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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-QSB
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 Commission File Number:
 0-25074
 PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
  Maryland
    
    39-6594066(State or other jurisdiction of incorporation)
    
    (I.R.S. Employer Identification Number)1240 Huron Road, Suite 301, Cleveland, OH
    
    44115(Address of principal executive offices)
    
    (Zip code)
  
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PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST AND SUBSIDIARIES
FORM 10-QSB
INDEX
 PART I. Financial InformationItem 1.
Financial Statements 
Consolidated Balance Sheet  September 30, 2005 (unaudited)
    
    Page - 2 -Consolidated
Statements of Operations  Nine months ended
September 30, 2005 and September 30, 2004 (unaudited)
    
    Page - 3 -Consolidated Statements of Operations  Three months ended
September 30, 2005 and September 30, 2004 (unaudited)
    
    Page - 4 -Consolidated Statements of Cash Flows  Nine months ended
September 30, 2005 and September 30, 2004 (unaudited)
    
    Page - 5 -Notes to Consolidated Financial Statements (unaudited)
    
    Page - 6 -Item 2. Managements Discussion and Analysis or
Plan of Operation
    
    Page - 13 -Item 3. Controls and Procedures
    
    Page - 20 -Part II. Other InformationItem 1. Legal Proceedings
    
    Page - 21 -Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    Page - 21 -Item 3. Defaults upon Senior Securities
    
    Page - 21 -Item 4. Submission of Matters to a Vote of Security Holders
    
    Page - 21 -Item 5. Other Information
    
    Page - 21 -Item 6. Exhibits
    
    Page - 21 -Signatures
    
    Page - 22 -EX  31.1 Section 302 Certification of Principal Executive OfficerEX  31.2 Section 302 Certification of Principal Financial OfficerEX  32.1 CEO/CFO Certification Under Section 906 of Sarbanes-Oxley ActEX-31.1 302 Certification for CEOEX-31.2 302 Certification for CFOEX-32.1 906 Certification for CEO/CFO
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Paragon Real Estate Equity and Investment Trust and Subsidiaries
 
 Consolidated Balance Sheet
September 30, 2005
(unaudited)
 AssetsInvestments in real estate:Land
    
    $
    797,682Buildings and improvements
    
    
    3,205,186Furniture, fixtures and equipment
    
    
    41,2904,044,158Accumulated depreciation and amortization
    
    
    (185,435
    )Net investments in real estate
    
    
    3,858,723Cash and cash equivalents
    
    
    917,179Marketable securities
    
    
    87,591Restricted cash
    
    
    130,501Accounts receivable, net
    
    
    5,516Other assets, net
    
    
    186,190Total Assets
    
    $
    5,185,700Liabilities and Shareholders EquityLiabilities:Mortgage loan payable
    
    $
    2,723,978Accounts payable and accrued expenses
    
    
    170,474Security deposits
    
    
    59,925Total liabilities
    
    
    2,954,377Minority interest in consolidated subsidiary
    
    
    2,185,316Commitments and ContingenciesShareholders equity:Preferred
Shares  $0.01 par value,
10,000,000 authorized: 278,155 Class A
cumulative convertible shares issued and
outstanding, $10.00 per share liquidation
preference
    
    
    2,782Common Shares  $0.01 par value,
100,000,000 authorized; 33,541,649 shares
issued and outstanding
    
    
    335,416Additional paid-in capital
    
    
    28,428,102Accumulated other comprehensive income, net
unrealized gain on marketable securities
    
    
    48,915Accumulated deficit
    
    
    (25,403,060
    )Treasury stock, at cost, 2,859,765 shares
    
    
    (800,735
    )Unearned compensation and trustees fees
    
    
    (2,565,413
    )Total shareholders equity
    
    
    46,007Total Liabilities and Shareholders Equity
    
    $
    5,185,700
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Paragon Real Estate Equity and Investment Trust and Subsidiaries
 
 Consolidated Statements of Operations
(unaudited)
 For the nine months ended September 30,2005
    
    
    2004RevenuesRental revenue
    
    $
    453,917
    
    
    $
    455,741Interest and other
    
    
    31,087
    
    
    
    38,511Total revenues
    
    
    485,004
    
    
    
    494,252ExpensesProperty, operating and maintenance
    
    
    147,698
    
    
    
    158,694Property taxes and insurance
    
    
    75,727
    
    
    
    70,738Depreciation and amortization
    
    
    67,689
    
    
    
    65,006Interest
    
    
    122,219
    
    
    
    124,912General and administrative
    
    
    874,963
    
    
    
    717,386Management fees
    
    
    20,468
    
    
    
    20,094Total expenses
    
    
    1,308,764
    
    
    
    1,156,830Loss from operations before (income) loss
allocated to minority interest
    
    
    (823,760
    )
    
    
    (662,578
    )(Income) loss allocated to minority interest
    
    
    (17,807
    )
    
    
    75,158Net loss attributable to Common Shareholders
    
    $
    (841,567
    )
    
    $
    (587,420
    )Net loss attributable to Common Shareholders per
Common Share: Basic and Diluted
    
    $
    (0.03
    )
    
    $
    (0.02
    )Weighted average number of Common Shares
outstanding: Basic and Diluted
    
    
    33,617,311
    
    
    
    32,899,490Comprehensive loss:Net loss
    
    $
    (841,567
    )
    
    $
    (587,420
    )Other comprehensive loss:Unrealized loss on marketable securities
    
    
    (2,358
    )
    
    
    (22,048
    )Comprehensive loss
    
    $
    (843,925
    )
    
    $
    (609,468
    )
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Paragon Real Estate Equity and Investment Trust and Subsidiaries
 
 Consolidated Statements of Operations
(unaudited)
 For the three months ended September 30,2005
    
    
    2004RevenuesRental revenue
    
    $
    153,128
    
    
    $
    160,130Interest and other
    
    
    10,686
    
    
    
    11,054Total revenues
    
    
    163,814
    
    
    
    171,184ExpensesProperty, operating and maintenance
    
    
    41,850
    
    
    
    58,511Property taxes and insurance
    
    
    26,312
    
    
    
    24,033Depreciation and amortization
    
    
    22,956
    
    
    
    21,997Interest
    
    
    40,994
    
    
    
    41,760General and administrative
    
    
    177,468
    
    
    
    253,024Management fees
    
    
    6,970
    
    
    
    6,537Total expenses
    
    
    316,550
    
    
    
    405,862Loss from operations before income allocated to
minority interest
    
    
    (152,736
    )
    
    
    (234,678
    )Income allocated to minority interest
    
    
    (15,050
    )
    
    
    (5,859
    )Net loss attributable to Common Shareholders
    
    $
    (167,786
    )
    
    
    (240,537
    )Net loss attributable to Common Shareholders per
Common Share: Basic and Diluted
    
    $
    (0.01
    )
    
    $
    (0.01
    )Weighted average number of Common Shares
outstanding: Basic and Diluted
    
    
    33,541,570
    
    
    
    33,342,790Comprehensive loss:Net loss
    
    $
    (167,786
    )
    
    $
    (240,537
    )Other comprehensive loss:Unrealized gain (loss) on marketable securities
    
    
    10,887
    
    
    
    (8,316
    )Comprehensive loss
    
    $
    (156,899
    )
    
    $
    (248,853
    )
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Paragon Real Estate Equity and Investment Trust and Subsidiaries
 
 Consolidated Statements of Cash Flows
(unaudited)
 For the nine months ended September 30,2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (841,567
    )
    
    $
    (587,420
    )Adjustments to reconcile net loss to net cash used
in continuing operations:Compensation costs and trustees fees incurred
through the issuance of shares
    
    
    72,427
    
    
    
    91,371Rent expense incurred through the issuance of
restricted shares
    
    
    51,500
    
    
    
    51,500Depreciation and amortization
    
    
    67,689
    
    
    
    65,006Income (loss) allocated to minority interest
    
    
    17,807
    
    
    
    (75,158
    )Net change in assets and liabilities:Accounts receivable, net
    
    
    2,761
    
    
    
    (581
    )Restricted cash
    
    
    (24,315
    )
    
    
    (25,970
    )Other assets, net
    
    
    (73,991
    )
    
    
    280,700Accounts payable and accrued expenses
    
    
    (93,136
    )
    
    
    (15,491
    )Rents received in advance and security deposits
    
    
    5,211
    
    
    
    2,316Net cash used in continuing operations
    
    
    (815,614
    )
    
    
    (213,727
    )Cash flows from investing activities:Additions to real estate properties
    
    
    (27,275
    )
    
    
    (20,258
    )Purchase of marketable securities
    
    
    
    
    
    
    (1,175
    )Net cash used in investing activities
    
    
    (27,275
    )
    
    
    (21,433
    )Cash flows from financing activities:Payments on mortgage loan
    
    
    (39,294
    )
    
    
    (36,601
    )Net cash used in financing activities
    
    
    (39,294
    )
    
    
    (36,601
    )Net decrease in cash and cash equivalents
    
    
    (882,183
    )
    
    
    (271,761
    )Cash and cash equivalentsBeginning of period
    
    
    1,799,362
    
    
    
    2,218,674End of period
    
    $
    917,179
    
    
    $
    1,946,913Supplemental information to Consolidated Statements of Cash FlowsInterest paid
    
    $
    122,219
    
    
    $
    124,912
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Paragon Real Estate Equity and Investment Trust and Subsidiaries
 
 Notes to Consolidated Financial Statements
(unaudited)
 Note 1
 Organization
   Note 2
 Basis of Presentation
  Note 3
 Summary of Significant Accounting Policies
 Use of Estimates in the Preparation of Financial Statements
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Investments in Real Estate
     YearsBuilding and improvements
    
    40Furniture, fixtures and equipment
    
    3-7
  Cash and cash equivalents
  Accounts Receivable
  Other Assets
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Revenue Recognition
  Stock Based Compensation
   For the nine month periods endedSeptember 30,2005
    
    
    2004Net loss attributable to Common Shareholders
    
    $
    (841,567
    )
    
    $
    (587,420
    )Add: Stock-based compensation expense
included in reported net loss, net of
related tax effects
    
    
    72,427
    
    
    
    91,371Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax
effects
    
    
    (101,845
    )
    
    
    (119,496
    )Pro forma net loss attributable to Common
Shareholders
    
    $
    (870,985
    )
    
    $
    (615,545
    )Net loss attributable to Common
Shareholders per Common Share:Basic and
Diluted  as reported
    
    $
    (0.03
    )
    
    $
    (0.02
    )Basic and
Diluted  pro forma
    
    $
    (0.03
    )
    
    $
    (0.02
    )
 Income Taxes
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Fair Value of Financial Instruments
  Segment Disclosure
  Note 4
 Marketable Securities
     Note 5
 Mortgage Loan Payable
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Note 6
 Equity
            Note 7
 Loss Per Share
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For the nine months ended September 30,2005
    
    
    2004NumeratorNet loss attributable to Common Shareholders
    
    
    (841,567
    )
    
    
    (587,420
    )DenominatorWeighted average Common Shares outstanding
at September 30, 2005 and
September 30, 2004, respectively: Basic and Diluted
    
    
    33,617,311
    
    
    
    32,899,490Basic and Diluted EPSNet loss attributable to Common
Shareholders   Basic and Diluted
    
    $
    (0.03
    )
    
    $
    (0.02
    )
 Note 8  Commitments and Contingencies
 Liquidity
 
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
    
    Borrowings from new loans;
    
    Additional equity issuances of our common and preferred shares; and
    
    Proceeds from the sales of our real estate and technology segment.
  Legal Proceedings
  Note 9  Related Party Transactions
 Richton Trail Acquisition and Management Fees
   Medical Insurance Reimbursement
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 Overview
     Brief History
   Forward-Looking Information
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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, 2005 compared to the nine month
period ended September 30, 2004.
    
    Explanation of changes in the results of operations in the Consolidated Statements of
Operations for the three month period ended September 30, 2005 compared to the three month
period ended September 30, 2004.
    
    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, 2005,
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, 2005 and 2004
 Revenues from Operations
   Expenses from Operations
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Loss from operations before minority interest
  Loss allocated to minority interest
  Net loss attributable to Common Shareholders
  Comparison of the Three Month Periods Ended September 30, 2005 and 2004
 Revenues from Operations
  Expenses from Operations
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Loss from operations before minority interest
  Income allocated to minority interest
  Net loss attributable to Common Shareholders
  Critical Accounting Policies and Estimates
  Impairment of Long-Lived Assets
  Real Estate Investments
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Deferred Acquisition Costs
  Valuation Allowance of Deferred Tax Asset
  Liquidity and Capital Resources
  Cash Flows
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Future Obligations
  
    
    The mortgage is being paid by the cash flow from Richton Trail. The property has been
well maintained and managed, and has had historical occupancy in the range of 95% to 100%.
So long as Richton Trail maintains approximately 85% occupancy, it will generate the cash
flow needed to pay its current expenses and the mortgage debt service. We intend to keep
the property as close to 100% occupancy as possible and do not foresee any market
conditions that would show a decline in occupancy or rents during the coming year.
Improvements to be made at the property through December 31, 2005 will be funded with cash
generated from its operations.
    
    As of September 30, 2005, we had four employees, and each employees monthly salary is
$5,000 or less. The Company has the benefit of highly qualified employees in the real
estate industry and other areas of expertise, for salaries that are well below market
levels. Several of them have previous experience with publicly traded companies. As the
Company grows and appreciates in value, our employees expect to share in the growth of the
Company and to earn higher levels of compensation. Our employees will also share in the
growth of the Company along with our other shareholders, because each has been incented by
the grant of a significant number of common shares.
    
    We entered into an agreement to acquire for $64.7 million, ten apartment communities in
Texas and Ohio, consisting of 1,478 units, which is subject to the completion of due
diligence, Paragons obtaining financing and other customary closing conditions. We are
exploring a variety of capital raising alternatives and expect the acquisition to close in
late 2005 or early 2006.
 Long Term Liquidity and Operating Strategies
  
    
    Borrowings from new loans;
    
    Additional equity issuances of our common and preferred shares; and
    
    Proceeds from the sales of our real estate and technology segment.
  American Stock Exchange Listing
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Current Tax Status
   Interest Rates and Inflation
   Off-Balance Sheet Arrangements
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ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM
6. EXHIBITS AND REPORTS ON FORM 8-K.
 Exhibits
 ExhibitNumber
    
    Exhibit Description10.8
    
    Purchase Agreement dated September 26, 2005, by and among Veard
Baytown Limited Partnership, Veard Stafford Limited Partnership,
Veard Lake Jackson Limited Partnership, Veard Wharton Limited
Partnership, Veard Irving Limited Partnership, Veard Arlington
Limited Partnership, Veard Amarillo Limited Partnership, Veard
Victoria Limited Partnership, Veard Kettering Limited Partnership,
Veard Canton Limited Partnership and Paragon Real Estate Equity and
Investment Trust (filed as exhibit 2.1 with the Companys Current
Report on Form 8-K filed on September 26, 2005 and
incorporated herein by reference)31.1
    
    Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002
 Principal Executive Officer31.2
    
    Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002
 Principal 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 17, 2005
    
    
    
    James C. MastandreaChief Executive OfficerParagon real estate equity and investment trustBy:
    
    /s/ John J. DeeDate: October 17, 2005
    
    
    
    John J. DeeChief Financial Officer
 - 22 -