##### Table of Contents



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, 2008
 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 0-25074
 PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
  Maryland
    
    39-6594066(State or other jurisdiction of 
incorporation or organization)
    
    (IRS Employer
Identification No.)
 1240 Huron Road
Cleveland, Ohio 44115
 (216) 430-2700
 þ 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




---



##### 



FORM 10-Q
INDEX
 PART I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheet  September 30, 2008 (unaudited) and
December 31, 2007
    
    Page - 3 -Condensed Consolidated Statements of Operations  Nine months ended
September 30, 2008 and September 30, 2007 (unaudited)
    
    Page - 4 -Condensed Consolidated Statements of Operations  Three months ended
September 30, 2008 and September 30, 2007 (unaudited)
    
    Page - 5 -Condensed Consolidated Statements of Cash Flows  Nine months ended
September 30, 2008 and September 30, 2007 (unaudited)
    
    Page - 6 -Notes to Condensed Consolidated Financial Statements (unaudited)
    
    Page - 7 -Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    Page - 13 -Item 4 and 4T. Controls and Procedures
    
    Page - 18 -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 4. Submission of Matters to a Vote of Security Holders
    
    Page - 18 -Item 5. Other Information
    
    Page - 18 -Item 6. Exhibits
    
    Page - 18 -Signatures
    
    Page - 19 -EX - 10.1 Form of First Amendment to Restricted Share Agreement for Trustees dated September
25, 2008EX - 10.2 First Amendment to Stock Subscription Agreement between James C. Mastandrea and the
Company dated September 25, 2008EX - 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 -




---



##### Table of Contents



Paragon Real Estate Equity and Investment Trust and Subsidiary
 
 Condensed Consolidated Balance Sheet
September 30, 2008 and December 31, 2007
 September 30,
    
    
    December 31,2008
    
    
    2007(unaudited)AssetsInvestments in equipment:Furniture, fixtures and equipment
    
    $
    5,370
    
    
    $
    5,370Accumulated depreciation
    
    
    (3,989
    )
    
    
    (3,183
    )Net investments in equipment
    
    
    1,381
    
    
    
    2,187Cash
    
    
    252,939
    
    
    
    421,196Marketable securities
    
    
    116,830
    
    
    
    Accounts receivable
    
    
    
    
    
    
    551Other assets
    
    
    2,570
    
    
    
    13,080Total Assets
    
    $
    373,720
    
    
    $
    437,014Liabilities and Shareholders EquityLiabilities:Accounts payable and accrued expenses
    
    
    17,015
    
    
    
    14,025Total liabilities
    
    
    17,015
    
    
    
    14,025Commitments and ContingenciesShareholders equity:Preferred A Shares  $0.01 par value,
10,000,000 authorized: 276,255 and
277,955 Class A cumulative convertible
shares issued and outstanding at
September 30, 2008 and December 31, 2007,
respectively, $10.00 per share
liquidation preference
    
    
    2,763
    
    
    
    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
    
    
    2,444
    
    
    
    2,444Common Shares  $0.01 par value,
100,000,000 authorized: 442,398 and
442,320 shares issued and outstanding at
September 30, 2008 and December 31, 2007,
respectively
    
    
    4,424
    
    
    
    4,424Additional paid-in capital
    
    
    30,556,454
    
    
    
    30,568,490Accumulated deficit
    
    
    (26,986,954
    )
    
    
    (26,744,762
    )Accumulated other comprehensive income,
net unrealized loss on marketable
securities
    
    
    (11,632
    )
    
    
    Treasury stock, at cost, 38,130 shares
    
    
    (800,735
    )
    
    
    (800,735
    )Unearned compensation and trustees fees
    
    
    (2,410,059
    )
    
    
    (2,609,652
    )Total shareholders equity
    
    
    356,705
    
    
    
    422,989Total Liabilities and Shareholders Equity
    
    $
    373,720
    
    
    $
    437,014
  - 3 -




---



##### Table of Contents



Paragon Real Estate Equity and Investment Trust and Subsidiary
 
 Condensed Consolidated Statements of Operations
(unaudited)
 For the nine months ended September 30,2008
    
    
    2007RevenuesInterest/dividend income
    
    $
    7,778
    
    
    $
    7,787Other income
    
    
    100
    
    
    
    Total revenues
    
    
    7,878
    
    
    
    7,787ExpensesDepreciation
    
    
    806
    
    
    
    806General and administrative
    
    
    253,517
    
    
    
    297,478Total expenses
    
    
    254,323
    
    
    
    298,284Loss from operations
    
    
    (246,445
    )
    
    $
    (290,497
    )Gain on sale of marketable securities
    
    
    4,253
    
    
    
    Net loss attributable to Common Shareholders
    
    $
    (242,192
    )
    
    $
    (290,497
    )Net loss attributable to Common Shareholders per
Common Share: Basic and Diluted
    
    $
    (0.55
    )
    
    $
    (0.66
    )Weighted average number of Common Shares
outstanding: Basic and Diluted
    
    
    442,346
    
    
    
    442,565Comprehensive loss:Net loss
    
    $
    (242,192
    )
    
    $
    (290,497
    )Other comprehensive loss:Unrealized loss on marketable securities
    
    
    (11,632
    )
    
    
    Comprehensive loss
    
    $
    (253,824
    )
    
    $
    (290,497
    )
  - 4 -




---



##### Table of Contents



Paragon Real Estate Equity and Investment Trust and Subsidiary
 
 Condensed Consolidated Statements of Operations
(unaudited)
 For the three months ended September 30,2008
    
    
    2007RevenuesInterest/dividend income
    
    $
    2,697
    
    
    $
    3,208Total revenues
    
    
    2,697
    
    
    
    3,208ExpensesDepreciation
    
    
    269
    
    
    
    269General and administrative
    
    
    85,354
    
    
    
    90,583Total expenses
    
    
    85,623
    
    
    
    90,852Loss from operations
    
    
    (82,926
    )
    
    
    (87,644
    )Gain on sale of marketable securities
    
    
    2,405
    
    
    
    Net loss attributable to Common Shareholders
    
    $
    (80,521
    )
    
    $
    (87,644
    )Net loss attributable to Common Shareholders per
Common Share: Basic and Diluted
    
    $
    (0.18
    )
    
    $
    (0.20
    )Weighted average number of Common Shares
outstanding: Basic and Diluted
    
    
    442,362
    
    
    
    442,565Comprehensive loss:Net loss
    
    $
    (80,521
    )
    
    $
    (87,644
    )Other comprehensive loss:Unrealized loss on marketable securities
    
    
    (2,021
    )
    
    
    Comprehensive loss
    
    $
    (82,542
    )
    
    $
    (87,644
    )
  - 5 -




---



##### Table of Contents



Paragon Real Estate Equity and Investment Trust and Subsidiary
 
 Condensed Consolidated Statements of Cash Flows
(unaudited)
 For the nine months ended September 30,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (242,192
    )
    
    $
    (290,497
    )Adjustments to reconcile net loss to net cash
used in continuing operations:Compensation costs and trustees fees incurred
through the issuance of shares
    
    
    187,541
    
    
    
    187,825Compensation costs, trustees fees and legal
costs incurred through the issuance
of options
    
    
    
    
    
    
    31,500Depreciation
    
    
    806
    
    
    
    806Net change in assets and liabilities:Accounts receivable and Other assets
    
    
    11,061
    
    
    
    12,419Accounts payable and accrued expenses
    
    
    2,989
    
    
    
    (11,678
    )Net cash used in continuing operations
    
    
    (39,795
    )
    
    
    (69,625
    )Cash flows from investing activities:Cash used for purchase of marketable securities
    
    
    (128,462
    )
    
    
    Net cash used in investing activities
    
    
    (128,462
    )
    
    
    Cash flows from financing activities:Cash proceeds from issuance of Preferred C shares
    
    
    
    
    
    
    200,000Net cash from financing activities
    
    
    
    
    
    
    200,000Net increase (decrease) in cash
    
    
    (168,257
    )
    
    
    130,375CashBeginning of period
    
    
    421,196
    
    
    
    212,706End of period
    
    $
    252,939
    
    
    $
    343,081
  - 6 -




---



##### Table of Contents



Paragon Real Estate Equity and Investment Trust and Subsidiary
 
 Notes to Condensed Consolidated Financial Statements
(unaudited)
 Note 1  Organization
 
 Note 2  Basis of Presentation
 Condensed Consolidated Financial Statement Presentation
   Going Concern
  - 7 -




---



##### Table of Contents



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
  Accounts Receivable
  Other Assets
  Revenue Recognition
  - 8 -




---



##### Table of Contents



Stock Based Compensation
 Share-Based Payment Accounting for Stock Issued to Employees
 Income Taxes
    Note 4  Marketable Securities
    - 9 -




---



##### Table of Contents



Note 5  Equity
         Note 6  Loss Per Share
 Earnings Per Share
 - 10 -




---



##### Table of Contents



For the nine months ended September 30,2008
    
    
    2007NumeratorNet loss attributable to Common Shareholders
    
    $
    (242,192
    )
    
    $
    (290,497
    )DenominatorWeighted average Common Shares outstanding at
September 30, 2008 and September 30, 2007,
respectively: Basic and Diluted
    
    
    442,346
    
    
    
    442,565Basic and Diluted EPSNet loss from continuing operations
    
    $
    (0.55
    )
    
    $
    (0.66
    )Net loss attributable to Common Shareholders:Basic and Diluted
    
    $
    (0.55
    )
    
    $
    (0.66
    )
 Note 7  Commitments and Contingencies
 Liquidity
 .
   Legal Proceedings
  - 11 -




---



##### Table of Contents



Note 8  Fair Value Measurements
 Fair
Value Measurements The Fair Value Option for Financial Assets and Financial
Liabilities  Including an amendment of FASB Statement No. 115
    Carrying Amountin ConsolidatedBalance Sheet
    
    
    Fair Value
    
    
    Fair Value Measurement UsingSeptember 30, 2008
    
    
    September 30, 2008
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Marketable Securities
    
    $
    116,830
    
    
    $
    116,830
    
    
    $
    116,830
    
    
    $
    
    
    
    $
    
  - 12 -




---



##### Table of Contents



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




---



##### Table of Contents




    
    Explanation of changes in the results of operations in the Condensed Consolidated
Statements of Operations for the nine month period ended September 30, 2008 compared to the
nine month period ended September 30, 2007.
    
    Explanation of changes in the results of operations in the Condensed Consolidated
Statements of Operations for the three month period ended September 30, 2008 compared to
the three month period ended September 30, 2007.
    
    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, 2008,
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, 2008 and 2007
 Revenues from Operations
  Expenses from Operations
   - 14 -




---



##### Table of Contents



Loss from Operations
  Net Loss Attributable to Common Shareholders
  Comparison of the Three Month Periods Ended September 30, 2008 and 2007
 Revenues from Operations
  Expenses from Operations
   Loss from Operations
  Net Loss Attributable to Common Shareholders
  Critical Accounting Policies and Estimates
  - 15 -




---



##### Table of Contents



Investments in Publicly Traded Shares of Real Estate Companies
  Valuation Allowance of Deferred Tax Asset
  Liquidity and Capital Resources
  Cash Flows
   - 16 -




---



##### Table of Contents



Future Obligations
  Long Term Liquidity and Operating Strategies
  Current Tax Status
   Interest Rates and Inflation
   Off-Balance Sheet Arrangements
  - 17 -




---



##### Table of Contents



ITEM 4 and 4T. 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
 Exhibit Number
    
    Exhibit Description10.1
    
    Form of First Amendment to Restricted Share Agreement for Trustees dated
September 25, 200810.2
    
    First Amendment to Stock Subscription Agreement between James C. Mastandrea
and
the Company dated September 25, 200831.1
    
    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.
 - 18 -




---



##### Table of Contents



SIGNATURES
  Paragon real estate equity and investment trustBy:
    /s/ James C. MastandreaDate: November 11, 2008
    
    James C. MastandreaChief Executive Officer Paragon real estate equity and investment trustBy:
    /s/ John J. DeeDate: November 11, 2008
    
    John J. DeeChief Financial Officer - 19 -