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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 June 30, 2005
 Commission File Number:
 0-25074
 PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
  Maryland
(State or other jurisdiction of incorporation)1240 Huron Road, Suite 301, Cleveland, OH
(Address of principal executive offices)
    
    39-6594066
(I.R.S. Employer Identification Number)44115
(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 StatementsConsolidated Balance Sheet  June 30, 2005 (unaudited)
    
    Page - 2 -Consolidated Statements of Operations  Six months ended June 30, 2005 and June 30, 2004 (unaudited)
    
    Page - 3 -Consolidated Statements of Operations  Three months ended June 30, 2005 and June 30, 2004 (unaudited)
    
    Page - 4 -Consolidated Statements of Cash Flows  Six months ended June 30, 2005 and June 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 - 19 -Part II. Other InformationItem 1. Legal Proceedings
    
    Page - 20 -Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    Page - 20 -Item 3. Defaults upon Senior Securities
    
    Page - 20 -Item 4. Submission of Matters to a Vote of Security Holders
    
    Page - 20 -Item 5. Other Information
    
    Page - 21 -Item 6. Exhibits
    
    Page - 21 -Signatures
    
    Page - 22 -EX-31.1 CertificationEX-31.2 CertificationEX-32.1 Certification
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Paragon Real Estate Equity and Investment Trust and Subsidiaries
 
 Consolidated Balance Sheet
 June 30, 2005
(unaudited)
 AssetsInvestments in real estate:Land
    
    $
    797,682Buildings and improvements
    
    
    3,205,187Furniture, fixtures and equipment
    
    
    30,2604,033,129Accumulated depreciation and amortization
    
    
    (163,843
    )Net investments in real estate
    
    
    3,869,286Cash and cash equivalents
    
    
    1,116,440Marketable securities
    
    
    76,704Restricted cash
    
    
    99,400Accounts receivable, net
    
    
    7,090Other assets, net
    
    
    105,257Total Assets
    
    $
    5,274,177Liabilities and Shareholders EquityLiabilities:Mortgage loan payable
    
    $
    2,736,822Accounts payable and accrued expenses
    
    
    127,648Security deposits
    
    
    57,004Total liabilities
    
    
    2,921,474Minority interest in consolidated subsidiary
    
    
    2,170,266Commitments and ContingenciesShareholders equity:Preferred Shares  $0.01 par value, 10,000,000
authorized: 278,455 Class A cumulative convertible
shares issued and outstanding, $10.00 per share
liquidation preference
    
    
    2,785Common Shares  $0.01 par value, 100,000,000
authorized; 33,540,615 shares issued and
outstanding
    
    
    335,406Additional paid-in capital
    
    
    28,428,109Accumulated other comprehensive income, net
unrealized gain on marketable securities
    
    
    38,028Accumulated deficit
    
    
    (25,235,275
    )Treasury stock, at cost, 2,859,765 shares
    
    
    (800,735
    )Unearned compensation and trustees fees
    
    
    (2,585,881
    )Total shareholders equity
    
    
    182,437Total Liabilities and Shareholders Equity
    
    $
    5,274,177
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Paragon Real Estate Equity and Investment Trust and Subsidiaries
 
 Consolidated Statements of Operations
 (unaudited)
 For the six months ended June 30,2005
    
    2004RevenuesRental revenue
    
    $
    300,789
    
    
    $
    295,611Interest and other
    
    
    20,401
    
    
    
    27,457Total revenues
    
    
    321,190
    
    
    
    323,068ExpensesProperty, operating and maintenance
    
    
    105,848
    
    
    
    100,183Property taxes and insurance
    
    
    49,415
    
    
    
    46,705Depreciation and amortization
    
    
    44,733
    
    
    
    43,009Interest
    
    
    81,225
    
    
    
    83,152General and administrative
    
    
    697,495
    
    
    
    464,362Management fees
    
    
    13,498
    
    
    
    13,557Total expenses
    
    
    992,214
    
    
    
    750,968Loss from operations before (income) loss
allocated to minority interest
    
    
    (671,024
    )
    
    
    (427,900
    )(Income) loss allocated to minority interest
    
    
    (2,757
    )
    
    
    81,017Net loss attributable to Common Shareholders
    
    $
    (673,781
    )
    
    $
    (346,883
    )Net loss attributable to Common Shareholders per
Common Share: Basic and Diluted
    
    $
    (0.02
    )
    
    $
    (0.01
    )Weighted average number of Common Shares
outstanding: Basic and Diluted
    
    
    33,655,808
    
    
    
    32,678,378Comprehensive loss:Net loss
    
    $
    (673,781
    )
    
    $
    (346,883
    )Other comprehensive loss:Unrealized loss on marketable securities
    
    
    (13,245
    )
    
    
    (13,732
    )Comprehensive loss
    
    $
    (687,026
    )
    
    $
    (360,615
    )
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Paragon Real Estate Equity and Investment Trust and Subsidiaries
 
 Consolidated Statements of Operations
 (unaudited)
 For the three months ended June 30,2005
    
    2004RevenuesRental revenue
    
    $
    150,014
    
    
    $
    145,009Interest and other
    
    
    9,780
    
    
    
    9,300Total revenues
    
    
    159,794
    
    
    
    154,309ExpensesProperty, operating and maintenance
    
    
    51,493
    
    
    
    43,830Property taxes and insurance
    
    
    24,930
    
    
    
    23,490Depreciation and amortization
    
    
    22,491
    
    
    
    21,578Interest
    
    
    40,739
    
    
    
    41,485General and administrative
    
    
    238,819
    
    
    
    224,769Management fees
    
    
    6,686
    
    
    
    6,691Total expenses
    
    
    385,158
    
    
    
    361,843Loss from operations before income allocated to
minority interest
    
    
    (225,364
    )
    
    
    (207,534
    )Income allocated to minority interest
    
    
    (2,589
    )
    
    
    (5,879
    )Net loss attributable to Common Shareholders
    
    $
    (227,953
    )
    
    $
    (213,413
    )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
    
    
    33,899,956
    
    
    
    32,775,781Comprehensive loss:Net loss
    
    $
    (227,953
    )
    
    $
    (213,413
    )Other comprehensive loss:Unrealized (loss) gain on marketable securities
    
    
    (9,114
    )
    
    
    10,768Comprehensive loss
    
    $
    (237,067
    )
    
    $
    (202,645
    )
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Paragon Real Estate Equity and Investment Trust and Subsidiaries
 
 Consolidated Statements of Cash Flows
 (unaudited)
 For the six months ended June 30,2005
    
    2004Cash flows from operating activities:Net loss
    
    $
    (673,781
    )
    
    $
    (346,883
    )Adjustments to reconcile net loss to net cash used in
continuing operations:Compensation costs and trustees fees incurred
through the issuance of shares
    
    
    51,959
    
    
    
    55,733Rent expense incurred through the issuance of
restricted shares
    
    
    51,500
    
    
    
    51,500Depreciation and amortization
    
    
    44,733
    
    
    
    43,009Income (loss) allocated to minority interest
    
    
    2,757
    
    
    
    (81,017
    )Net change in assets and liabilities:Accounts receivable, net
    
    
    1,186
    
    
    
    (5,764
    )Restricted cash
    
    
    6,786
    
    
    
    (9,835
    )Other assets, net
    
    
    8,306
    
    
    
    265,168Accounts payable and accrued expenses
    
    
    (134,143
    )
    
    
    (27,185
    )Rents received in advance and security deposits
    
    
    471
    
    
    
    2,985Net cash used in continuing operations
    
    
    (640,226
    )
    
    
    (52,289
    )Cash flows from investing activities:Additions to real estate properties
    
    
    (16,246
    )
    
    
    (8,319
    )Purchase of marketable securities
    
    
    
    
    
    
    (1,175
    )Net cash used in investing activities
    
    
    (16,246
    )
    
    
    (9,494
    )Cash flows from financing activities:Payments on mortgage loan
    
    
    (26,450
    )
    
    
    (24,523
    )Net cash used in financing activities
    
    
    (26,450
    )
    
    
    (24,523
    )Net decrease in cash and cash equivalents
    
    
    (682,922
    )
    
    
    (86,306
    )Cash and cash equivalentsBeginning of period
    
    
    1,799,362
    
    
    
    2,218,674End of period
    
    $
    1,116,440
    
    
    $
    2,132,368
 Supplemental information to Consolidated Statements of Cash Flows
 Interest paid
    
    $
    81,225
    
    
    $
    83,152
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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 six month periods endedJune 30,2005
    
    
    2004Net loss attributable to Common Shareholders
    
    $
    (673,781
    )
    
    $
    (346,883
    )Add: Stock-based employee compensation
expense included in reported net loss, net
of related tax effects
    
    
    51,958
    
    
    
    55,733Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects
    
    
    (77,876
    )
    
    
    (71,483
    )Pro forma net loss attributable to Common
Shareholders
    
    $
    (699,699
    )
    
    $
    (362,633
    )Net loss attributable to Common
Shareholders per Common Share:Basic and Diluted  as reported
    
    $
    (0.02
    )
    
    $
    (0.01
    )Basic and Diluted  pro forma
    
    $
    (0.02
    )
    
    $
    (0.01
    )
 Income Taxes
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Fair Value of Financial Instruments
  Segment Disclosure
  Note 4  Marketable Securities
     Note 5  Mortgage Loan Payable
  Note 6  Equity
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Note 7  Loss Per Share
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For the six months ended June 30,2005
    
    2004NumeratorNet loss attributable to Common Shareholders
    
    
    (673,781
    )
    
    
    (346,883
    )DenominatorWeighted average Common Shares outstanding
at June 30, 2005 and June 30, 2004,
respectively:Basic and Diluted
    
    
    33,655,808
    
    
    
    32,678,378Basic and Diluted EPSNet loss attributable to Common
Shareholders -Basic and Diluted
    
    $
    (0.02
    )
    
    $
    (0.01
    )
 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
  
    
    Explanation of changes in the results of operations in the Consolidated Statements of
Operations for the six month period ended June 30, 2005 compared to the six month period
ended June 30, 2004.
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
    
    Explanation of changes in the results of operations in the Consolidated Statements of
Operations for the three month period ended June 30, 2005 compared to the three month
period ended June 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 six month period ended June 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 Six Month Periods Ended June 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 June 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
  Valuation Allowance of Deferred Tax Asset
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Liquidity and Capital Resources
  Cash Flows
   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 June 30, 2005, we had five 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.
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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.
  Listing on American Stock Exchange
  Current Tax Status
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Interest Rates and Inflation
   Off-Balance Sheet Arrangements
  
 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
  Description of each matter voted on at meeting:
 Proposal 1
    
    Re-election of the following Trustees:Daryl J. Carter and Michael T. Oliver.Proposal 2
    
    To authorize the Trustees to effect a reverse share
split of our common shares.
 Results of vote(1):Proposal 1: Daryl J. Carter
    
    CombinedFor
    
    
    33,373,566Withheld
    
    
    89,852Individual shareholder non-votes
    
    
    764,226Proposal 1: Michael T. Oliver
    
    CombinedFor
    
    
    33,373,566Withheld
    
    
    89,852Individual shareholder non-votes
    
    
    764,226Proposal 2
    
    CombinedFor
    
    
    32,884,703Withheld
    
    
    578,714Individual shareholder non-votes
    
    
    764,226
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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 trustBy:
    /s/ James C. MastandreaDate: August 8, 2005
    
    James C. MastandreaChief Executive OfficerParagon real estate equity and investment trustBy:
    /s/ John J. DeeDate: August 8, 2005
    
    John J. DeeChief Financial Officer - 22 -