##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-KSB
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 Commission File Number: 0-25074
 PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
  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)
  
   o
 þ o
 þ
 þ o
     o þ




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##### 



PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
2007 ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
 PagePART IItem 1 Description of Business
    
    
    2Item 2 Description of Property
    
    
    4Item 3 Legal Proceedings
    
    
    4Item 4 Submission of Matters to a Vote of Security Holders
    
    
    4PART IIItem 5 Market for Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
    
    
    4Item 6 Managements Discussion and Analysis or Plan of Operation
    
    
    6Item 7 Financial Statements
    
    
    11Item 8 Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    11Item 8a Controls and Procedures
    
    
    11Item 8b Other Information
    
    
    11PART IIIItem 9 Trustees, Executive Officers, Promoters, Control Persons and
Corporate Governance; Compliance with Section 16(a) of the Exchange Act
    
    
    12Item 10 Executive Compensation
    
    
    14Item 11 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    16Item 12 Certain Relationships and Related Transactions; Trustee Independence
    
    
    20Item 13 Exhibits
    
    
    20Item 14 Principal Accountant Fees and Services
    
    
    23SIGNATURES
    
    
    24EXHIBITSExhibit 31.1Section 302 CEO CertificateExhibit 31.2Section 302 CFO CertificateExhibit 32.1Section 906 CEO & CFO CertificateEX-31.1EX-31.2EX-32.1
  1




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##### Table of Contents



PART I
 
 Item 1. Description of Business
 Company Overview
 
    Real Estate
  2




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Real Estate Tenants
  Competition
  Employees
  Cautionary Statements Regarding Forward-Looking Statements
  
    
    changes in national economic conditions;
    
    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 been able to raise 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. Description of Property
  Investments in Real Estate, Depreciation and Insurance Coverages
  Mortgage Loan
  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 PART II
 
 Item 5. Market for Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities
  4




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High
    
    Low20074th Quarter
    
    $
    0.45
    
    
    $
    0.223rd Quarter
    
    $
    0.51
    
    
    $
    0.292nd Quarter
    
    $
    0.51
    
    
    $
    0.301st Quarter
    
    $
    0.53
    
    
    $
    0.3820064th Quarter
    
    $
    1.50
    
    
    $
    0.383rd Quarter
    
    $
    2.25
    
    
    $
    0.522nd Quarter
    
    $
    5.25
    
    
    $
    0.901st Quarter
    
    $
    9.75
    
    
    $
    4.50
  Dividend Policy
  Preferred Share Conversions
  Issuer Purchases of Equity Securities
  5




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##### Table of Contents



Item 6. Managements Discussion and Analysis or Plan of Operation
 Cautionary Statements Regarding Forward-Looking Statements
  
    
    changes in national economic conditions;
    
    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 been able to raise 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.
 6




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##### Table of Contents



Overview
   Brief History
  Recent Developments in 2007 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, 2007 compared to the year ended
December 31, 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 year ended December 31, 2007, and how
we intend to generate cash for long-term capital needs.
    
    Our current income tax status.
 Comparison of the years ended December 31, 2007 and 2006
  7




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Revenues from Operations
  Expenses from Operations
  Loss from continuing operations
  Gain on sale of marketable securities
  Discontinued operations
   8




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Net loss attributable to Common Shareholders
  Liquidity and Capital Resources
  Cash Flows
    Future Obligations
  Long Term Liquidity and Operating Strategies
  9




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
    
    Borrowings from new loans;
    
    Additional equity issuances of our common and preferred shares; and
    
    Proceeds from the sales of our real estate and technology segment.
  Current Tax Status
   Interest Rates and Inflation
   Off-Balance Sheet Arrangements
  Application of Critical Accounting Estimates
  10




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Valuation Allowance of Deferred Tax Asset
  
 Item 7. Financial Statements
  
 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 8a. Controls and Procedures
      
 Item 8b. Other Information
  11




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##### Table of Contents



PART III
 
 Item 9. Trustees, Executive Officers of the Registrant, Promoters, Control Persons and Corporate
Governance; Compliance with Section 16(a) of the Exchange Act
  ExpirationName
    
    Age
    
    Position
    
    of Term(1)James C. Mastandrea
    
    
    64
    
    
    President, Chief
Executive Officer
and Chairman of
Board of Trustees
    
    2006 (1)John J. Dee
    
    
    56
    
    
    Senior Vice
President, Chief
Financial Officer
and
Trustee
    
    2007 (1)Daryl J. Carter
    
    
    52
    
    
    Trustee
    

    2008Daniel G. DeVos
    
    
    50
    
    
    Trustee
    
    2006 (1)Paul T. Lambert
    
    
    55
    
    
    Trustee
    
    2007 (1)Michael T. Oliver
    
    
    64
    
    
    Trustee
    

    2008
 
 (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 2007 or 2006. 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
 12




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John J. Dee
 Daryl J. Carter
 Daniel G. DeVos
 Paul T. Lambert
 Michael T. Oliver
 13




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Code of Ethics
  Section 16(a) Beneficial Ownership Reporting Compliance
  
 Item 10. Executive Compensation
  Restricted Stock
    
    All OtherName and Position
    
    Year
    
    Salary(1)
    
    Awards(6)
    Compensation(6)
    
    TotalJames C. Mastandrea
    
    
    2007
    
    
    $
    0
    (2)
    
    $
    0
    
    
    $
    0
    
    
    $
    0Chief Executive Officer,President and Chairman
    
    
    2006
    
    
    $
    45,000
    (3)
    
    $
    200,000
    (4)
    
    $
    50,000
    (5)
    
    $
    295,000
 
 (1)
    
    No bonuses were paid for the years ended December 31, 2007 and December 31, 2006.(2)
    
    No cash salary was paid for the year ended December 31, 2007.(3)
    
    Represents salary from January 1 through September 30, 2006.(4)
    
    Represents 44,444 restricted Class C Convertible Preferred Shares for services as an
officer of the Company from September 29, 2006 through September 29, 2008.(5)
    
    Represents 12,500 restricted Class C Convertible Preferred Shares for services as a
trustee and Chairman of the Company from September 29, 2006 through September 29, 2008.(6)
    
    Amounts were determined in accordance with Statement of Financial Accounting Standard
No. 123R 14




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Stock AwardsEquity IncentivePlan Awards:Option 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
    
    
    2,000
    (1)
    
    
    
    
    
    $
    20.25
    
    
    
    1/2/09
    
    
    
    2,000
    (2)
    
    $
    760.00
    
    
    
    (3
    )Chief Executive Officer,
President and Chairman
 
 (1)
    
    The options are exercisable beginning January 2, 2007 and expire 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
proforma 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
 th
 15




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
    
    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
    
 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  16




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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
    
    
    176,163
    (7)
    
    
    43.4
    %
    
    
    161,410
    (15)
    
    
    58.2
    %
    
    
    56,944
    
    
    
    23.3
    %
    
    
    794,846
    (17)
    
    
    77.6
    %Paragon Real Estate
    
    
    163,117
    (8)
    
    
    40.4
    %
    
    
    161,410
    (15)
    
    
    58.2
    %
    
    
    
    
    
    
    
    
    
    
    212,359
    (18)
    
    
    46.8
    %Development, LLCPaul T. Lambert
    
    
    34,448
    (9)
    
    
    8.5
    %
    
    
    
    
    
    
    
    
    
    
    62,500
    
    
    
    25.6
    %
    
    
    659,448
    (19)
    
    
    64.0
    %John J. Dee
    
    
    6,000
    (10)
    
    
    1.5
    %
    
    
    
    (16)
    
    
    
    
    
    
    12,500
    
    
    
    5.1
    %
    
    
    131,000
    (20)
    
    
    24.7
    %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)
    
    
    224,278
    (14)
    
    
    54.3
    %
    
    
    161,410
    
    
    
    58.2
    %
    
    
    244,444
    
    
    
    100.0
    %
    
    
    2,717,961
    (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 404,212 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 14, 2008. The total
options for all named persons is 8,667.(3)
    
    Percentages based on 277,455 preferred A shares outstanding as of March 14, 2008, which convert to
54,578 common shares as follows: 161,410 preferred A shares are each convertible into 0.305 common
shares and 116,045 preferred A shares are each convertible into 0.046 common shares.(4)
    
    Percentages based on 244,444 preferred C shares outstanding as of March 14, 2008, which convert to
2,444,440 common shares. Each preferred C share is convertible into 10 common shares.(5)
    
    Percentages based on 404,212 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 14, 2008. Mr. Mastandreas
percentage is calculated using a denominator that includes (i) 404,212 common shares, not
including 38,130 shares held in treasury; (ii) 56,944 preferred C shares that convert to 569,440
common shares; (iii) 2,000 options; and (iv) 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; (iv) 2,000 options; and (v) 379 common shares.(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. 17




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##### Table of Contents



(10)
    
    Includes: (i) 4,000 restricted common shares; and (iii) 2,000 options. 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) 8,667 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) 2,000 options; (v) 49,243 common shares issuable upon conversion of 161,410 preferred
A shares held by Paragon Real Estate Development, LLC; (vi) 569,440 common shares issuable upon
conversion of 56,944 preferred C shares; and (vii) 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; (ii) 2,000 options; and (iii) 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) 8,667 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. 18




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Equity Compensation Plan Information
 Number of
    
    Weighted-
    
    Number of securitiessecurities to be
    
    average exercise
    
    remaining availableissued upon
    
    price of
    
    for future issuanceexercise of
    
    outstanding
    
    under equityoutstanding
    
    options,
    
    compensation plansoptions, warrants
    
    warrants and
    
    (excluding securitiesEquity Compensation Plans Approved/
    
    and rights
    
    rights
    
    reflected in column (a))Not Approved by Security Holders
    
    (a)
    
    (b)
    
    (c)Equity compensation plans approved by
security holdersFormer Share Option PlanOptions for common shares
    
    
    725
    
    
    $
    402.75
    
    
    
    2004 Share Option PlanRestricted common shares
    
    
    17,333
    
    
    $
    Options for common shares
    
    
    8,667
    
    
    $
    18.0026,000
    
    
    $
    6.00
    
    
    
    20,667Equity compensation plans not approved
by security holdersCommon shares
    
    
    6,667
    
    
    $
    Warrants for common shares
    
    
    12,300
    
    
    $
    27.8518,967
    
    
    $
    18.00
    
    
    
    Total all plans  Common shares
    
    
    45,692
    
    
    $
    17.25
    
    
    
    20,667 Preferred shares
    
    
    
    
    
    $
    
  19




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##### Table of Contents



Item 12. Certain Relationships and Related Transactions; Trustee Independence
 Relationships and Related Transactions
  Trustee Independence
  
 Item 13. Exhibits
 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)
 20




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description3.3
    
    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)3.6
    
    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)
 21




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description10.7
    
    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)10.10
    
    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)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 22




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##### Table of Contents



Item 14. Principal Accountant Fees and Services
  % Approvedby AuditCategory
    
    Year
    
    Fees
    
    CommitteeAudit Fees (1)
    
    
    2007
    
    
    $
    31,900
    
    
    
    100
    %2006
    
    
    $
    46,700
    
    
    
    100
    %Audit-Related Fees
    
    
    2007
    
    
    $
    2006
    
    
    $
    Tax Fees (2)
    
    
    2007
    
    
    $
    3,600
    
    
    
    100
    %2006
    
    
    $
    3,700
    
    
    
    100
    %All Other Fees
    
    
    2007
    
    
    $
    2006
    
    
    $
    
 
 (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
  23




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##### Table of Contents



SIGNATURES
  Paragon real estate equity and investment trustBy:
    
    /s/ James C. MastandreaDate: March 18, 2008
    
    
    
    James C. MastandreaChief Executive OfficerParagon real estate equity and investment trustBy:
    
    /s/ John J. DeeDate: March 18, 2008
    
    
    
    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 18, 2008/s/ John J. Dee

John J. Dee
    
    Trustee, Senior Vice President and
Chief Financial Officer
    
    March 18, 2008/s/ Daryl J. Carter
    
    
    
    March 18, 2008Daryl J. Carter
    
    Trustee/s/ Daniel G. DeVos
    
    
    
    March 18, 2008Daniel G. DeVos
    
    Trustee/s/ Paul T. Lambert
    
    
    
    March 18, 2008Paul T. Lambert
    
    Trustee/s/ Michael T. OliverMichael T. Oliver
    
    Trustee
    
    March 18, 2008
 24




---



##### 



PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheet as of December 31, 2007
    
    
    F-3Consolidated Statements of Operations  Years ended
December 31, 2007 and December 31, 2006
    
    
    F-4Consolidated Statements of Shareholders Equity  Years ended
December 31, 2007 and December 31, 2006
    
    
    F-5Consolidated Statements of Cash Flows  Years ended
December 31, 2007 and December 31, 2006
    
    
    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 Subsidiaries
 
 Consolidated Balance Sheet
December 31, 2007
 AssetsInvestments in equipment:Furniture, fixtures and equipment
    
    
    5,370Accumulated depreciation and amortization
    
    
    (3,183
    )Net investments in equipment
    
    
    2,187Cash
    
    
    421,196Accounts receivable
    
    
    551Other assets
    
    
    13,080Total Assets
    
    $
    437,014Liabilities and Shareholders EquityLiabilities:Accounts payable and accrued expenses
    
    
    14,025Total liabilities
    
    
    14,025Commitments and ContingenciesShareholders equity:Preferred A Shares  $0.01 par value, 10,000,000
authorized: 277,955 Class A cumulative convertible
shares issued and outstanding, $10.00 per share
liquidation preference
    
    
    2,780Preferred C Shares  $0.01 par value, 300,000
authorized: 244,444 Class C cumulative convertible
shares issued and outstanding, $10.00 per share
liquidation preference
    
    
    2,444Common Shares  $0.01 par value, 100,000,000
authorized; 442,320 shares issued and outstanding
    
    
    4,424Additional paid-in capital
    
    
    30,568,490Accumulated deficit
    
    
    (26,744,762
    )Treasury shares, at cost, 38,130 shares
    
    
    (800,735
    )Unearned compensation and trustees fees
    
    
    (2,609,652
    )Total shareholders equity
    
    
    422,989Total Liabilities and Shareholders Equity
    
    $
    437,014
  F-3




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##### Table of Contents



Paragon Real Estate Equity and Investment Trust and Subsidiaries
 
 Consolidated Statements of Operations
 For the year ended December 31,2007
    
    2006RevenuesInterest and other
    
    $
    10,252
    
    
    $
    5,225Total revenues
    
    
    10,252
    
    
    
    5,225ExpensesDepreciation and amortization
    
    
    1,074
    
    
    
    1,074General and administrative
    
    
    372,170
    
    
    
    451,410Total expenses
    
    
    373,244
    
    
    
    452,484Loss from continuing operations
    
    
    (362,992
    )
    
    
    (447,259
    )Gain on sale of marketable securities
    
    
    
    
    
    
    777Discontinued operations:Income from discontinued operations of
residential
properties before allocation to
minority interest
    
    
    
    
    
    
    12,448Income allocated to minority interest
    
    
    
    
    
    
    (12,324
    )Net loss attributable to Common Shareholders
    
    
    (362,992
    )
    
    
    (446,358
    )Net loss attributable to Common
Shareholders per Common
Share: Basic and Diluted
    
    $
    (.82
    )
    
    $
    (1.01
    )Weighted average number of Common Shares
outstanding: Basic and Diluted
    
    
    442,482
    
    
    
    442,561Comprehensive loss:Net loss
    
    $
    (362,992
    )
    
    $
    (446,358
    )Comprehensive loss
    
    $
    (362,992
    )
    
    $
    (446,358
    )
  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, 2007 and 2006
 Accumulatedothercomprehensiveincome, netunrealized gainClass A
    
    Class C
    
    
    
    
    
    Subscriptions
    
    
    
    
    
    (loss) on
    
    
    
    
    
    
    
    UnearnedPreferred
    
    Preferred
    
    
    
    
    
    Receivable Class C
    
    Additional Paid-in
    
    marketable
    
    
    
    
    
    Cost of Shares
    
    compensation andShares
    
    Shares
    
    Common Shares
    
    Preferred Shares
    
    Capital
    
    securities
    
    Accumulated Deficit
    
    held in Treasury
    
    trustees fees
    
    TotalBalance at December 31, 2005
    
    $
    2,782
    
    
    $
    
    
    
    $
    331,916
    
    
    $
    
    
    
    $
    28,374,727
    
    
    $
    749
    
    
    ($ 25,935,287)
    
    ($800,735)
    
    ($ 2,488,069)
    
    ($ 513,917)Allocate 1% LP Operating Profit to REIT
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (124
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (124
    )Transfer of 1% ownership interest in Paragon Real
Estate, LP, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    824,699
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    824,699Stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68,832
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68,832Amortization of unearned compensation and
trustee fees, net of market price reduction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40,576
    )
    
    
    
    
    
    
    
    
    
    
    
    
    112,292
    
    
    
    71,716Conversion of preferred shares to common shares
    
    
    (2
    )
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    (5
    )Unrealized loss on marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (749
    )
    
    
    
    
    
    
    
    
    
    
    
    
    (749
    )75:1 Reverse stock split
    
    
    
    
    
    
    
    
    
    
    (327,497
    )
    
    
    
    
    
    
    327,497Issue Preferred C shares for cash and subscriptions
receivable
    
    
    
    
    
    $
    1,250
    
    
    
    
    
    
    
    
    
    
    
    498,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500,000Issue Preferred C shares in lieu of salary
    
    
    
    
    
    
    444
    
    
    
    
    
    
    
    
    
    
    
    199,556
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000Issue Preferred C shares in lieu of trustee fees
    
    
    
    
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    299,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000Subscriptions receivable on issuance of Preferred
C shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ($ 300,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (300,000
    )Deferred salary & trustee fees on issuance of
Preferred C shares in lieu of salary & fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (500,000
    )
    
    
    (500,000
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (446,358
    )
    
    
    
    
    
    
    
    
    (446,358
    )Balance at December 31, 2006
    
    $
    2,780
    
    
    $
    2,444
    
    
    $
    4,426
    
    
    
    ($ 300,000
    )
    
    $
    30,552,606
    
    
    $
    
    
    
    ($26,381,645)
    
    ($800,735)
    
    ($ 2,875,777)
    
    $
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,741
    )
    
    
    
    
    
    
    
    
    
    
    
    
    266,125
    
    
    
    250,384Cash receipts for Subscriptions receivable onissuance 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
    
    
    $
    
    
    
    $30,568,490
    
    $
    
    
    
    ($ 26,744,762)
    
    ($800,735)
    
    
    ($ 2,609,652
    )
    
    $
    422,989
  F-5




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##### Table of Contents



Paragon Real Estate Equity and Investment Trust and Subsidiaries
 
 Consolidated Statements of Cash Flows
 For the year ended December 31,2007
    
    2006Cash flows from operating activities:Net loss
    
    $
    (362,992
    )
    
    $
    (446,358
    )Adjustments to reconcile net loss to net cash
used in continuing operations:Compensation costs paid through amortization
of restricted common shares
    
    
    385
    
    
    
    71,716Compensation costs and trustee fees incurred
through the issuance of shares
    
    
    250,000
    
    
    
    Stock based compensation
    
    
    31,500
    
    
    
    68,832Depreciation and amortization
    
    
    1,074
    
    
    
    1,074Income 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
    
    
    2,217
    
    
    
    108,455Accounts payable and accrued expenses
    
    
    (13,692
    )
    
    
    (132,089
    )Net cash used in continuing operations
    
    
    (91,508
    )
    
    
    (329,271
    )Cash flows from investing activities:Cash proceeds from sale of marketable securities
    
    
    
    
    
    
    1,953Net cash from investing activities
    
    
    
    
    
    
    1,953Cash flows from financing activities:Cash proceeds from issuance of Preferred C shares
    
    
    300,000
    
    
    
    200,000Fractional shares purchased for cash
    
    
    (2
    )
    
    
    Net cash from financing activities Net
    
    
    299,998
    
    
    
    200,000Net increase (decrease) in cash
    
    
    208,490
    
    
    
    (127,318
    )CashBeginning of period
    
    
    212,706
    
    
    
    340,024End of period
    
    $
    421,196
    
    
    $
    212,706
  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, 2007
 Note 1  Organization
    Note 2  Basis of Presentation
 Consolidated Financial Statement Presentation
  Going Concern
   F-7




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##### Table of Contents



Note 3  Summary of Significant Accounting Policies
 Use of Estimates in the Preparation of Financial Statements
  Investments in Equipment
   YearsFurniture, fixtures and equipment
    
    3-7
 Cash
  Other Assets
  Revenue Recognition
  Stock-Based Compensation
 Share-Based
Payment
 F-8




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##### Table of Contents



Accounting for Stock Issued to Employees
 Income Taxes
    Fair Value of Financial Instruments
  Recent Accounting Pronouncements
  Note 4  Marketable Securities
   Note 5  Shareholders Equity
 Preferred Shares
  F-9




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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.
       Common Shares
  F-10




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##### Table of Contents



Shares Held in Treasury
  Restricted Common Shares
  Unvested Restricted Common SharesWeighted-AverageNumber of
    
    
    Grant-DateShares
    
    
    Fair ValueUnvested at January 1, 2006
    
    
    175,117
    
    
    $
    11.54Vested
    
    
    (2,667
    )
    
    $
    10.50Unvested at December 31, 2006
    
    
    172,450
    
    
    $
    11.55Vested
    
    
    (4,000
    )
    
    $
    16.50Unvested at December 31, 2007
    
    
    168,450
    
    
    $
    11.44
   Options
  F-11




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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, 2006
    
    
    9,391
    
    
    $
    48.00
    
    
    
    1.8Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Canceled/forfeited/expired
    
    
    
    
    
    
    Balance at December 31, 2006
    
    
    9,391
    
    
    
    48.00
    
    
    
    1.8Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Canceled/forfeited/expired
    
    
    
    
    
    
    Balance at December 31, 2007
    
    
    9,391
    
    
    $
    48.00
    
    
    
    1.8
    
    
    $
    0.00Vested and exercisable as
of December 31, 2007
    
    
    9,391
    
    
    $
    47.87
    
    
    
    0.9
    
    
    $
    0.00Vested and expected to vest
as of December 31, 2007
    
    
    9,391
    
    
    $
    47.87
    
    
    
    0.9
    
    
    $
    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, 2007. Because the weighted average exercise
price exceeds fair market value at December 31, 2007, there is no aggregate intrinsic value
for the options.  F-12




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##### Table of Contents



Warrants
   Note 6  Loss Per Share
  For the year ended December 31,2007
    
    
    2006NumeratorNet loss attributable to Common Shareholders
    
    $
    (362,992
    )
    
    $
    (446,358
    )DenominatorWeighted average Common Shares outstanding at
December 31, 2007 and December 31, 2006 - Basic
and Diluted
    
    
    442,482
    
    
    
    442,561Basic and Diluted EPSNet loss attributable to Common Shareholders -
Basic and Diluted
    
    $
    (0.82
    )
    
    $
    (1.01
    )
 Note 7  Dividends/Distributions
  Note 8  Income taxes
  For the year ended December 31,2007
    
    
    2006Current
    
    $
    
    
    
    $
    Deferred
    
    
    
    
    
    
    Total tax provision
    
    $
    
    
    
    $
    
 F-13




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##### Table of Contents



For the year ended December 31,2007
    
    
    2006Tax / (Benefit) at Federal statutory rate
    
    $
    (102,000
    )
    
    $
    (136,000
    )State income tax / (benefit), net of Federal tax effect
    
    
    (18,000
    )
    
    
    (25,000
    )Adjustment to net operating and capital loss carryforwards
    
    
    
    
    
    
    Change in valuation allowance
    
    
    120,000
    
    
    
    161,000Other
    
    
    
    
    
    
    Tax provision
    
    $
    
    
    
    $
    
  At December 31,2007
    
    
    2006Deferred tax assets:Net operating loss carryforwards
    
    $
    746,000
    
    
    $
    5,164,000Capital loss carryforward
    
    
    
    
    
    
    262,000Provision for loss on marketable securities
    
    
    
    
    
    
    Accrual and other temporary variances
    
    
    
    
    
    
    Valuation allowance
    
    
    (746,000
    )
    
    
    (5,426,000
    )Deferred tax liabilities
    
    
    
    
    
    
    Net deferred tax assets
    
    $
    
    
    
    $
    
   Year Expiring
    
    Net Operating Loss2026
    
    $
    1,553,0002027
    
    
    300,000Total loss carryforwards
    
    $
    1,853,000
 Note 9  Commitments and Contingencies
 Employment Agreements
  F-14




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##### Table of Contents



th
  Note 10  Related Party Transactions
 Richton Trail Acquisition and Management Fees
   Note 11  Supplemental Information to Statements of Cash Flows
 For the year ended December 31,2007
    
    
    2006Interest paid
    
    $
    0
    
    
    $
    39,714
 Supplemental Disclosure of Noncash Investing Activities and Financing Activities
 For the year ended December 31,2007
    
    
    2006Preferred C shares issued in lieu of salaries
    
    $
    0
    
    
    $
    200,000Preferred C shares issued in lieu of trustee fees
    
    $
    0
    
    
    $
    300,000Transfer of 1% ownership interest in Paragon Real Estate, LP, net
    
    $
    0
    
    
    $
    824,699
 F-15