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, 2007

Commission File Number:

0-25074

PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
(Exact name of registrant as specified in its charter)

Maryland		39-6594066
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification Number)
1240 Huron Road, Cleveland, OH		44115
(Address of principal executive offices)		(Zip code)

Issuer’s telephone number: 216-430-2700

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.   Yes þ          No o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes þ          No o

As of November 12, 2007 the issuer had 442,565 common shares outstanding, including 38,130 common shares held in treasury.

Transitional Small Business Disclosure Format (Check one):   Yes o          No þ

 

 

PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST AND SUBSIDIARIES
FORM 10-QSB
INDEX

PART I. Financial Information
		Item 1. Financial Statements
				Consolidated Balance Sheet — September 30, 2007 (unaudited).		Page - 2 -
				Consolidated Statements of Operations — Nine months ended September 30, 2007 and September 30, 2006 (unaudited).		Page - 3 -
				Consolidated Statements of Operations — Three months ended September 30, 2007 and September 30, 2006 (unaudited).		Page - 4 -
				Consolidated Statements of Cash Flows —Nine months ended September 30, 2007 and September 30, 2006 (unaudited).		Page - 5 -
				Notes to Consolidated Financial Statements (unaudited).		Page - 6 -
		Item 2. Management’s Discussion and Analysis or Plan of Operation				Page - 12 -
		Item 3. Controls and Procedures				Page - 18 -
Part II. Other Information
		Item 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-31.1
EX-31.2
EX-32.1

Paragon Real Estate Equity and Investment Trust and Subsidiaries
Consolidated Balance Sheet
September 30, 2007
(unaudited)

Assets
Investments in equipment:
Furniture, fixtures and equipment		$	5,370
Accumulated depreciation			(2,915	)
Net investments in equipment			2,455
Cash			343,081
Other assets, net			3,428
Total Assets		$	348,964
Liabilities and Shareholders’ Equity
Liabilities:
Accounts payable and accrued expenses		$	16,039
Total liabilities			16,039
Commitments and Contingencies
Shareholders’ 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			2,780
Preferred 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
Common Shares — $0.01 par value,			4,426
100,000,000 authorized; 442,565 shares issued and outstanding
Additional paid-in capital			30,572,461
Accumulated deficit			(26,672,267	)
Treasury stock, at cost, 38,130 shares			(800,735	)
Unearned compensation and trustees’ fees			(2,676,184	)
Subscriptions receivable Preferred C Shares			(100,000	)
Total shareholders’ equity			332,925
Total Liabilities and Shareholders’ Equity		$	348,964

The accompanying notes are an integral part of the consolidated financial statements.

Paragon Real Estate Equity and Investment Trust and Subsidiaries
Consolidated Statements of Operations
(unaudited)

		For the nine months ended September 30,
		2007				2006
Revenues
Interest		$	7,787			$	4,149
Total revenues			7,787				4,149
Expenses
Depreciation			806				806
General and administrative			297,478				345,264
Total expenses			298,284				346,070
Loss from operations			(290,497	)			(341,921	)
Gain on sale of marketable securities			—				777
Loss from continuing operations			(290,497	)			(341,144	)
Discontinued operations:
Income from discontinued operations of residential properties before allocation to minority interest			—				12,448
Income allocated to minority interest			—				(12,324	)
Net loss attributable to Common Shareholders			(290,497	)			(341,020	)
Net loss attributable to Common Shareholders per Common Share: Basic and Diluted		$	(0.66	)		$	(0.77	)
Weighted average number of Common Shares outstanding: Basic and Diluted			442,565				442,560
Comprehensive loss:
Net loss		$	(290,497	)		$	(341,020	)
Other comprehensive loss:
Unrealized gain on marketable securities			—				—
Comprehensive loss		$	(290,497	)		$	(341,020	)

The accompanying notes are an integral part of the consolidated financial statements.

Paragon Real Estate Equity and Investment Trust and Subsidiaries
Consolidated Statements of Operations
(unaudited)

		For the three months ended September 30,
		2007				2006
Revenues
Interest		$	3,208			$	1,046
Total revenues			3,208				1,046
Expenses
Depreciation			269				269
General and administrative			90,583				84,135
Total expenses			90,852				84,404
Loss from operations			(87,644	)			(83,358	)
Gain on sale of marketable securities			—				—
Net loss attributable to Common Shareholders			(87,644	)			(83,358	)
Net loss attributable to Common Shareholders per Common Share: Basic and Diluted		$	(0.20	)		$	(0.19	)
Weighted average number of Common Shares outstanding: Basic and Diluted			442,565				442,555
Comprehensive loss:
Net loss		$	(87,644	)		$	(83,358	)
Other comprehensive loss:
Unrealized gain on marketable securities			—				—
Comprehensive loss		$	(87,644	)		$	(83,358	)

The accompanying notes are an integral part of the consolidated financial statements.

Paragon Real Estate Equity and Investment Trust and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)

		For the nine months ended September 30,
		2007				2006
Cash flows from operating activities:
Net loss		$	(290,497	)		$	(341,020	)
Adjustments to reconcile net loss to net cash used in continuing operations:
Compensation costs and trustees fees incurred through the issuance of shares			187,825				8,983
Compensation costs, trustees fees and legal costs incurred through the issuance of options			31,500				53,082
Depreciation			806				806
Income from discontinued operations, net of allocation to minority interest			—				(124	)
Gain on sale of marketable securities			—				(777	)
Net change in assets and liabilities:
Other assets, net			12,419				113,313
Accounts payable and accrued expenses			(11,678	)			(75,162	)
Net cash used in continuing operations			(69,625	)			(240,899	)
Cash flows from investing activities:
Cash proceeds from sale of marketable securities			—				1,953
Net cash from investing activities			—				1,953
Cash flows from financing activities:
Cash proceeds from issuance of Preferred C shares			200,000				125,000
Net cash from financing activities			200,000				125,000
Net increase (decrease) in cash			130,375				(113,946	)
Cash
Beginning of period			212,706				340,024
End of period		$	343,081			$	226,078

The accompanying notes are an integral part of the consolidated financial statements.

Paragon Real Estate Equity and Investment Trust and Subsidiaries

Notes to Consolidated Financial Statements
(unaudited)

Note 1 — Organization

Paragon Real Estate Equity and Investment Trust (the “Company,” “Paragon,” “we,” “our,” or “us”)
is a real estate company with its primary focus on searching for and reviewing value-added real estate deals, including land development, retail, office, industrial, hotel, and joint venture investments. The Board of Trustees intends to keep the Company currently filed with the SEC as a corporate shell that may be used in the future for real estate deals or sold to another company.

Note 2 — Basis of Presentation

Consolidated Financial Statement Presentation

We have prepared the consolidated financial statements without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, we believe that the included disclosures are adequate to make the information presented not misleading. In our opinion, all adjustments (consisting solely of normal recurring items) necessary for a fair presentation of our financial position as of September 30, 2007, the results of our operations for the nine month and three month periods ended September 30, 2007 and 2006 and of our cash flows for the nine month periods ended September 30, 2007 and 2006 have been included. The results of operations for interim periods are not necessarily indicative of the results for a full year. For further information, refer to our consolidated financial statements and footnotes included in the Annual Report on Form 10-KSB for the year ended December 31, 2006.

We report our investments using the consolidated method of accounting as we own the majority of the outstanding voting interests and can control operations of a non-active subsidiary company. In the consolidation method, the accounts of this entity are combined with our accounts. All significant intercompany transactions are eliminated in consolidation.

Going Concern

The financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the continued operations as a public company and paying liabilities in the normal course of business. The Company received $200,000 in 2006 and $200,000 in 2007 from three trustees for payment of Class C Convertible Preferred Shares, which is being used to maintain Paragon as a public shell current in its SEC filings. The Company has continued to incur net losses and at September 30, 2007 had unrestricted cash of approximately $343,000. The increase in cash during 2007 was approximately $130,000, from installments of $200,000 received from three independent trustees for the purchase of Class C Convertible Preferred Shares, offset by expenses to keep the Company operating as a public company. Our ability to continue as a going concern will be dependent upon acquiring assets to generate cash flow because we have no revenue generating assets.

During 2007 and 2006, Paragon has also been searching for and reviewing other value-added real estate deals, including land development, retail, office, industrial, hotel, and joint venture investments. Because our unrestricted cash is not sufficient to allow us to continue operations, we have been reviewing other alternatives, including selling the corporate entity and seeking additional investors. Three independent trustees signed subscription agreements to purchase 125,000 Class C Convertible Preferred Shares for an aggregate contribution of $500,000 cash to maintain the Company as a corporate shell current in its SEC filings so that it may be used in the future for real estate deals or sold

to another company. We have received $400,000 of the $500,000 cash for the Class C Convertible Preferred Shares. There can be no assurance that we will be able to close a transaction or keep the Company currently filed with the SEC. Even if our management is successful in closing a transaction, investors may not value the transaction in the same manner as we did, and investors may not value the transaction as they would value other transactions or alternatives. Failure to obtain external sources of capital and complete a transaction will materially and adversely affect the Company’s ability to continue operations.

Fair Value of Financial Instruments

Our financial statements include cash only. We do not have any cash equivalents at September 30, 2007.

Note 3 — Summary of Significant Accounting Policies

Use of Estimates in the Preparation of Financial Statements

In order to conform with generally accepted accounting principles, management, in preparation of our consolidated financial statements, is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of September 30, 2007, and the reported amounts of revenues and expenses for the nine month periods ended September 30, 2007 and 2006, and for the three month periods ended September 30, 2007 and 2006. Actual results could differ from those estimates. Significant estimates include the valuation of deferred taxes and a related allowance, and these significant estimates, as well as other estimates and assumptions, may change in the near term.

Investments in Equipment

Our investments in equipment assets were reported at the lower of cost or estimated net realizable value.

Depreciation expense was computed using the straight-line method based on the following useful lives:

		Years
Furniture, fixtures and equipment			3-7

Cash

We maintain our cash in bank accounts in amounts that may exceed federally insured limits at times.

Other Assets

As of September 30, 2007, other assets of approximately $3,400 includes $2,800 of prepaid insurance and $600 of miscellaneous accounts receivable.

Revenue Recognition

Revenues include interest earned on cash balances.

Stock Based Compensation

On January 1, 2006, the Company adopted Statement of Financial Accounting Standard No. 123 (revised 2004) (“SFAS No. 123R”), Share-Based Payment, which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the

enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. In January 2005, the SEC issued Staff Accounting Bulletin No. 107, which provides supplemental implementation guidance for SFAS No. 123R. SFAS No. 123R eliminates the ability to account for stock-based compensation transactions using the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and instead generally requires that such transactions be accounted for using a fair-value-based method. In accordance with the modified-prospective transition method, the Company’s financial statements for prior periods have not been restated to reflect the impact of SFAS No. 123R. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards.

Income Taxes

Because we have not elected to be taxed as a Real Estate Investment Trust (“REIT”) for federal income tax purposes, we account for income taxes using the liability method under which deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the period in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Although we were eligible to re-elect REIT status in 2005, we intend to take advantage of our tax loss carryforwards before qualifying to be a REIT again.

At September 30, 2007, we have net operating losses, and at December 31, 2006, we had net operating losses totaling approximately $12.4 million. While the loss created a deferred tax asset, a valuation allowance was applied against the asset because of the uncertainty of whether we will be able to use these loss carryforwards, which will expire in varying amounts through the year 2026. Pursuant to Internal Revenue Code regulations, Paragon will be limited to using approximately $1.6 million of the $12.4 million net operating losses. These same regulations also limit the amount of loss used in any one year.

We are also subject to certain state and local income, excise and franchise taxes. The provision for state and local taxes has been reflected in general and administrative expense in the consolidated statements of operations and has not been separately stated due to its insignificance.

Note 4 — Marketable Securities

As of September 30, 2007, we did not have any marketable securities. We sold our 100 common shares of Century Realty Trust in April 2006 for approximately $2,000.

We recognize gain or loss on the sale of marketable securities based upon the first-in-first-out method.

Note 5 — Equity

Effective September 29, 2006, Paragon filed articles supplementary to its declaration of trust, as amended, restated and supplemented with the State Department of Assessment and Taxation of Maryland designating 300,000 Class C Convertible Preferred Shares. Dividends for the holders of the Class C Convertible Preferred Shares are at the discretion of the trustees. The Class C Convertible Preferred Shares have voting rights equal to the number of common shares into which they are convertible. Each Class C Convertible Preferred Share is convertible into common shares by dividing by the sum of $10.00 and any accrued but unpaid dividends on the Class C Convertible Preferred Shares by the conversion price of $1.00. The Class C Convertible Preferred Shares have a liquidation preference of $10.00 per share, plus any accrued but unpaid dividends, and can be redeemed by the Board of Trustees at any time, with notice, at the same price per share.

Effective September 29, 2006, three independent trustees of Paragon signed subscription agreements to purchase 125,000 Class C Convertible Preferred Shares for an aggregate contribution of $500,000 to maintain Paragon as a corporate shell current in its SEC filings and will receive Class C Convertible Preferred Shares. The trustees paid installments of $200,000 in 2006 and $200,000 in 2007.

In addition, on September 29, 2006, James C. Mastandrea, President, Chief Executive Officer, and Chairman of the Board of Trustees of Paragon, signed a subscription agreement whereby he will purchase 44,444 restricted shares of Class C Convertible Preferred Shares. The consideration for the purchase will be Mr. Mastandrea’s services as an officer of Paragon for the period beginning September 29, 2006 and ending September 29, 2008. The Class C Convertible Preferred Shares are subject to forfeiture and are restricted from being sold by Mr. Mastandrea until the latest to occur of a public offering by Paragon sufficient to liquidate the Class C Convertible Preferred Shares, an exchange of Paragon’s existing shares for new shares, or September 29, 2008.

Each of the trustees of Paragon, namely Daryl J. Carter, John J. Dee, Daniel G. DeVos, Paul T. Lambert, James C. Mastandrea and Michael T. Oliver, signed a restricted share agreement with Paragon, dated September 29, 2006, to receive a total of 12,500 restricted Class C Convertible Preferred Shares in lieu of receiving fees in cash for service as a trustee for the two years ending September 29, 2008. The restrictions on the Class C Convertible Preferred Shares will be removed upon the latest to occur of a public offering by Paragon sufficient to liquidate the Class C Convertible Preferred Shares, an exchange of Paragon’s existing shares for new shares, or September 29, 2008.

Effective July 27, 2006, the Board of Trustees approved a reverse share split of 1-for-75 for the outstanding common shares. Shareholders approved a proposal at the June 3, 2005 annual meeting authorizing the Board, at its discretion, to determine the timing of the reverse share split and declare the split at one of four ratios. Information related to the number of common shares and the earnings per share have been restated in the accompanying financial statements and related footnotes to reflect this reverse split.

During the nine months ended September 30, 2007, no preferred shares were converted to common shares.

No options were issued or cancelled during the nine month period ended September 30, 2007.

Note 6 — Loss Per Share

Effective July 27, 2006, the Board of Trustees approved a reverse share split of 1-for-75 for the outstanding common shares. Information related to the number of common shares and the earnings per share have been restated for September 30, 2006 in the accompanying financial statements.

The Company has adopted the Statement of Financial Accounting Standards No. 128, “Earnings Per Share” for all periods presented herein. Net loss per weighted average common share outstanding—basic and diluted are computed based on the weighted average number of common shares outstanding for the period. As shown in the following table, the weighted average number of common shares outstanding for the nine months ended September 30, 2007 and September 30, 2006 were 442,565 and 442,560, respectively. Common share equivalents of 2,520,733 as of September 30, 2007 and September 30, 2006 include outstanding convertible preferred class A shares, convertible preferred class C shares, warrants, and stock options, and are not included in net loss per weighted average Common Share outstanding—diluted as they would be anti-dilutive.

		For the nine months ended September 30,
		2007				2006
Numerator
Loss from continuing operations		$	(290,497	)		$	(341,144	)
Discontinued operations:
Income from discontinued operations of residential properties before allocation to minority interest			—				12,448
Income allocated to minority interest			—				(12,324	)
Net loss attributable to Common Shareholders		$	(290,497	)		$	(341,020	)
Denominator
Weighted average Common Shares outstanding at September 30, 2007 and September 30, 2006, respectively: Basic and Diluted			442,565				442,560
Basic and Diluted EPS
Net loss from continuing operations		$	(0.66	)		$	(0.77	)
Net loss attributable to Common Shareholders: Basic and Diluted		$	(0.66	)		$	(0.77	)

Note 7 — Commitments and Contingencies

Liquidity

As of September 30, 2007, our unrestricted cash resources were approximately $343,000. Three of our independent trustees signed subscription agreements to purchase 125,000 Class C Convertible Preferred Shares for an aggregate contribution $500,000 cash. The trustees paid installments of $200,000 in 2006 and $200,000 in 2007 which is being used to maintain Paragon as a corporate shell current with its SEC filings.

We are dependent on our existing cash to meet our liquidity needs and we have reduced our day-to-day overhead expenses and material future obligations. We have reduced overhead expenses by not replacing employees who have left, reducing office space and rent, reducing use of outside consultants, negotiating discounts on prices wherever possible, and delaying or foregoing other expenses.

Paragon has been searching for and reviewing other value-added real estate deals, including land development, retail, office, industrial, hotel, and joint venture investments. Paragon has also been reviewing the sale of the corporate entity and seeking additional investors. The Board of Trustees intends to keep the Company as a corporate shell that may be used in the future for real estate deals or sold to another company. There can be no assurance that any of the alternatives will be adopted, or if adopted, will be successful.

Legal Proceedings

In the normal course of business, we may be involved in legal actions arising from the ownership and administration of our properties. In our opinion, the liabilities, if any, that may ultimately result from such legal actions are not expected to have a materially adverse effect on our consolidated financial position, operations or liquidity. We are not currently involved in any legal actions.

Note 8 — Discontinued Operations

Effective March 31, 2006, the Company transferred its 1.0% interest in Paragon Real Estate, LP, the operating partnership that owns Richton Trail, to Hampton Court Associates, the sole limited partner of Paragon Real Estate, LP.

In our financial statements prior to the transfer of our 1.0% interest as of March 31, 2006, we consolidated the revenues and expenses of Richton Trail. As of September 30, 2006, the revenues and expenses of Richton Trail are shown as discontinued operations for the nine months ended
September 30, 2006 because of the transfer of our 1.0% interest as of March 31, 2006. The following table summarizes the income from discontinued operations of Richton Trail. The nine month period ended September 30, 2006 includes the three months of discontinued operations through March 31, 2006, which was the date of the transfer.

	For the nine months
	ended September 30, 2006
Revenues		$	163,926
Operating expenses			(88,288	)
Depreciation and amortization			(23,476	)
Interest expense			(39,714	)
Income from discontinued operations		$	12,448

Note 9 — Related Party Transactions

Richton Trail Disposition and Previous Acquisition and Management Fees

As of March 31, 2006, the Company transferred its 1.0% interest in Paragon Real Estate, LP, the operating partnership that owns Richton Trail, to Hampton Court Associates, the sole limited partner of Paragon Real Estate, LP. The Company is no longer the general partner of Paragon Real Estate, LP and will not be liable for the mortgage loan secured by Richton Trail. Hampton Court Associates is a partnership controlled by James C. Mastandrea, its general partner and our Chairman, Chief Executive Officer and President. Previously, on July 1, 2003, we purchased Richton Trail from Hampton Court Associates by issuing 813,938 partnership units to Hampton Court Associates, which were redeemable after four years for cash, or at the option of the Company, for 0.305 (post-reverse split) common shares for each unit. As of March 31, 2006, when the Company transferred its 1.0% interest in Paragon Real Estate, LP, the Company cancelled the right of Hampton Court Associates to redeem the partnership units of Paragon Real Estate, LP for cash or for the Company’s common shares. In connection with the cancellation of the right to redeem the partnership units of Paragon Real Estate, LP, the Company also recorded an increase of approximately $825,000 to its additional paid in capital based on the cancellation of indebtedness to Paragon Real Estate, LP.

Mr. Mastandrea also owns two companies that provided services to Richton Trail. Mid Illinois Realty Corp. managed Richton Trail and MDC Realty Corp. was reimbursed, at cost, for Richton Trail’s payroll related costs. The related management fees included in discontinued operations for the nine month period ended September 30, 2006 were approximately $8,000. Reimbursement, at cost, for the payroll related costs paid and accrued that were included in discontinued operations for the nine month period ended September 30, 2006 was approximately $17,000.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Overview

Paragon Real Estate Equity and Investment Trust (the “Company,” “Paragon,” “we,” “our,” or “us”) is a real estate company with its primary focus on and reviewing value-added real estate deals, including land development, retail, office, industrial, hotel, and joint venture investments. Paragon has also been reviewing the possibility of selling the corporate entity or seeking additional investors.

Effective September 29, 2006, three independent members of the Board of Trustees signed subscription agreements to purchase a total of 125,000 Class C Convertible Preferred Shares for an aggregate contribution of $500,000 cash, and James C. Mastandrea, Paragon’s President, Chief Executive Officer and Chairman of the Board of Trustees, signed a similar agreement to purchase 44,444 restricted Class C Convertible Preferred Shares in exchange for his compensation for services to Paragon for the following two years ended September 29, 2008. The Company received installments of $200,000 in 2006 and $200,000 in 2007 from three trustees for payment of Class C Convertible Preferred Shares, which is to be used to maintain Paragon as a public shell current with its SEC filings. Also, each of the trustees of Paragon, namely Daryl J. Carter, John J. Dee, Daniel G. DeVos, Paul T. Lambert, James C. Mastandrea and Michael T. Oliver, signed a restricted share agreement with Paragon to receive a total of 12,500 restricted Class C Convertible Preferred Shares in lieu of receiving fees in cash for service as a trustee for the two years ending September 29, 2008. Additional information related to the Class C Convertible Preferred Shares is described in the equity note to the financial statements.

Effective July 27, 2006, the Board of Trustees approved a reverse share split of 1-for-75 for our outstanding common shares. Shareholders approved a proposal at the June 3, 2005 annual meeting authorizing the Board, at its discretion, to determine the timing of the reverse share split and declare the split at one of four ratios. Information related to the number of common shares and the earnings per share have been restated in the accompanying financial statements and related footnotes to reflect this reverse split.

Effective March 31, 2006, the Company transferred its 1.0% interest in Paragon Real Estate, LP, the operating partnership that owns Richton Trail Apartments (“Richton Trail”), to Hampton Court Associates, the sole limited partner of Paragon Real Estate, LP. The Company is no longer the general partner of Paragon Real Estate, LP and will not be liable for the mortgage loan of approximately $2.7 million secured by Richton Trail. The Company cancelled the right of Hampton Court Associates to redeem 813,938 partnership units of Paragon Real Estate, LP for cash after July 1, 2007, or at the option of the Company, for each unit to be converted into 0.0305 (post-reverse split) of the Company’s common shares. In connection with the cancellation of the right to redeem the partnership units of Paragon Real Estate, LP, the Company also recorded an increase of approximately $825,000 to its additional paid in capital based on the cancellation of indebtedness to Paragon Real Estate, LP.

During 2007 and 2006, Paragon has been searching for and reviewing other value-added real estate deals, including land development, retail, office, industrial, hotel, and joint venture investments. Because our unrestricted cash is not sufficient to allow us to continue operations, we have been reviewing other alternatives, including selling the corporate entity and seeking additional investors. The Board of Trustees intends to keep the Company currently filed with the SEC as a corporate shell that may be used in the future for real estate deals or sold to another company. There can be no assurance that we will be able to close a transaction or keep the Company currently filed with the SEC. Even if our management is successful in closing a transaction, investors may not value the transaction or the current filing status with the SEC in the same manner as we did, and investors may not value the transaction as they would value other transactions or alternatives. Failure to obtain external sources of capital will materially and adversely affect the Company’s ability to continue operations, as well as its liquidity and financial results.

Brief History

Paragon was formed on March 15, 1994 as a Maryland real estate investment trust (“REIT”). We operated as a traditional REIT by buying, selling, owning and operating commercial and residential properties through December 31, 1999. In February 2000, the Company purchased a software technology company, resulting in the Company not meeting the Internal Revenue Code qualifications to be a REIT for federal tax purposes. In 2002, the Company discontinued the operations of the technology segment and we were eligible to elect REIT status in 2005, though we intend to take advantage of our tax loss carryforwards before qualifying to be a REIT again.

Forward-Looking Information

The following is a discussion of our results of operations for the three month and nine month periods ended September 30, 2007 and 2006 and financial condition, including:

	•		Explanation of changes in the results of operations in the Consolidated Statements of Operations for the nine month period ended September 30, 2007 compared to the nine month period ended September 30, 2006.
	•		Explanation of changes in the results of operations in the Consolidated Statements of Operations for the three month period ended September 30, 2007 compared to the three month period ended September 30, 2006.
	•		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, 2007, and how we intend to generate cash for long-term capital needs.
	•		Our current income tax status.

This report on Form 10-QSB contains “forward-looking” statements for the purposes of the Securities Act of 1933 and the Securities Exchange Act of 1934 and may involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance, and achievements of the Company to be materially different from results, performance or achievements expressed or implied by such forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, there can be no assurance that these expectations will be realized. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. Factors that could cause actual results to differ materially from management’s current expectations include, but are not limited to, our failure to obtain adequate financing to continue our operations, changes in general economic conditions, changes in real estate conditions, changes in prevailing interest rates, changes in our current filing status with the SEC, the cost or general availability of equity and debt financing, failure to acquire properties in accordance with our value added strategy, unanticipated costs associated with the acquisition and integration of our acquisitions, our ability to obtain adequate insurance for terrorist acts, and potential liability under environmental or other laws. For further information, refer to our consolidated financial statements and footnotes included in the Annual Report on Form 10-KSB for the year ended December 31, 2006.

The following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein.

Results of Operations

Comparison of the Nine Month Periods Ended September 30, 2007 and 2006

Effective March 31, 2006, the Company transferred its 1.0% interest in Paragon Real Estate, LP, the operating partnership that owns Richton Trail, to Hampton Court Associates, the sole limited partner of Paragon Real Estate, LP. In our financial statements, we consolidated the revenues and expenses of Richton Trail as of September 30, 2006, which are shown as discontinued operations for the nine months ended September 30, 2006 because of the transfer of our 1.0% interest to Hampton Court Associates as of March 31, 2006.

Revenues from Operations

Interest income was approximately $8,000 for the nine month period ended September 30, 2007 and approximately $4,000 for the nine month period ended September 30, 2006. The increase is due to the increase in cash as a result of payments received from the sale of Class C Convertible Preferred Shares.

Expenses from Operations

Total expenses, comprised mostly of general and administrative expenses, decreased from approximately $346,000 for the nine month period ended September 30, 2006 to approximately $298,000 for the nine month period ended September 30, 2007, a net decrease of $48,000. This net decrease resulted from several general and administrative expenses being lower in 2007 compared to 2006 because the Company is currently filed with the SEC as a corporate shell. The most notable decreases in general and administrative expenses were in director and officer liability insurance, travel, and professional fees for legal and accounting.

Because the Company has limited unrestricted cash available, it has been reducing overhead expenses paid with cash. The $298,000 general and administrative expenses for the nine month period ended September 30, 2007 included $219,000 of non-cash charges for executive officer salary, trustee fees and professional fees paid with shares and options.

Loss from continuing operations

As a result of the above, loss from continuing operations decreased from approximately $341,000 for the nine month period ended September 30, 2006 to approximately $290,000 for the nine month period ended September 30, 2007.

Discontinued operations

Discontinued operations includes the revenues and expenses of Richton Trail, the Company’s former real estate asset. Effective March 31, 2006, the Company transferred its 1.0% interest in Paragon Real Estate, LP, the operating partnership that owns Richton Trail, to Hampton Court Associates, the sole limited partner of Paragon Real Estate, LP. The Company is no longer the general partner of Paragon Real Estate, LP and will not be liable for the mortgage loan of approximately $2.7 million secured by Richton Trail.

Income from discontinued operations of residential properties before allocation to minority interest was approximately $12,000 for the nine months ended September 30, 2006. In 2006, the operations of Richton Trail are included for only three months through March 31, 2006, which was the date of the transfer of the property to its previous owner.

Most of the income from discontinued operations is allocated to the minority interest, which owned 99.0% of the operating partnership, resulting in 1.0% of the discontinued operations remaining as part of the Company.

Net loss attributable to Common Shareholders

Based on the above, the net loss attributable to Common Shareholders decreased from approximately $341,000 for the nine month period ended September 30, 2006 to approximately $290,000 for the nine month period ended September 30, 2007.

Comparison of the Three Month Periods Ended September 30, 2007 and 2006

Revenues from Operations

Interest income was approximately $3,000 for the three month period ended September 30, 2007 and approximately $1,000 for the three month period ended September 30, 2006. The increase is due to the increase in cash as a result of payments received from the sale of Class C Convertible Preferred Shares.

Expenses from Operations

Total expenses, comprised mostly of general and administrative expenses, increased from approximately $84,000 for the three month period ended September 30, 2006 to approximately $91,000 for the three month period ended September 30, 2007, a net increase of $7,000. This net increase resulted from credits received from contractors that agreed to reduce their fees in 2006.

Because the Company has limited unrestricted cash available, it has been reducing overhead expenses paid with cash. The $91,000 general and administrative expenses for the three month period ended September 30, 2007 included $73,000 of non-cash charges for executive officer salary, trustee fees and professional fees paid with shares and options.

Loss from operations

As a result of the above, loss from operations increased from approximately $83,000 for the three month period ended September 30, 2006 to approximately $88,000 for the three month period ended September 30, 2007.

Net loss attributable to Common Shareholders

Based on the above, the net loss attributable to Common Shareholders increased from approximately $83,000 for the three month period ended September 30, 2006 to approximately $88,000 for the three month period ended September 30, 2007.

Critical Accounting Policies and Estimates

Our Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles, which require us to make certain estimates and assumptions. A summary of our significant accounting policies is provided in Note 3 to our Consolidated Financial Statements. The following section is a summary of certain aspects of those accounting policies that both require our most subjective judgment and are most important to the presentation of our financial condition and results of operations. It is possible that the use of different estimates or assumptions in making these judgments could result in materially different amounts being reported in our Consolidated Financial Statements.

Valuation Allowance of Deferred Tax Asset

We account for income taxes using the liability method under which deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the period in which the differences are expected to affect taxable income. As of September 30, 2007, we have net operating losses and at December 31, 2006, we had net operating losses totaling approximately $12.4 million. While the loss created a deferred tax asset of approximately $5.4 million, a valuation allowance of $5.4 million was applied against this asset

because of the uncertainty of whether we will be able to use these loss carryforwards, which will expire in varying amounts through the year 2026. Pursuant to Internal Revenue Code regulations, we will be limited to using approximately $1.6 million of the $12.4 million net operating losses, and these same regulations also limit the amount of loss used in any one year.

Liquidity and Capital Resources

Historically, the Company has used cash provided by operations, equity transactions, and borrowings from affiliates and lending institutions to fund operating expenses, satisfy its debt service obligations and fund distributions to shareholders. Currently, our unrestricted cash is not sufficient to allow us to continue operations and we have been reviewing alternatives, including value-added real estate deals for land development, retail, office, industrial, hotel and joint venture investments, as well as reverse merging with a private company, selling the corporate entity, and seeking additional investors. The Company received installments of $200,000 in 2006 and $200,000 in 2007 from three trustees for payment of Class C Convertible Preferred Shares, which is to be used to maintain Paragon as a public shell current in its SEC filings. The Board of Trustees intends to keep the Company as a corporate shell that may be used in the future for real estate deals or sold to another company. However, there can be no assurances that the Company will be able to maintain its current filing status or successfully close a future transaction.

Cash Flows

As of September 30, 2007, our unrestricted cash resources were approximately $343,000. We are dependent on our existing cash resources to meet our liquidity needs because cash from operations is not sufficient to meet our operating requirements.

During the nine month period ended September 30, 2007, approximately $70,000 of cash was used for our continuing operations. The cash used for continuing operations was offset by the proceeds from the issuance of the Class C Convertible Preferred Shares of $200,000. There were no additions to assets of the Company. As a result, our cash balance increased by approximately $130,000 from approximately $213,000 at December 31, 2006 to approximately $343,000 at September 30, 2007.

Future Obligations

We are dependent on our existing cash to meet our liquidity needs and have reduced our day-to-day overhead expenses and material future obligations. We have reduced overhead expenses by not replacing employees who have left, reducing office space and rent, reducing use of outside consultants, negotiating discounts on prices wherever possible, and delaying or foregoing other expenses.

Long Term Liquidity and Operating Strategies

Our unrestricted cash of $343,000 is sufficient to meet only the Company’s current liabilities. Our ability to continue as a going concern will be dependent upon our acquiring assets to generate cash flow for the Company. During 2007 and 2006, Paragon has been searching for and reviewing value-added real estate deals, including land development, retail, office, industrial, hotel, and joint venture investments. Paragon has also been reviewing other alternatives, including selling the corporate entity and seeking additional investors. During 2006 and 2007, the Company received installments of $400,000 from three trustees for payment of Class C Convertible Preferred Shares.

Current Tax Status

At September 30, 2007, we have a net operating loss, and at December 31, 2006, we had net operating losses totaling approximately $12.4 million. While the loss created a deferred tax asset, a valuation allowance was applied against the asset because of the uncertainty of whether we will be able to use

these loss carryforwards, which will expire in varying amounts through the year 2026. Pursuant to Internal Revenue Code regulations, we will be limited to using approximately $1.6 million of the $12.4 million net operating losses, and these same regulations also limit the amount of loss used in any one year.

We, and certain of our subsidiaries, are also subject to certain state and local income, excise and franchise taxes. The provision for state and local taxes has been reflected in general and administrative expense in the consolidated statements of operations and has not been separately stated due to its insignificance.

Interest Rates and Inflation

Because Paragon is a corporate shell without debt, it is not presently affected by interest rates. During 2007 and 2006, Paragon has been searching for and reviewing other value-added real estate deals, including land development, retail, office, industrial, hotel, and joint venture investments, as well as reviewing other alternatives, including a reverse merger with a private company, selling the corporate entity, and seeking additional investors.

We were not significantly affected by inflation during the periods presented in this report due primarily to the relative low nationwide inflation rates.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have, or are likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

ITEM 3. CONTROLS AND PROCEDURES

As of September 30, 2007, the date of this report, James C. Mastandrea, our Chairman of the Board, Chief Executive Officer and President, and John J. Dee, our Chief Financial Officer and Senior Vice President, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934. Based upon this evaluation, Messrs. Mastandrea and Dee concluded that, as of September 30, 2007, our disclosure controls and procedures are effective to ensure that material information relating to the Company and our consolidated subsidiaries is recorded, processed, summarized and reported in a timely manner.

Further, there were no significant changes in the internal controls or, to our knowledge, in other factors that could significantly affect such controls subsequent to September 30, 2007.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the normal course of business, we may be involved in legal actions arising from the ownership and administration of our properties. In our opinion, the liabilities, if any, that may ultimately result from such legal actions are not expected to have a materially adverse effect on our consolidated financial position, operations or liquidity. We are not currently involved in any legal actions.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

Exhibits

Exhibit Number		Exhibit Description
31.1		Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002 — Chief Executive Officer
31.2		Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002 — Chief Financial Officer
32.1		CEO/CFO Certification under Section 906 of Sarbanes-Oxley Act of 2002.

SIGNATURES

In accordance with the requirements of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		Paragon real estate equity and investment trust
		By:		/s/ James C. Mastandrea
Date: November 12, 2007				James C. Mastandrea
				Chief Executive Officer
		Paragon real estate equity and investment trust
		By:		/s/ John J. Dee
Date: November 12, 2007				John J. Dee
				Chief Financial Officer