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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-QSB
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 Commission File Number:
 0-25074
 PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
  Maryland
(State or other jurisdiction of incorporation)
    
    39-6594066
(I.R.S. Employer Identification Number)1240 Huron Road, Cleveland, OH
(Address of principal executive offices)
    
    44115
(Zip code)
  
 þ o
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PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST AND SUBSIDIARIES
FORM 10-QSB
INDEX
 PART I. Financial InformationItem 1. Financial StatementsConsolidated Balance Sheet  September 30, 2006 (unaudited)
    
    Page - 2 -Consolidated Statements of Operations  Nine months ended
September 30, 2006 and September 30, 2005 (unaudited)
    
    Page - 3 -Consolidated Statements of Operations  Three months ended
September 30, 2006 and September 30, 2005 (unaudited)
    
    Page - 4 -Consolidated Statements of Cash Flows  Nine months ended
September 30, 2006 and September 30, 2005 (unaudited)
    
    Page - 5 -Notes to Consolidated Financial Statements (unaudited)
    
    Page - 6 -Item 2. Managements Discussion and Analysis or
Plan of Operation
    
    Page - 16 -Item 3. Controls and Procedures
    
    Page - 24 -Part II. Other InformationItem 1. Legal Proceedings
    
    Page - 24 -Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    Page - 24 -Item 3. Defaults upon Senior Securities
    
    Page - 24 -Item 4. Submission of Matters to a Vote of Security Holders
    
    Page - 24 -Item 5. Other Information
    
    Page - 24 -Item 6. Exhibits
    
    Page - 24 -Signatures
    
    Page - 25 -EX - 31.1 Section 302 Certification of Chief Executive OfficerEX - 31.2 Section 302 Certification of Chief Financial OfficerEX - 32.1 CEO/CFO Under 906 of Sarbanes-Oxley ActEX-31.1EX-31.2EX-32.1
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Paragon Real Estate Equity and Investment Trust and Subsidiaries
 
 Consolidated Balance Sheet
 September 30, 2006
 (unaudited)
 AssetsInvestments in equipment:Furniture, fixtures and equipment
    
    $
    5,370Accumulated depreciation and amortization
    
    
    (1,841
    )Net investments in equipment
    
    
    3,529Cash and cash equivalents
    
    
    226,078Other assets, net
    
    
    10,991Total Assets
    
    $
    240,598Liabilities and Shareholders EquityLiabilities:Accounts payable and accrued expenses
    
    $
    84,645Total liabilities
    
    
    84,645Commitments and ContingenciesShareholders equity:Preferred A Shares  $0.01 par value,
10,000,000 authorized: 277,955 Class A
cumulative convertible shares issued and
outstanding, $10.00 per share liquidation
preference
    
    
    2,780Preferred 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
    
    
    2,444Common Shares  $0.01 par value,
100,000,000 authorized; 442,565 shares
issued and outstanding
    
    
    4,426Additional paid-in capital
    
    
    30,546,156Accumulated deficit
    
    
    (26,276,309
    )Treasury stock, at cost, 38,130 shares
    
    
    (800,735
    )Unearned compensation and trustees fees
    
    
    (2,947,809
    )Subscriptions receivable Preferred C Shares
    
    
    (375,000
    )Total shareholders equity
    
    
    155,953Total Liabilities and Shareholders Equity
    
    $
    240,598
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Paragon Real Estate Equity and Investment Trust and Subsidiaries
 
 Consolidated Statements of Operations
 (unaudited)
 For the nine months ended September 30,2006
    
    2005RevenuesInterest and other
    
    $
    4,149
    
    
    $
    16,617Total revenues
    
    
    4,149
    
    
    
    16,617ExpensesDepreciation and amortization
    
    
    806
    
    
    
    652General and administrative
    
    
    345,264
    
    
    
    874,964Total expenses
    
    
    346,070
    
    
    
    875,616Loss from operations
    
    
    (341,921
    )
    
    
    (858,999
    )Gain on sale of marketable securities
    
    
    777
    
    
    
    Loss from continuing operations
    
    
    (341,144
    )
    
    
    (858,999
    )Discontinued operations:Income from discontinued operations of
residential properties before
allocation to
minority interest
    
    
    12,448
    
    
    
    35,239Income allocated to minority interest
    
    
    (12,324
    )
    
    
    (35,059
    )Net loss attributable to Common Shareholders
    
    
    (341,020
    )
    
    
    (858,819
    )Net loss attributable to Common Shareholders per
Common Share: Basic and Diluted
    
    $
    (0.77
    )
    
    $
    (1.92
    )Weighted average number of Common Shares
outstanding: Basic and Diluted
    
    
    442,560
    
    
    
    448,231Comprehensive loss:Net loss
    
    $
    (341,020
    )
    
    $
    (858,819
    )Other comprehensive loss:Unrealized gain (loss) on marketable securities
    
    
    
    
    
    
    (2,358
    )Comprehensive loss
    
    $
    (341,020
    )
    
    $
    (861,177
    )
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Paragon Real Estate Equity and Investment Trust and Subsidiaries
 
 Consolidated Statements of Operations
 (unaudited)
 For the three months ended September 30,2006
    
    2005RevenuesInterest and other
    
    $
    1,046
    
    
    $
    5,177Total revenues
    
    
    1,046
    
    
    
    5,177ExpensesDepreciation and amortization
    
    
    269
    
    
    
    269General and administrative
    
    
    84,135
    
    
    
    177,469Total expenses
    
    
    84,404
    
    
    
    177,738Loss from operations
    
    
    (83,358
    )
    
    
    (172,561
    )Gain on sale of marketable securities
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (83,358
    )
    
    
    (172,561
    )Discontinued operations:Income from discontinued operations of
residential properties before
allocation to
minority interest
    
    
    
    
    
    
    19,824Income allocated to minority interest
    
    
    
    
    
    
    (19,672
    )Net loss attributable to Common Shareholders
    
    
    (83,358
    )
    
    
    (172,409
    )Net loss attributable to Common Shareholders per
Common Share: Basic and Diluted
    
    $
    (0.19
    )
    
    $
    (0.39
    )Weighted average number of Common Shares
outstanding: Basic and Diluted
    
    
    442,555
    
    
    
    447,221Comprehensive loss:Net loss
    
    $
    (83,358
    )
    
    $
    (172,409
    )Other comprehensive loss:Unrealized gain (loss) on marketable securities
    
    
    
    
    
    
    10,887Comprehensive loss
    
    $
    (83,358
    )
    
    $
    (161,522
    )
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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 30,2006
    
    2005Cash flows from operating activities:Net loss
    
    $
    (341,020
    )
    
    $
    (858,819
    )Adjustments to reconcile net loss to net cash used in
continuing operations:Compensation costs and trustees fees incurred
through the issuance of shares
    
    
    8,983
    
    
    
    72,427Compensation costs, trustees fees and legal costs
incurred through the issuance of options
    
    
    53,082
    
    
    
    Rent expense incurred through the issuance of
restricted shares
    
    
    
    
    
    
    51,500Depreciation and amortization
    
    
    806
    
    
    
    652Income from discontinued operations, net of
allocation to minority interest
    
    
    (124
    )
    
    
    (180
    )Gain on sale of marketable securities
    
    
    (777
    )
    
    
    Net change in assets and liabilities:Other assets, net
    
    
    113,313
    
    
    
    (69,268
    )Accounts payable and accrued expenses
    
    
    (75,162
    )
    
    
    (113,532
    )Net cash used in continuing operations
    
    
    (240,899
    )
    
    
    (917,220
    )Cash flows from investing activities:Cash proceeds from sale of marketable securities
    
    
    1,953
    
    
    
    Purchase of equipment
    
    
    
    
    
    
    (3,070
    )Net cash from (used in) investing activities
    
    
    1,953
    
    
    
    (3,070
    )Cash flows from financing activities:Cash proceeds from issuance of Preferred C shares
    
    
    125,000
    
    
    
    Net cash from financing activities
    
    
    125,000
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (113,946
    )
    
    
    (920,290
    )Cash and cash equivalentsBeginning of period
    
    
    340,024
    
    
    
    1,629,350End of period
    
    $
    226,078
    
    
    $
    709,060
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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
 Consolidated Financial Statement Presentation
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Going Concern
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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
  Other Assets
  Revenue Recognition
  Stock Based Compensation
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Dividend yield
    
    0.0%Expected volatility
    
    168.9  175.5%Risk free interest rate
    
    3.40  4.05%Expected lives
    
    5  10 years
  For the nine month period endedSeptember 30, 2005Net loss attributable to Common Shareholders
    
    $
    (858,819
    )Add: Stock-based employee compensation expense
included in reported net loss, net of related tax
effects
    
    
    72,427Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects
    
    
    (101,845
    )Pro forma net loss attributable to Common Shareholders
    
    $
    (888,237
    )Net loss attributable to Common Shareholders per
Common Share:Basic and
Diluted  as reported
    
    $
    (1.92
    )Basic and
Diluted  pro forma
    
    $
    (1.98
    )
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Income Taxes
    Segment Disclosure
  Note 4
 Marketable Securities
   Note 5
 Equity
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Note 6
 Loss Per Share
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For the nine months ended September 30,2006
    
    2005NumeratorLoss from continuing operations
    
    
    $(341,144
    )
    
    
    $(858,999
    )Discontinued operations:Income from discontinued operations of
residential properties before allocation to
minority interest
    
    
    12,448
    
    
    
    35,239Income allocated to minority interest
    
    
    (12,324
    )
    
    
    (35,059
    )Net loss attributable to Common Shareholders
    
    
    $(341,020
    )
    
    
    $(858,819
    )DenominatorWeighted average Common Shares outstanding
at June 30, 2006 and June 30, 2005,
respectively: Basic and Diluted
    
    
    442,560
    
    
    
    448,231Basic and Diluted EPSNet loss from continuing operations
    
    
    $       (0.77
    )
    
    
    $       (1.92
    )Discontinued operations:Income from discontinued operations of
residential properties before allocation
to minority interest
    
    
    0.00
    
    
    
    0.00Income allocated to minority interest
    
    
    0.00
    
    
    
    0.00Net loss attributable to Common
Shareholders:Basic and Diluted
    
    
    $       (0.77
    )
    
    
    $       (1.92
    )
 Note 7
 Commitments and Contingencies
 Liquidity
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Legal Proceedings
  Note 8
 Discontinued Operations
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For the nine months ended September 30,2006
    
    2005Revenues
    
    
    $163,926
    
    
    
    $468,387Operating expenses
    
    
    (88,288
    )
    
    
    (243,892
    )Depreciation and amortization
    
    
    (23,476
    )
    
    
    (67,037
    )Interest expense
    
    
    (39,714
    )
    
    
    (122,219
    )Income from discontinued operations
    
    
    $   12,448
    
    
    
    $   35,239
 For the three months ended September 30,2006
    
    2005Revenues
    
    
    $
    
    
    
    $158,638Operating expenses
    
    
    
    
    
    
    (75,133
    )Depreciation and amortization
    
    
    
    
    
    
    (22,687
    )Interest expense
    
    
    
    
    
    
    (40,994
    )Income from discontinued operations
    
    
    $
    
    
    
    $   19,824
 Note 9
 Related Party Transactions
 Richton Trail Disposition and Previous Acquisition and Management Fees
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 Overview
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Brief History
  Forward-Looking Information
  
    
    Explanation of changes in the results of operations in the Consolidated Statements of
Operations for the nine month period ended September 30, 2006 compared to the nine month
period ended September 30, 2005.
    
    Explanation of changes in the results of operations in the Consolidated Statements of
Operations for the three month period ended September 30, 2006 compared to the three month
period ended September 30, 2005.
    
    Our critical accounting policies and estimates that require our subjective judgement 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, 2006,
and how we intend to generate cash for long-term capital needs.
    
    Our current income tax status.
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Results of Operations
 Comparison of the Nine Month Periods Ended September 30, 2006 and 2005
  Revenues from Operations
  Expenses from Operations
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Loss from continuing operations
  Discontinued operations
    Net loss attributable to Common Shareholders
  Comparison of the Three Month Periods Ended September 30, 2006 and 2005
  Revenues from Operations
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Expenses from Operations
  Loss from continuing operations
  Discontinued operations
    Net loss attributable to Common Shareholders
  Critical Accounting Policies and Estimates
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Impairment of Long-Lived Assets
  Real Estate Investments
  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
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Off-Balance Sheet Arrangements
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ITEM 3. CONTROLS AND PROCEDURES
   
 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 Description31.1
    
    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 trustDate: November 6, 2006
    
    By:
    
    /s/ James C. Mastandrea

James C. MastandreaChief Executive OfficerParagon real estate equity and investment trustDate: November 6, 2006
    
    By:
    
    /s/ John J. Dee

John J. DeeChief Financial Officer
 - 25 -