheet  September 30, 2009 (unaudited) and December 31, 2008
    
    Page -3-Consolidated Statements of Operations  Nine months ended
September 30, 2009 and September 30, 2008 (unaudited)
    
    Page -4-Consolidated Statements of Operations  Three months ended
September 30, 2009 and September 30, 2008 (unaudited)
    
    Page -5-Consolidated Statements of Cash Flows  Nine months ended
September 30, 2009 and September 30, 2008 (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 -18-Part II. Other InformationItem 1. Legal Proceedings
    
    Page -19-Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    Page -19-Item 3. Defaults upon Senior Securities
    
    Page -19-Item 4. Submission of Matters to a Vote of Security Holders
    
    Page -19-Item 5. Other Information
    
    Page -19-Item 6. Exhibits
    
    Page -19-Signatures
    
    Page -20-EX-10.1EX-10.2EX-31.1EX-31.2EX-32.1
  EX  10.1
    
    Form of second Amendment to Restricted Share Agreement for Trustees dated September
21, 2009EX  10.2
    
    Second Amendment to Stock Subscription Agreement between James C. Mastandrea and the
Company dated September 21, 2009EX  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 Act
 -2-




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Paragon Real Estate Equity and Investment Trust and Subsidiary
Consolidated Balance Sheets
September 30, 2009 and December 31, 2008
 September 30,2009
    
    December 31,(unaudited)
    
    2008AssetsInvestments in equipment:Furniture, fixtures and equipment
    
    $
    5,370
    
    
    $
    5,370Accumulated depreciation
    
    
    (5,063
    )
    
    
    (4,257
    )Net investments in equipment
    
    
    307
    
    
    
    1,113Cash
    
    
    125,907
    
    
    
    182,373Marketable securities
    
    
    167,182
    
    
    
    111,191Other assets
    
    
    2,654
    
    
    
    9,343Total Assets
    
    $
    296,050
    
    
    $
    304,020Liabilities and Shareholders EquityLiabilities:Accounts payable and accrued expenses
    
    
    12,122
    
    
    
    6,959Total liabilities
    
    
    12,122
    
    
    
    6,959Commitments and ContingenciesShareholders equity:Preferred A Shares  $0.01 par value,
10,000,000 authorized: 258,736 and
276,255 Class A cumulative convertible
shares issued and outstanding at
September 30, 2009 and December 31, 2008,
respectively, $10.00 per share
liquidation preference
    
    
    2,587
    
    
    
    2,763Preferred 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: 443,203 and
442,398 shares issued and outstanding at
September 30, 2009 and December 31, 2008,
respectively
    
    
    4,432
    
    
    
    4,424Additional paid-in capital
    
    
    28,146,620
    
    
    
    28,146,404Accumulated deficit
    
    
    (27,096,373
    )
    
    
    (27,021,670
    )Accumulated other comprehensive gain
(loss), net unrealized gain (loss) on
marketable securities
    
    
    24,953
    
    
    
    (36,569
    )Treasury stock, at cost, 38,130 shares
    
    
    (800,735
    )
    
    
    (800,735
    )Total shareholders equity
    
    
    283,928
    
    
    
    297,061Total Liabilities and Shareholders Equity
    
    $
    296,050
    
    
    $
    304,020
  -3-




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Paragon Real Estate Equity and Investment Trust and Subsidiary
Consolidated Statements of Operations
(unaudited)
 For the nine months ended September 30,2009
    
    2008RevenuesInterest/dividend income
    
    $
    7,420
    
    
    $
    7,778Other income
    
    
    
    
    
    
    100Total revenues
    
    
    7,420
    
    
    
    7,878ExpensesDepreciation and amortization
    
    
    806
    
    
    
    806General and administrative
    
    
    69,910
    
    
    
    253,517Total expenses
    
    
    70,716
    
    
    
    254,323Loss from operations
    
    
    (63,296
    )
    
    
    (246,445
    )Gain (loss) on sale of marketable securities
    
    
    (11,408
    )
    
    
    4,253Net loss attributable to Common Shareholders
    
    
    (74,704
    )
    
    
    (242,192
    )Net loss attributable to Common Shareholders per
Common Share: Basic and Diluted
    
    $
    (.17
    )
    
    $
    (.55
    )Weighted average number of Common Shares
outstanding: Basic and Diluted
    
    
    442,748
    
    
    
    442,346Comprehensive loss:Net loss
    
    $
    (74,704
    )
    
    $
    (242,192
    )Other comprehensive income (loss):Unrealized gain (loss) on marketable securities
    
    
    61,522
    
    
    
    (11,632
    )Comprehensive loss
    
    $
    (13,182
    )
    
    $
    (253,824
    )
  -4-




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Paragon Real Estate Equity and Investment Trust and Subsidiary
Consolidated Statements of Operations
(unaudited)
 For the three months ended September 30,2009
    
    2008RevenuesInterest/dividend income
    
    $
    2,525
    
    
    $
    2,697Total revenues
    
    
    2,525
    
    
    
    2,697ExpensesDepreciation and amortization
    
    
    269
    
    
    
    269General and administrative
    
    
    17,464
    
    
    
    85,354Total expenses
    
    
    17,733
    
    
    
    85,623Loss from operations
    
    
    (15,208
    )
    
    
    (82,926
    )Gain (loss) on sale of marketable securities
    
    
    (6,702
    )
    
    
    2,405Net loss attributable to Common Shareholders
    
    
    (21,910
    )
    
    
    (80,521
    )Net loss attributable to Common Shareholders per
Common Share: Basic and Diluted
    
    $
    (.05
    )
    
    $
    (.18
    )Weighted average number of Common Shares
outstanding: Basic and Diluted
    
    
    443,164
    
    
    
    442,362Comprehensive income (loss):Net loss
    
    $
    (21,910
    )
    
    $
    (80,521
    )Other comprehensive income (loss):Unrealized gain (loss) on marketable securities
    
    
    49,006
    
    
    
    (2,021
    )Comprehensive income (loss)
    
    $
    27,096
    
    
    $
    (82,542
    )
  -5-




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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 30,2009
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (74,704
    )
    
    $
    (242,192
    )Adjustments to reconcile net loss to net cash used in
continuing operations:Compensation costs paid through amortization of
restricted common shares
    
    
    50
    
    
    
    41Compensation costs and trustee fees incurred through
the issuance of shares
    
    
    
    
    
    
    187,500Depreciation and amortization
    
    
    806
    
    
    
    806Loss (gain) on sale of marketable securities
    
    
    11,408
    
    
    
    (4,253
    )Net change in assets and liabilities:Other assets
    
    
    6,688
    
    
    
    11,061Accounts payable and accrued expenses
    
    
    5,162
    
    
    
    2,989Net cash used in continuing operations
    
    
    (50,590
    )
    
    
    (44,048
    )Cash flows from investing activities:Cash used for the purchase of marketable securities
    
    
    (118,252
    )
    
    
    (153,431
    )Proceeds from the sale of marketable securities
    
    
    112,376
    
    
    
    29,222Net cash used for investing activities
    
    
    (5,876
    )
    
    
    (124,209
    )Cash flows from financing activities:Net cash from financing activities
    
    
    
    
    
    
    Net decrease in cash
    
    
    (56,466
    )
    
    
    (168,257
    )CashBeginning of period
    
    
    182,373
    
    
    
    421,196End of period
    
    $
    125,907
    
    
    $
    252,939
  -6-




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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
  -8-




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Stock Based Compensation
 Share-Based Payment Compensation  Stock Compensation
 Income Taxes
    Reclassifications
  Subsequent Events
  Note 4  Marketable Securities
   -9-




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Note 5  Equity
        Note 6  Loss Per Share
  -10-




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For the nine months ended September 30,2009
    
    
    2008NumeratorNet loss attributable to Common Shareholders
    
    $
    (74,704
    )
    
    $
    (242,192
    )DenominatorWeighted average Common Shares outstanding
at September 30, 2009 and September 30,
2008, respectively: Basic and Diluted
    
    
    442,748
    
    
    
    442,346Basic and Diluted EPSNet loss from continuing operations
    
    $
    (0.17
    )
    
    $
    (0.55
    )Net loss attributable to Common
Shareholders: Basic and Diluted
    
    $
    (0.17
    )
    
    $
    (0.55
    )
 Note 7  Commitments and Contingencies
 Liquidity
 .
   Legal Proceedings
  -11-




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Note 8  Fair Value Measurements
 Fair Value
Measurements and Disclosures, Financial Instruments Fair Value Measurements The Fair Value Option for Financial
Assets and Financial Liabilities  Including an amendment of FASB Statement No.
    Carrying Amountin ConsolidatedBalance Sheet
    
    Fair Value
    
    Fair Value Measurement UsingSeptember 30, 2009
    
    September 30, 2009
    
    Level 1
    
    Level 2
    
    Level 3Marketable Securities
    
    $
    167,182
    
    
    $
    167,182
    
    
    $
    167,182
    
    
    $
    
    
    
    $
    
  -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, 2009 compared to the nine month
period ended September 30, 2008.
    
    Explanation of changes in the results of operations in the Consolidated Statements of
Operations for the three month period ended September 30, 2009 compared to the three month
period ended September 30, 2008.
    
    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, 2009,
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, 2009 and 2008
 Revenues from Operations
   Expenses from Operations
  -14-




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Loss from Operations
  Gain/Loss on Sale of Marketable Securities
   Net Loss Attributable to Common Shareholders
  Comparison of the Three Month Periods Ended September 30, 2009 and 2008
 Revenues from Operations
   Expenses from Operations
  Loss from Operations
  -15-




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Gain/Loss on Sale of Marketable Securities
  Net Loss Attributable to Common Shareholders
  Critical Accounting Policies and Estimates
  Investments in Shares of Publicly Traded Companies
  Valuation Allowance of Deferred Tax Asset
  Liquidity and Capital Resources
  -16-




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Cash Flows
   Future Obligations
  Long Term Liquidity and Operating Strategies
  Current Tax Status
   -17-




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Interest Rates and Inflation
   Off-Balance Sheet Arrangements
  
 ITEM 4T. CONTROLS AND PROCEDURES
   -18-




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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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 Exhibits
 ExhibitNumber
    
    Exhibit Description10.1
    
    Form of Second Amendment to Restricted Share Agreement for Trustees dated
September 21, 200910.2
    
    Second Amendment to Stock Subscription Agreement between James C. Mastandrea and the Company dated September 21, 200931.1
    
    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: November 16, 2009
    
    James C. MastandreaChief Executive Officer(Principal executive officer)Paragon real estate equity and investment trustBy:
    /s/ John J. DeeDate: November 16, 2009
    
    John J. DeeChief Financial Officer(Principal financial and accounting officer) -20-