##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 o
    
    TRANSITION REPORT PERSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 Commission File Number: 0-25074
 PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
  Maryland
(State or other jurisdiction of incorporation)1240 Huron Road, Cleveland, OH
(Address of principal executive offices)
    
    39-6594066
(I.R.S. Employer Identification Number)44115
(Zip code)
  
   o þ
 o þ
 þ o
 þ
  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




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##### 



PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
2008 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
 PagePART IItem 1
    
    Business
    
    
    2Item 1A
    
    Risk Factors
    
    
    3Item 2
    
    Properties
    
    
    4Item 3
    
    Legal Proceedings
    
    
    4Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    4PART IIItem 5
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    4Item 6
    
    Selected Financial Data
    
    
    6Item 7
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    6Item 8
    
    Financial Statements and Supplementary Data
    
    
    11Item 9
    
    Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    11Item 9A(T)
    
    Controls and Procedures
    
    
    11Item 9B
    
    Other Information
    
    
    12PART IIIItem 10
    
    Directors, Executive Officers and Corporate Governance
    
    
    13Item 11
    
    Executive Compensation
    
    
    16Item 12
    
    Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    18Item 13
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    21Item 14
    
    Principal Accounting Fees and Services
    
    
    21PART IVItem 15
    
    Exhibits, Financial Statement Schedules
    
    
    22SIGNATURES
    
    
    
    
    25EX-31.1EX-31.2EX-32.1
  1




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##### Table of Contents



PART I
 
 Item 1. Business.
 Company Overview
 
    Real Estate
  Real Estate Tenants
  2




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##### Table of Contents



Competition
  Employees
  
 Item 1A. Risk Factors.
  
    
    worsening of national economic conditions, including continuation of
lack of liquidity in the capital markets and more stringent lending requirements by
financial institutions;
    
    depressed values for commercial real estate properties and companies;
    
    changes in local market conditions due to changes in general or local
economic conditions and neighborhood characteristics;
    
    changes in interest rates and in the availability, cost and terms of
mortgage funds;
    
    impact of present or future environmental legislation and compliance
with environmental laws;
    
    ongoing need for capital improvements, particularly in older properties;
    
    more attractive lease incentives offered by competitors in similar
markets;
    
    increased market demand for newer properties;
    
    changes in real estate tax rates and other operating expenses;
    
    decreases in market prices of the shares of publicly traded real estate
companies;
    
    adverse changes in governmental rules and fiscal policies;
    
    adverse changes in zoning laws; and
    
    other factors which are beyond our control.
 3




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##### Table of Contents




    
    we have no operating assets;
    
    our cash resources are limited;
    
    we have a history of losses;
    
    we have not raised funds through a public equity offering;
    
    our trustees control a significant percentage of our voting shares;
    
    shareholders could experience possible future dilution through the
issuance of additional shares;
    
    we are dependent on a small number of key senior professionals who are
part-time employees; and
    
    we currently do not plan to distribute dividends to the holders of our shares.
 
 Item 2. Properties.
  Insurance
  Mortgage Loans
  
 Item 3. Legal Proceedings.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 PART II
 
 Item 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities.
  4




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##### Table of Contents



High
    
    Low20084th Quarter
    
    $
    0.05
    
    
    $
    0.033rd Quarter
    
    $
    0.05
    
    
    $
    0.052nd Quarter
    
    $
    0.05
    
    
    $
    0.051st Quarter
    
    $
    0.26
    
    
    $
    0.0520074th Quarter
    
    $
    0.45
    
    
    $
    0.223rd Quarter
    
    $
    0.51
    
    
    $
    0.292nd Quarter
    
    $
    0.51
    
    
    $
    0.301st Quarter
    
    $
    0.53
    
    
    $
    0.38
  Dividend Policy
  Preferred Share Conversions
  Issuer Purchases of Equity Securities
  5




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##### Table of Contents



Item 6. Selected Financial Data.
  
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Cautionary Statements Regarding Forward-Looking Statements
  
    
    worsening of national economic conditions, including continuation of
lack of liquidity in the capital markets and more stringent lending requirements by
financial institutions;
    
    depressed values for commercial real estate properties and companies;
    
    changes in local market conditions due to changes in general or local
economic conditions and neighborhood characteristics;
    
    changes in interest rates and in the availability, cost and terms of
mortgage funds;
    
    impact of present or future environmental legislation and compliance
with environmental laws;
    
    ongoing need for capital improvements, particularly in older properties;
    
    more attractive lease incentives offered by competitors in similar
markets;
    
    increased market demand for newer properties;
    
    changes in real estate tax rates and other operating expenses;
    
    decreases in market prices of the shares of publicly traded real estate
companies;
    
    adverse changes in governmental rules and fiscal policies;
    
    adverse changes in zoning laws; and
    
    other factors which are beyond our control.
  
    
    we have no operating assets;
    
    our cash resources are limited;
    
    we have a history of losses;
    
    we have not raised funds through a public equity offering;
 6




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##### Table of Contents




    
    our trustees control a significant percentage of our voting shares;
    
    shareholders could experience possible future dilution through the
issuance of additional shares;
    
    we are dependent on a small number of key senior professionals who are
part-time employees; and
    
    we currently do not plan to distribute dividends to the holders of our shares.
 Overview
   Brief History
  Recent Developments in 2008 and Executive Overview
  Results of Operations
  
    
    Explanation of changes in the results of operations in the Consolidated Statements
of Operations for the year ended December 31, 2008 compared to the year ended December 31, 2007.
 7




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##### Table of Contents




    
    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 year ended December 31, 2008, and how
we intend to generate cash for long-term capital needs.
    
    Our current income tax status.
 Comparison of the years ended December 31, 2008 and 2007
 Revenues from Operations
  Expenses from Operations
   Loss from operations
  Gain on sale of marketable securities and impairment loss on marketable securities
   Net loss attributable to Common Shareholders
  8




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##### Table of Contents



Liquidity and Capital Resources
  Cash Flows
    Future Obligations
  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.
  9




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##### Table of Contents



Current Tax Status
   Interest Rates and Inflation
   Off-Balance Sheet Arrangements
  Application of Critical Accounting Estimates
  Valuation Allowance of Deferred Tax Asset
  10




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##### Table of Contents



Fair Value of Financial Instruments
     
 Item 8. Financial Statements and Supplementary Data
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A(T). Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  11




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Managements Report on Internal Control Over Financial Reporting
   Attestation Report of Independent Registered Public Accounting Firm
  
 Item 9B. Other Information.
  12




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##### Table of Contents



PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance.
  ExpirationName
    
    Age
    
    Position
    
    of Term(1)James C. Mastandrea
    
    
    65
    
    
    President, Chief
Executive Officer
and Chairman of
Board of Trustees
    
    2006 (1)John J. Dee
    
    
    57
    
    
    Senior Vice
President, Chief
Financial Officer
and Trustee
    
    2007 (1)Daryl J. Carter
    
    
    53
    
    
    Trustee
    
    2008 (1)Daniel G. DeVos
    
    
    51
    
    
    Trustee
    
    2006 (1)Paul T. Lambert
    
    
    56
    
    
    Trustee
    
    2007 (1)Michael T. Oliver
    
    
    65
    
    
    Trustee
    
    2008 (1)
 
 (1)
    
    Because the trustees own a significant number of the voting shares and the
Company is reducing expenses to conserve its limited cash, an annual meeting was not
held in 2008 or 2007. The trustees will continue to serve until an election of
trustees is held, though no election is currently planned. Board of Trustees and Executive Officers
  James C. Mastandrea
 13




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##### Table of Contents



John J. Dee
 Daryl J. Carter
 Daniel G. DeVos
 Paul T. Lambert
 Michael T. Oliver
 14




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Code of Ethics
  Section 16(a) Beneficial Ownership Reporting Compliance
  15




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##### Table of Contents



Item 11. Executive Compensation.
  Outstanding Equity Awards at Fiscal Year End
  Option Awards
    
    Stock AwardsEquity IncentivePlan Awards:Market
    
    Number ofNumber of
    
    Number of
    
    
    
    
    
    
    
    Number of
    
    Value of
    
    UnearnedSecurities
    
    Securities
    
    
    
    
    
    
    
    Shares or
    
    Shares or
    
    Shares, UnitsUnderlying
    
    Underlying
    
    
    
    
    
    
    
    Units of
    
    Units of
    
    or OtherUnexercised
    
    Unexercised
    
    Option
    
    Option
    
    Stock That
    
    Stock That
    
    Rights ThatOptions
    
    Options
    
    Exercise
    
    Expiration
    
    Have Not
    
    Have Not
    
    Have NotName
    
    Exercisable
    
    Unexercisable
    
    Price
    
    Date
    
    Vested
    
    Vested
    
    VestedJames
C. Mastandrea
Chief Executive
Officer,
President and Chairman
    
    2,000 (1)
    
    
    
    $
    20.25
    
    
    1/2/09
    
    4,000 (2)
    
    $
    120.00
    
    
    
    (3
    )
 
 (1)
    
    The options are exercisable beginning January 2, 2007 and expired on January 2, 2009.(2)
    
    Represents restricted common shares issued January 2, 2004. Half of the restricted shares
vest in five years or earlier if Paragons share price rises to $75.00 per share. The
remaining half vests when funds from operations has doubled or when Paragons share price is
50% higher compared to the average trading price for the five days preceding the grant date.(3)
    
    On June 30, 2003, our shareholders approved the issuance of additional common shares to
Paragon Real Estate Development, LLC for James C. Mastandrea, our Chief Executive Officer and
President, and John J. Dee, our Chief Financial Officer and Senior Vice President, to
encourage them to substantially grow the asset base, net operating income, funds from
operations, net value, and share value of Paragon. On September 29, 2006, Paragon amended
this agreement to add each of the trustees to the agreement so that if a trustee brings a new
deal to Paragon, he would receive additional common shares of Paragon in accordance with a
formula in the agreement. We will issue restricted common shares if they locate and close on
our behalf future acquisition, development or re-development transactions. Any of these
transactions would be subject to approval by the members of our board of trustees who are not
receiving the additional common shares. The maximum number of common shares they may receive
under the additional contribution agreement is limited to a total value of $26 million based
on the average closing price of the common shares for 30 calendar days preceding the closing
of any acquisition. The common shares will be restricted until we achieve the five-year pro
forma income target for the acquisition, as approved by the board of trustees, and an increase
of 5% in Paragons net operating income and funds from operations. The restricted shares would
vest immediately upon any shift in ownership, as defined in the agreement. Employment Agreements
  16




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##### Table of Contents




    
    the date our gross assets exceed $50.0 million, or
    
    50% of the restricted shares on March 4, 2004; 25% of the shares on
March 4, 2005, and the remaining 25% of the shares on March 4, 2006.
  Compensation of Trustees
    17




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##### Table of Contents



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
   Total Common SharesCommon Shares (2)
    

Preferred A Shares (3)
    

Preferred C Shares (4)
    

and Preferred Shares (5)Name and Address (1)
    
    Number
    

Percent (6)
    
    Number
    

Percent (6)
    
    Number
    

Percent (6)
    
    Number
    

Percent (6)James C. Mastandrea
    
    
    174,163
    (7)
    
    
    43.1
    %
    
    
    161,410
    (15)
    
    
    58.4
    %
    
    
    56,944
    
    
    
    23.3
    %
    
    
    792,846
    (17)
    
    
    77.5
    %Paragon Real Estate
Development, LLC
    
    
    163,117
    (8)
    
    
    40.3
    %
    
    
    161,410
    (15)
    
    
    58.4
    %
    
    
    
    
    
    
    
    
    
    
    212,359
    (18)
    
    
    46.8
    %Paul T. Lambert
    
    
    34,448
    (9)
    
    
    8.5
    %
    
    
    
    
    
    
    
    
    
    
    62,500
    
    
    
    25.6
    %
    
    
    659,448
    (19)
    
    
    64.0
    %John J. Dee
    
    
    4,000
    (10)
    
    
    1.0
    %
    
    
    
    (16)
    
    
    
    
    
    
    12,500
    
    
    
    5.1
    %
    
    
    129,000
    (20)
    
    
    24.4
    %Daryl J. Carter
    
    
    3,000
    (11)
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    37,500
    
    
    
    15.3
    %
    
    
    378,000
    (21)
    
    
    48.4
    %Daniel G. DeVos
    
    
    3,000
    (11)
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    62,500
    
    
    
    25.6
    %
    
    
    628,000
    (22)
    
    
    61.0
    %Michael T. Oliver
    
    
    1,667
    (12)
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    12,500
    
    
    
    5.1
    %
    
    
    126,667
    (23)
    
    
    23.9
    %All trustees and
current executive
officers as a group
(13)
    
    
    220,278
    (14)
    
    
    53.9
    %
    
    
    161,410
    
    
    
    58.4
    %
    
    
    244,444
    
    
    
    100.0
    %
    
    
    2,713,961
    (24)
    
    
    93.5
    %
 
 *
    
    Indicates less than one percent(1)
    
    Unless otherwise indicated, the address of all beneficial owners is our corporate headquarters at
1240 Huron Road, Cleveland, Ohio 44115.(2)
    
    Percentages based on 404,267 common shares outstanding, not including 38,130 shares held in
treasury. For each individual trustee and executive officer, also includes common shares he has
the right
to acquire through share options that are currently exercisable as of March 5, 2009. The total
options for all named persons is 4,667.(3)
    
    Percentages based on 276,255 preferred A shares outstanding as of March 5, 2009, which convert to
54,523 common shares as follows: 161,410 preferred A shares are each convertible into 0.305 common
shares and 114,845 preferred A shares are each convertible into 0.046 common shares.(4)
    
    Percentages based on 244,444 preferred C shares outstanding as of March 5, 2009, which convert to
2,444,440 common shares. Each preferred C share is convertible into 10 common shares.(5)
    
    Percentages based on 404,267 common shares outstanding, not including 38,130 shares held in
treasury, and 244,444 preferred C shares which convert to 2,444,440 common shares. For each
individual trustee and executive officer, also includes common shares he has the right to acquire
through share options that are currently exercisable as of March 5, 2009. Mr. Mastandreas
percentage is calculated using a denominator that includes (i) 404,267 common shares, not
including 38,130 shares held in treasury; (ii) 56,944 preferred C shares that convert to 569,440
common shares; and (iii) 161,410 preferred A shares, which convert to 49,243 common shares.(6)
    
    The ownership percents total more than 100% due to more than one person or entity being considered
the beneficial owner of the same shares, in accordance with SEC regulations for this table.(7)
    
    Includes: (i) 6,667 restricted common shares issuable to an independent third party which Mr.
Mastandrea has the right to vote; (ii) 163,117 common shares held by Paragon Real Estate
Development, LLC, of which Mr. Mastandrea is the managing member; (iii) 4,000 restricted common
shares; and (v) 379 common shares. 18




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##### Table of Contents



(8)
    
    Mr. Mastandrea is the managing member of Paragon Real Estate Development, LLC and these shares are
also included in Mr. Mastandreas common shares.(9)
    
    Includes: (i) 1,666 options; (ii) 5,930 common shares held by Lambert Equities II, LLC, of which
Mr. Lambert is the controlling majority member and sole manager; and (iii) 26,852 common shares.(10)
    
    Includes: (i) 4,000 restricted common shares. Does not include 163,117 common shares held by
Paragon Real Estate Development, LLC, of which Mr. Dee is a member.(11)
    
    Includes: (i) 2,000 common shares and (ii) 1,000 options.(12)
    
    Includes (i) 667 common shares and (ii) 1,000 options.(13)
    
    Includes six named persons.(14)
    
    Includes: (i) 6,667 restricted common shares issuable to an independent third party which Mr.
Mastandrea has the right to vote; (ii) 163,117 common shares held by Paragon Real Estate
Development, LLC, of which Mr. Mastandrea is the managing member; (iii) 8,000 restricted common
shares; (iv) 4,667 options; and (v) 37,827 common shares.(15)
    
    Represents shares held by Paragon Real Estate Development, LLC, of which Mr. Mastandrea is the
managing member. Each preferred A share is convertible into 0.305 common shares.(16)
    
    Does not include 161,410 preferred A shares held by Paragon Real Estate Development, LLC, of which
Mr. Dee is a member.(17)
    
    Includes: (i) 6,667 restricted common shares issuable to an independent third party which Mr.
Mastandrea has the right to vote; (ii) 163,117 common shares held by Paragon Real Estate
Development, LLC, of which Mr. Mastandrea is the managing member; (iii) 4,000 restricted common
shares; (iv) 49,243 common shares issuable upon conversion of 161,410 preferred A shares held by
Paragon Real Estate Development, LLC; (v) 569,440 common shares issuable upon conversion of 56,944
preferred C shares; and (vi) 379 common shares.(18)
    
    Includes (i) 163,116 common shares and (ii) 49,243 common shares issuable upon conversion of
161,410 preferred A shares. These shares are also included in Mr. Mastandreas total shares.(19)
    
    Includes: (i) 1,666 options; (ii) 625,000 common shares issuable upon conversion of 62,500
preferred C shares; and (iii) 32,782 common shares.(20)
    
    Includes: (i) 4,000 restricted common shares; and (ii) 125,000 common shares issuable upon
conversion of 12,500 preferred C shares. Does not include 163,117 common shares or 161,410
preferred A shares held by Paragon Real Estate Development, LLC, of which Mr. Dee is a member.(21)
    
    Includes: (i) 2,000 common shares; (ii) 1,000 options; and (iii) 375,000 common shares issuable
upon conversion of 37,500 preferred C shares.(22)
    
    Includes: (i) 2,000 common shares; (ii) 1,000 options; and (iii) 625,000 common shares issuable
upon conversion of 62,500 preferred C shares.(23)
    
    Includes: (i) 667 common shares; (ii) 1,000 options; and (iii) 125,000 common shares issuable upon
conversion of 12,500 preferred C shares.(24)
    
    Includes: (i) 6,667 restricted common shares issuable to an independent third party which
Mr. Mastandrea has the right to vote; (ii) 163,117 common shares held by Paragon Real Estate
Development, LLC, of which Mr. Mastandrea is the managing member; (iii) 8,000 restricted common
shares; (iv) 4,667 options; (v) 49,243 common shares issuable upon conversion of 161,410 preferred
A shares held by Paragon Real Estate Development, LLC; (vi) 2,444,440 common shares issuable upon
conversion of 244,444 preferred C shares; and (vii) 37,827 common shares. 19




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Equity Compensation Plan Information
 Number of securitiesNumber of
    
    Weighted-
    
    remaining availablesecurities to be
    
    average exercise
    
    for future issuanceissued upon
    
    price of
    
    under equityexercise of
    
    outstanding
    
    compensation plansoutstanding
    
    options,
    
    (excluding securitiesEquity Compensation Plans
    
    options, warrants
    
    warrants and
    
    reflected in columnApproved/ Not Approved by Security
    
    and rights
    
    rights
    
    (a))Holders
    
    (a)
    
    (b)
    
    (c)Equity compensation plans
approved by security holders2004 Share Option PlanRestricted common shares
    
    
    17,333
    
    
    $
    Options for common shares
    
    
    8,667
    
    
    $
    18.0026,000
    
    
    $
    6.00
    
    
    
    20,666Equity compensation plans not
approved by security holdersCommon shares
    
    
    6,667
    
    
    $
    Warrants for common shares
    
    
    11,667
    
    
    $
    7.5018,334
    
    
    $
    4.77
    
    
    
    Total all plans  Common shares
    
    
    44,334
    
    
    $
    5.49
    
    
    
    20,666
  20




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##### Table of Contents



Item 13. Certain Relationships and Related Transactions, and Director Independence
 Relationships and Related Transactions
  Trustee Independence
  
 Item 14. Principal Accounting Fees and Services.
 
 % Approvedby AuditCategory
    
    Year
    
    Fees
    
    CommitteeAudit Fees (1)
    
    
    2008
    
    
    $
    35,300
    
    
    
    100
    %2007
    
    
    $
    33,700
    
    
    
    100
    %Audit-Related Fees
    
    
    2008
    
    
    $
    2007
    
    
    $
    Tax Fees (2)
    
    
    2008
    
    
    $
    2,765
    
    
    
    100
    %2007
    
    
    $
    3,600
    
    
    
    100
    %All Other Fees
    
    
    2008
    
    
    $
    2007
    
    
    $
    
 
 (1)
    
    Audit fees include audits and reviews of required SEC filings and proposed
acquisitions of properties.(2)
    
    Tax fees include the preparation of the Federal tax return. Policy for Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
 
 21




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##### Table of Contents



PART IV
 
 Item 15. Exhibits, Financial Statement Schedules.
 ExhibitNumber
    
    Exhibit Description2.1
    
    Asset Contribution Agreement among Hampton Court Associates, L.P., Paragon Real Estate,
L.P., and the Company (filed as Exhibit 2.1 with the Companys Current Report on Form 8-K
filed on March 5, 2003 and incorporated herein by reference)2.2
    
    Additional Contribution Agreement between the Company and Paragon Real Estate
Development, LLC (filed as Exhibit 2.7 with the Companys Current Report on Form 8-K
filed on March 5, 2003 and incorporated herein by reference)2.3
    
    Amendment to Additional Contribution Agreement between the Company, the Board of Trustees
and each Trustee individually dated September 29, 2006. (filed as Exhibit 2.1 with the
Companys Current Report on Form 8-K filed on October 3, 2006 and incorporated herein by
reference)2.4
    
    Modification Agreement between the Company and Paragon Real Estate Development, LLC
(filed as Exhibit 2.8 with the Companys Current Report on Form 8-K filed on March 5,
2003 and incorporated herein by reference)2.5
    
    Amendment No. 1 to the Agreement of Limited Partnership of Wellington Properties
Investments, L.P. among the Company and the Limited Partners named therein (filed as
Exhibit 2.9 with the Companys Current Report on Form 8-K filed on March 5, 2003 and
incorporated herein by reference)2.6
    
    Closing Agreement dated June 27, 2003 among the Company, Hampton Court Associates, L.P.,
Hoyt Properties, Inc. and WLPT Funding LLC (filed as Exhibit 2.5 with the Companys
Current Report on Form 8-K filed on July 15, 2003 and incorporated herein by reference)3.1
    
    Articles of Amendment and Restatement of the Declaration of Trust of the Company (filed
as Exhibit 3.1 with the Companys Registration Statement on Form SB-2/A filed on October
14, 1999 and incorporated herein by reference)3.2
    
    Articles of Amendment of Declaration of Trust of the Company (filed as Exhibit 2.3 with
the Companys Current Report on Form 8-K filed on July 15, 2003 and incorporated herein
by reference)3.3
    
    Articles Supplementary to the Declaration of Trust of the Company (filed as Exhibit 3.1
with the Companys Current Report on Form 8-K filed on July 23, 2004 and incorporated
herein by reference)3.4
    
    Articles of Amendment of Declaration of Trust of the Company (filed as Exhibit 3.1 with
the Companys Current Report on Form 8-K filed on July 17, 2006 and incorporated herein
by reference)3.5
    
    Articles Supplementary to the Declaration of Trust of the Company (filed as Exhibit 3.1
with the Companys Current Report on Form 8-K filed on October 3, 2006 and incorporated
herein by reference)
 22




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description3.6
    
    Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 with the Companys
Registration Statement on Form SB-2/A filed on October 14, 1999 and incorporated herein
by reference)3.7
    
    Amendment No. 1 to the Amended and Restated Bylaws of the Company (filed as Exhibit 3.4
with the Companys Quarterly Report on Form 10-QSB for the quarter ended June 30, 2003
and incorporated herein by reference)3.8
    
    Amendment No. 2 to the Amended and Restated Bylaws of the Company (filed as Exhibit 3.2
with the Companys Current Report on Form 8-K filed on October 19, 2005 and incorporated
herein by reference)4.1
    
    Voting and Stock Restriction Agreement among the Company, Steven B. Hoyt, Duane H. Lund,
Paul T. Lambert, John J. Dee, James C. Mastandrea, and Paragon Real Estate Development,
LLC (filed as Exhibit 2.2 with the Companys Current Report on Form 8-K filed on March 5,
2003 and incorporated herein by reference)10.1
    
    Employment Agreement of James C. Mastandrea (filed as Exhibit 2.3 with the Companys
Current Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference)
(1)10.2
    
    Employment Agreement of John J. Dee (filed as Exhibit 2.4 with the Companys Current
Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference)
(1)10.3
    
    Restricted Share Agreement of James C. Mastandrea (filed as Exhibit 2.5 with the
Companys Current Report on Form 8-K filed on March 5, 2003 and incorporated herein by
reference) (1)10.4
    
    Restricted Share Agreement of John J. Dee (filed as Exhibit 2.6 with the Companys
Current Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference)
(1)10.5
    
    Form of Restricted Share Agreement for Trustees dated September 26, 2006 (filed as
Exhibit 10.3 with the Companys Current Report on Form 8-K filed on October 3, 2006 and
incorporated herein by reference) (1)10.6
    
    Agreement of Limited Partnership of Paragon Real Estate, L.P. (filed as Exhibit 2.2 with
the Companys Current Report on Form 8-K filed on July 15, 2003 and incorporated herein
by reference)10.7
    
    2004 Share Option Plan of the Company (filed as Exhibit 4.1 with the Companys
Registration Statement on Form S-8 filed on July 23, 2004 and incorporated herein by
reference)10.8
    
    Stock Subscription Agreement between James C. Mastandrea and the Company dated as of
September 29, 2006 (filed as Exhibit 10.2 with the Companys Current Report on Form 8-K
filed on October 3, 2006 and incorporated herein by reference)10.9
    
    Form of Stock Subscription Agreement between Investors and the Company dated as of
September 29, 2006 (filed as Exhibit 10.1 with the Companys Current Report on Form 8-K
filed on October 3, 2006 and incorporated herein by reference)
 23




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description10.10
    
    Modification Agreement between the Company and John J. Dee dated April 3, 2006 (filed as
Exhibit 10.2 with the Companys Current Report on Form 8-K filed on April 6, 2006 and
incorporated herein by reference)10.11
    
    Modification Agreement between the Company and James C. Mastandrea dated April 3, 2006
(filed as Exhibit 10.1 with the Companys Current Report on Form 8-K filed on April 6,
2006 and incorporated herein by reference)10.12
    
    Form of First Amendment to Restricted Share Agreement for Trustees dated September 25,
2008 (filed as Exhibit 10.1 with the Companys Quarterly Report on Form 10-Q for the
quarter ended September 30, 2008 and incorporated herein by reference)10.13
    
    First Amendment to Stock Subscription Agreement between James C. Mastandrea and the
Company dated September 25, 2008 (filed as Exhibit 10.2 with the Companys Quarterly
Report on Form 10-Q for the quarter ended September 30, 2008 and incorporated herein by
reference)14
    
    Code of Conduct and Ethics (filed as Exhibit 14 with the Companys Annual Report on
Form 10-KSB for the year ended December 31, 2003 and incorporated herein by reference)31.1
    
    Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002  Chief Executive
Officer (2)31.2
    
    Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002  Chief Financial
Officer (2)32.1
    
    CEO/CFO Certification under Section 906 of Sarbanes-Oxley Act of 2002 (2)
 
 (1)
    
    Indicates a management contract or compensatory plan or arrangement(2)
    
    Filed or furnished herewith 24




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##### Table of Contents



SIGNATURES
  Paragon real estate equity and investment trustBy:
    /s/ James C. MastandreaDate: March 5, 2009
    
    James C. MastandreaChief Executive OfficerParagon real estate equity and investment trustBy:
    /s/ John J. DeeDate: March 5, 2009
    
    John J. DeeChief Financial Officer   PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
 Signature
    
    Title
    
    Date/s/ James C. Mastandrea

James C. Mastandrea
    
    Trustee, Chief Executive Officer and
President
    
    March 5, 2009/s/ John J. Dee

John J. Dee
    
    Trustee, Senior Vice President and
Chief Financial Officer
    
    March 5, 2009/s/ Daryl J. Carter

Daryl J. Carter
    
    Trustee
    
    March 5, 2009/s/ Daniel G. DeVos

Daniel G. DeVos
    
    Trustee
    
    March 5, 2009/s/ Paul T. Lambert

Paul T. Lambert
    
    Trustee
    
    March 5, 2009/s/ Michael T. Oliver

Michael T. Oliver
    
    Trustee
    
    March 5, 2009
 25




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##### Table of Contents



PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2008 and December 31, 2007
    
    
    F-3Consolidated Statements of Operations  Years ended
December 31, 2008 and December 31, 2007
    
    
    F-4Consolidated Statements of Shareholders Equity  Years ended
December 31, 2008 and December 31, 2007
    
    
    F-5Consolidated Statements of Cash Flows  Years ended
December 31, 2008 and December 31, 2007
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7




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##### Table of Contents



F-2




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##### Table of Contents



Paragon Real Estate Equity and Investment Trust and Subsidiary
Consolidated Balance Sheets
December 31, 2008 and December 31, 2007
 December 31,
    
    December 31,2008
    
    2007AssetsInvestments in equipment:Furniture, fixtures and equipment
    
    $
    5,370
    
    
    $
    5,370Accumulated depreciation
    
    
    (4,257
    )
    
    
    (3,183
    )Net investments in equipment
    
    
    1,113
    
    
    
    2,187Cash
    
    
    182,373
    
    
    
    421,196Marketable securities
    
    
    111,191
    
    
    
    Accounts receivable
    
    
    
    
    
    
    551Other assets
    
    
    9,343
    
    
    
    13,080Total Assets
    
    $
    304,020
    
    
    $
    437,014Liabilities and Shareholders EquityLiabilities:Accounts payable and accrued expenses
    
    
    6,959
    
    
    
    14,025Total liabilities
    
    
    6,959
    
    
    
    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 December
31, 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
December 31, 2008 and December 31, 2007,
respectively
    
    
    4,424
    
    
    
    4,424Additional paid-in capital
    
    
    28,146,404
    
    
    
    27,958,838Accumulated deficit
    
    
    (27,021,670
    )
    
    
    (26,744,762
    )Accumulated other comprehensive income,
net unrealized loss on marketable
securities
    
    
    (36,569
    )
    
    
    Treasury stock, at cost, 38,130 shares
    
    
    (800,735
    )
    
    
    (800,735
    )Total shareholders equity
    
    
    297,061
    
    
    
    422,989Total Liabilities and Shareholders Equity
    
    $
    304,020
    
    
    $
    437,014
  F-3




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##### Table of Contents



Paragon Real Estate Equity and Investment Trust and Subsidiary
Consolidated Statements of Operations
 For the year ended December 31,2008
    
    2007RevenuesInterest/dividend income
    
    $
    10,080
    
    
    $
    10,252Other income
    
    
    12,016
    
    
    
    Total revenues
    
    
    22,096
    
    
    
    10,252ExpensesDepreciation and amortization
    
    
    1,074
    
    
    
    1,074General and administrative
    
    
    269,568
    
    
    
    372,170Total expenses
    
    
    270,642
    
    
    
    373,244Loss from operations
    
    
    (248,546
    )
    
    
    (362,992
    )Gain on sale of marketable securities
    
    
    4,253
    
    
    
    Impairment loss on marketable securities
    
    
    (32,615
    )
    
    
    Net loss attributable to Common Shareholders
    
    
    (276,908
    )
    
    
    (362,992
    )Net loss attributable to Common Shareholders per
Common Share: Basic and Diluted
    
    $
    (.63
    )
    
    $
    (.82
    )Weighted average number of Common Shares
outstanding: Basic and Diluted
    
    
    442,359
    
    
    
    442,482Comprehensive loss:Net loss
    
    $
    (276,908
    )
    
    $
    (362,992
    )Other comprehensive loss:Unrealized loss on marketable securities
    
    
    (36,569
    )
    
    
    Comprehensive loss
    
    $
    (313,477
    )
    
    $
    (362,992
    )
  F-4




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##### Table of Contents



Paragon Real Estate Equity and Investment Trust
Consolidated Statements of Shareholders Equity
For the years ended December 31, 2008 and 2007
 Accumulatedothercomprehensiveincome, netSubscriptions
    
    
    
    
    
    unrealized gainClass A
    
    Class C
    
    
    
    
    
    Receivable Class
    
    
    
    
    
    (loss) onPreferred
    
    Preferred
    
    Common
    
    C Preferred
    
    Additional Paid-
    
    marketable
    
    Accumulated
    
    Cost of SharesShares
    
    Shares
    
    Shares
    
    Shares
    
    in Capital
    
    securities
    
    Deficit
    
    held in Treasury
    
    TotalBalance at December 31, 2006
    
    $
    2,780
    
    
    $
    2,444
    
    
    $
    4,426
    
    
    
    ($300,000
    )
    
    $
    27,676,829
    
    
    $
    
    
    
    
    ($26,381,645
    )
    
    
    ($800,735
    )
    
    $
    204,099Cash paid in lieu of fractional
shares
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )Stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,500Amortization of unearned
compensation and trustee fees,
net of market price reduction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,384
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,384Cash receipts for subscriptions
receivable on issuance of
Preferred C shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000Reclassify discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    (125
    )
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (362,992
    )
    
    
    
    
    
    
    (362,992
    )Balance at December 31, 2007
    
    $
    2,780
    
    
    $
    2,444
    
    
    $
    4,424
    
    
    $
    
    
    
    $
    27,958,838
    
    
    $
    
    
    
    
    ($26,744,762
    )
    
    
    ($800,735
    )
    
    $
    422,989Unrealized loss on Marketable
Securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36,569
    )
    
    
    
    
    
    
    
    
    
    
    (36,569
    )Conversion of Preferred Shares
    
    
    (17
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of unearned
compensation and trustee fees,
net of market price reduction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    187,549
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    187,549Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (276,908
    )
    
    
    
    
    
    
    (276,908
    )Balance at December 31, 2008
    
    $
    2,763
    
    
    $
    2,444
    
    
    $
    4,424
    
    
    $
    
    
    
    $
    28,146,404
    
    
    
    ($36,569
    )
    
    
    ($27,021,670
    )
    
    
    ($800,735
    )
    
    $
    297,061
  F-5




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##### Table of Contents



Paragon Real Estate Equity and Investment Trust and Subsidiary
Consolidated Statements of Cash Flows
 For the year ended December 31,2008
    
    2007Cash flows from operating activities:Net loss
    
    $
    (276,908
    )
    
    $
    (362,992
    )Adjustments to reconcile net loss to net cash used in
continuing operations:Compensation costs paid through amortization of
restricted common shares
    
    
    50
    
    
    
    385Compensation costs and trustee fees incurred through
the issuance of shares
    
    
    187,499
    
    
    
    250,000Stock based compensation
    
    
    
    
    
    
    31,500Depreciation and amortization
    
    
    1,074
    
    
    
    1,074Removal of non cash estimated liabilities
    
    
    (12,016
    )
    
    
    Gain on sale of marketable securities
    
    
    (4,253
    )
    
    
    Impairment loss on marketable securities
    
    
    32,615
    
    
    
    Net change in assets and liabilities:Other assets
    
    
    4,288
    
    
    
    2,217Accounts payable and accrued expenses
    
    
    4,950
    
    
    
    (13,692
    )Net cash
used in continuing operations
    
    
    (62,701
    )
    
    
    (91,508
    )Cash flows from investing activities:Cash used for the purchase of marketable securities
    
    
    (217,175
    )
    
    
    Proceeds from the sale of marketable securities
    
    
    41,053Net cash used for investing activities
    
    
    (176,122
    )
    
    
    Cash flows from financing activities:Cash proceeds from issuance of Preferred C shares
    
    
    
    
    
    
    300,000Fractional shares purchased for cash
    
    
    
    
    
    
    (2
    )Net cash from financing activities
    
    
    
    
    
    
    299,998Net increase (decrease) in cash
    
    
    (238,823
    )
    
    
    208,490CashBeginning of period
    
    
    421,196
    
    
    
    212,706End of period
    
    $
    182,373
    
    
    $
    421,196
  F-6




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##### Table of Contents



Paragon Real Estate Equity and Investment Trust and Subsidiaries
 
 Notes to Consolidated Financial Statements
December 31, 2008
 Note 1  Organization
 
 Note 2  Basis of Presentation
 Going Concern
   Note 3  Summary of Significant Accounting Policies
 Use of Estimates in the Preparation of Financial Statements
  Investments in Equipment
  F-7




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##### Table of Contents



YearsFurniture, fixtures and equipment
    
    3-7
 Cash
  Other Assets
  Revenue Recognition
  Stock-Based Compensation
 Share-Based
Payment Accounting for Stock Issued to Employees
 Income Taxes
    F-8




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##### Table of Contents



Fair Value of Financial Instruments
 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 UsingDecember 31, 2008
    
    December 31, 2008
    
    Level 1
    
    Level 2
    
    Level 3Marketable Securities
    
    $
    111,191
    
    
    $
    111,191
    
    
    $
    111,191
    
    
    $
    
    
    
    $
    
  Recent Accounting Pronouncements
  Reclassifications
  F-9




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##### Table of Contents



Note 4  Marketable Securities
    Note 5  Shareholders Equity
 Preferred Shares
   
    
    the date our gross assets exceed $50.0 million, or
    
    50% of the restricted shares on March 4, 2004; 25% of the shares on March 4, 2005
and the remaining 25% of the shares on March 4, 2006.
    F-10




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##### Table of Contents



Common Shares
 
 Shares Held in Treasury
  Restricted Common Shares
  F-11




---



##### Table of Contents



Unvested Restricted Common SharesWeighted-AverageNumber of
    
    Grant-DateShares
    
    Fair ValueUnvested at January 1, 2007
    
    
    172,450
    
    
    $
    11.55Vested
    
    
    (4,000
    )
    
    $
    16.50Unvested at December 31, 2007
    
    
    168,450
    
    
    $
    11.44Vested
    
    
    (667
    )
    
    $
    9.75Unvested at December 31, 2008
    
    
    167,783
    
    
    $
    11.44
   Options
 
 
 F-12




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##### Table of Contents



Options OutstandingWeighted-AverageWeighted-
    
    RemainingAverage
    
    Contractual
    
    AggregateNumber of
    
    Exercise
    
    Term
    
    Intrinsic ValueShares
    
    Price
    
    (in years)
    
    (1)Balance at January 1, 2007
    
    
    9,391
    
    
    $
    48.00
    
    
    
    4.3Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Canceled/forfeited/expired
    
    
    
    
    
    
    Balance at December 31, 2007
    
    
    9,391
    
    
    $
    48.00
    
    
    
    3.3Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Canceled/forfeited/expired
    
    
    725
    
    
    $
    402.75Balance at December 31, 2008
    
    
    8,666
    
    
    $
    18.17
    
    
    
    2.7
    
    
    $
    0.00Vested and exercisable as of December 31, 2008
    
    
    8,666
    
    
    $
    18.17
    
    
    
    2.7
    
    
    $
    0.00Vested and expected to vest
as of December 31,
2008
    
    
    8,666
    
    
    $
    18.17
    
    
    
    2.7
    
    
    $
    0.00
 
 (1)
    
    The aggregate intrinsic value is calculated as approximately the difference between the
weighted average exercise price of the underlying awards and the Companys estimated
current fair market value at December 31, 2008. Because the weighted average exercise
price exceeds fair market value at December 31, 2008, there is no aggregate intrinsic value
for the options.  Warrants
   Note 6  Loss Per Share
 
 F-13




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##### Table of Contents



For the year ended December 31,2008
    
    
    2007NumeratorNet loss attributable to Common Shareholders
    
    $
    (276,908
    )
    
    $
    (362,992
    )DenominatorWeighted average Common Shares outstanding
at December 31, 2008 and December 31, 2007  Basic and Diluted
    
    
    442,359
    
    
    
    442,482Basic and Diluted EPSNet loss attributable to Common Shareholders  Basic and Diluted
    
    $
    (0.63
    )
    
    $
    (0.82
    )
 Note 7  Dividends/Distributions
  Note 8  Income taxes
  For the year ended December 31,2008
    
    
    2007Current
    
    $
    
    
    
    $
    Deferred
    
    
    
    
    
    
    Total tax provision
    
    $
    
    
    
    $
    
  For the year ended December 31,2008
    
    
    2007Tax / (Benefit) at Federal statutory rate
    
    $
    (83,000
    )
    
    $
    (102,000
    )State income tax / (benefit), net of Federal tax effect
    
    
    (15,000
    )
    
    
    (18,000
    )Adjustment to net operating and capital loss carryforwards
    
    
    (21,000
    )
    
    
    Change in valuation allowance
    
    
    119,000
    
    
    
    120,000Other
    
    
    
    
    
    
    Tax provision
    
    $
    
    
    
    $
    
 F-14




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##### Table of Contents



At December 31,2008
    
    
    2007Deferred tax assets:Net operating loss carryforwards
    
    $
    865,000
    
    
    $
    746,000Capital loss carryforward
    
    
    
    
    
    
    Provision for loss on marketable securities
    
    
    
    
    
    
    Accrual and other temporary variances
    
    
    
    
    
    
    Valuation allowance
    
    
    (865,000
    )
    
    
    (746,000
    )Deferred tax liabilities
    
    
    
    
    
    
    Net deferred tax assets
    
    $
    
    
    
    $
    
   Year Expiring
    
    Net Operating Loss2026
    
    $
    1,553,0002027
    
    
    365,0002028
    
    
    245,000Total loss carryforwards
    
    $
    2,163,000
 Note 9  Commitments and Contingencies
 Employment Agreements
  F-15




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##### Table of Contents



Note 10  Related Party Transactions
  F-16