##### 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, 2006
 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
2006 ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
 PagePART IItem 1
    
    Description of Business
    
    
    2Item 2
    
    Description of Property
    
    
    4Item 3
    
    Legal Proceedings
    
    
    5Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    5PART IIItem 5
    
    Market for Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
    
    
    5Item 6
    
    Managements Discussion and Analysis or Plan of Operation
    
    
    6Item 7
    
    Financial Statements
    
    
    12Item 8
    
    Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure
    
    
    12Item 8a
    
    Controls and Procedures
    
    
    12Item 8b
    
    Other Information
    
    
    12PART IIIItem 9
    
    Trustees and Executive Officers; Compliance with Section 16(a) of the
Exchange Act
    
    
    13Item 10
    
    Executive Compensation
    
    
    15Item 11
    
    Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    18Item 12
    
    Certain Relationships and Related Transactions
    
    
    21Item 13
    
    Exhibits
    
    
    21Item 14
    
    Principal Accountant Fees and Services
    
    
    24SIGNATURES
    
    
    25EX-31.1EX-31.2EX-32.1
  EXHIBITSExhibit 31.1Section 302 CEO CertificateExhibit 31.2Section 302 CFO CertificateExhibit 32.1Section 906 CEO & CFO Certificate
 1




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##### Table of Contents



PART I
 
 Item 1. Description of Business
 Company Overview
      2




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Real Estate
  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;
 3




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
    
    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;
    
    adverse changes in governmental rules and fiscal policies;
    
    adverse changes in zoning laws; and
    
    other factors which are beyond our control.
  
    
    our cash resources are limited;
    
    we have a history of losses;
    
    we have not been able to raise funds through public equity offering;
    
    we are dependent on three independent trustees paying
installments under subscription agreements for Class C Convertible Preferred Shares;
    
    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; 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
  4




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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
  Company Guide.
   5




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##### Table of Contents



High
    
    Low20064th Quarter
    
    $
    1.50
    
    
    $
    0.383rd Quarter
    
    $
    2.25
    
    
    $
    0.522nd Quarter
    
    $
    5.25
    
    
    $
    0.901st Quarter
    
    $
    9.75
    
    
    $
    4.5020054th Quarter
    
    $
    13.50
    
    
    $
    7.503rd Quarter
    
    $
    10.50
    
    
    $
    6.002nd Quarter
    
    $
    14.25
    
    
    $
    7.501st Quarter
    
    $
    19.50
    
    
    $
    8.25
  Dividend Policy
  Preferred Share Conversions
  Issuer Purchases of Equity Securities
  
 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;
 6




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##### Table of Contents




    
    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;
    
    adverse changes in governmental rules and fiscal policies;
    
    adverse changes in zoning laws; and
    
    other factors which are beyond our control.
  
    
    our cash resources are limited;
    
    we have a history of losses;
    
    we have not been able to raise funds through public equity offering;
    
    we are dependent on three independent trustees paying installments under
subscription agreements for Class C Convertible Preferred Shares;
    
    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; and
    
    we currently do not plan to distribute dividends to the holders of our shares.
 Overview
   7




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Brief History
  Recent Developments in 2006 and Executive Overview
      8




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Results of Operations
  
    
    Explanation of changes in the results of operations in the Consolidated Statements
of Operations for the year ended December 31, 2006 compared to the year ended
December 31, 2005.
    
    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, 2006, and how
we intend to generate cash for long-term capital needs.
    
    Our current income tax status.
 Comparison of the years ended December 31, 2006 and 2005
  Revenues from Operations
  Expenses from Operations
  Loss from continuing operations
  Gain on sale of marketable securities
  9




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Discontinued operations
    Net loss attributable to Common Shareholders
  Liquidity and Capital Resources
  Cash Flows
    10




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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.
  Current Tax Status
   Interest Rates and Inflation
   11




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##### Table of Contents



Off-Balance Sheet Arrangements
  Application of Critical Accounting Estimates
  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
  12




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##### Table of Contents



PART III
 
 Item 9. Trustees and Executive Officers of the Registrant; Compliance with Section 16(a) of the Exchange Act
  ExpirationName
    
    Age
    
    Position
    
    of Term (1)James C. Mastandrea
    
    
    63
    
    
    President, Chief
Executive Officer
and Chairman of
Board of Trustees
    
    
    2006John J. Dee
    
    
    55
    
    
    Senior Vice
President, Chief
Financial Officer
and
Trustee
    
    
    2007Daryl J. Carter
    
    
    51
    
    
    Trustee
    
    
    2008Daniel G. DeVos
    
    
    49
    
    
    Trustee
    
    
    2006Paul T. Lambert
    
    
    54
    
    
    Trustee
    
    
    2007Michael T. Oliver
    
    
    63
    
    
    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 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
 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
  
 Item 10. Executive Compensation
  Restricted
    
    All OtherName and Position
    
    Year
    
    Salary(1)
    
    Stock Awards
    
    Compensation
    
    TotalJames C. Mastandrea
    
    
    2006
    
    
    $
    45,000
    (2)
    
    $
    200,000
    (3)
    
    $
    50,000
    (4)
    
    $
    295,000Chief Executive Officer,President and Chairman
 
 (1)
    
    No bonuses were paid for the year ended December 31, 2006.(2)
    
    Represents salary from January 1 through September 30, 2006.(3)
    
    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.(4)
    
    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. 15




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##### Table of Contents



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
    
    
    1,333.3
    
    
    
    666.7
    (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
  16




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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
  Fees Earned or
    
    All OtherName
    
    Paid in Cash
    
    Compensation(1) (2)
    
    TotalDaryl J. Carter
    
    $
    2,050
    
    
    $
    50,000
    
    
    $
    52,050John J. Dee
    
    
    
    
    
    $
    50,000
    
    
    $
    50,000Daniel G. DeVos
    
    $
    2,050
    
    
    $
    50,000
    
    
    $
    52,050Paul T. Lambert
    
    $
    1,650
    
    
    $
    50,000
    
    
    $
    51,650James C. Mastandrea
    
    
    
    
    
    
    
    (1)Michael T. Oliver
    
    $
    2,050
    
    
    $
    50,000
    
    
    $
    52,050
 
 (1)
    
    In lieu of cash payments for trustee fees, effective September 29, 2006, each trustee of
the Company received 12,500 restricted Class C Convertible Preferred Shares for service as a
trustee until September 29, 2008. The shares are restricted until the latest to occur of:
(a) a public offering by the Company sufficient to liquidate the shares, (b) an exchange of
the Companys existing shares for new shares, and (c) September 29, 2008. Mr. Mastandreas
12,500 restricted Class C Convertible Preferred Shares are included in the executive
compensation table above.(2)
    
    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.  17




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##### Table of Contents



Item 11. 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
    
    
    175,496
    (7)
    
    
    43.3
    %
    
    
    161,410
    (16)
    
    
    58.1
    %
    
    
    56,944
    
    
    
    23.3
    %
    
    
    794,179
    (18)
    
    
    77.5
    %Paragon Real Estate
    
    
    163,117
    (8)
    
    
    46.8
    %
    
    
    161,410
    (16)
    
    
    58.1
    %
    
    
    
    
    
    
    
    
    
    
    212,359
    (19)
    
    
    46.8
    %Development, LLCLoeb Partners
Corp.(9)
61 Broadway 
New York, NY 1006
    
    
    41,805
    
    
    
    10.3
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,805
    
    
    
    10.3
    %Paul T. Lambert
    
    
    34,448
    (10)
    
    
    8.5
    %
    
    
    
    
    
    
    
    
    
    
    62,500
    
    
    
    25.6
    %
    
    
    659,448
    (20)
    
    
    64.0
    %John J. Dee
    
    
    5,333
    (11)
    
    
    1.3
    %
    
    
    
    (17)
    
    
    
    
    
    
    12,500
    
    
    
    5.1
    %
    
    
    130,333
    (21)
    
    
    24.6
    %Daryl J. Carter
    
    
    3,000
    (12)
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    37,500
    
    
    
    15.3
    %
    
    
    378,000
    (22)
    
    
    48.4
    %Daniel G. DeVos
    
    
    3,000
    (12)
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    62,500
    
    
    
    25.6
    %
    
    
    628,000
    (23)
    
    
    60.9
    %Michael T. Oliver
    
    
    1,667
    (13)
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    12,500
    
    
    
    5.1
    %
    
    
    126,667
    (24)
    
    
    23.9
    %All trustees and
current executive
officers as a group (14)
    
    
    222,944
    (15)
    
    
    54.1
    %
    
    
    161,410
    
    
    
    58.1
    %
    
    
    244,444
    
    
    
    100.0
    %
    
    
    2,716,627
    (25)
    
    
    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 404,434 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 or will become exercisable as of May 14, 2007.(3)
    
    Percentages based on 277,955 preferred A shares outstanding as of December 31, 2006, which convert
to 54,601 common shares as follows: 161,410 preferred A shares are each convertible into 0.305
common shares and 116,545 preferred A shares are each convertible into 0.046 common shares.(4)
    
    Percentages based on 244,444 preferred C shares outstanding as of September 30, 2006, which
convert to 2,444,440 common shares. Each preferred C share is convertible into 10 common shares.(5)
    
    Percentages based on 404,434 common shares outstanding, not including 38,130 shares held in
treasury, and 244,444 preferred C shares which convert to 2,444,444 common shares. For each
individual trustee and executive officer, also includes common shares he has the right to acquire
through share options that are or will become exercisable as of May 14, 2007. Mr. Mastandreas
percentage is calculated using a denominator that includes (i) 404,434 common shares, not
including 38,130 shares held in treasury; (ii) 56,944 preferred C shares that convert to 569,440
common shares; (iii) 1,333 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) 1,333 options; 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)
    
    Based solely on information in the Schedule 13D filed on February 11, 2005 with the SEC by Loeb
Partners Corporation listing the following entities and quantities of shares owned: Loeb
Arbitrage Fund 26,267 shares; Loeb Partners Corporation 1,980 shares; Loeb Offshore Fund Ltd.
2,466 shares; Robert Grubin 7,747 shares; and other affiliates of Loeb Partners Corporation 3,345
shares. The Schedule 13D reported an ownership percentage of 9.37% based on the number of common
shares reported as outstanding in our filing for the third quarter and nine months ended September
30, 2005, which included shares held in treasury. The ownership percentage reported in the table
above is based on 404,434 common shares outstanding, which does not include shares held in
treasury.(10)
    
    Includes: (i) 1,666 options; (ii) 2,000 restricted common shares; (iii) 5,930 common shares held
by Lambert Equities II, LLC, of which Mr. Lambert is the controlling majority member and sole
manager; and (iv) 24,852 common shares.(11)
    
    Includes: (i) 4,000 restricted common shares; and (iii) 1,333 options. Does not include 163,117
common shares held by Paragon Real Estate Development, LLC, of which Mr. Dee is a member.(12)
    
    Includes: (i) 2,000 restricted common shares and (ii) 1,000 options.(13)
    
    Includes (i) 667 restricted common shares and (ii) 1,000 options.(14)
    
    Includes six named persons.(15)
    
    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) 14,667 restricted common
shares; (iv) 7,332 options; and (v) 31,161 common shares.(16)
    
    Represents shares held by Paragon Real Estate Development, LLC, of which Mr. Mastandrea is the
managing member. Each preferred A share is convertible into 0.30508 common shares.(17)
    
    Does not include 161,410 preferred A shares held by Paragon Real Estate Development, LLC, of which
Mr. Dee is a member.(18)
    
    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) 1,333 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.(19)
    
    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.(20)
    
    Includes: (i) 2,000 restricted common shares; (ii) 1,666 options; (iii) 625,000 common shares
issuable upon conversion of 62,500 preferred C shares; and (vii) 30,782 common shares.(21)
    
    Includes: (i) 4,000 restricted common shares; (ii) 1,333 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.(22)
    
    Includes: (i) 2,000 restricted common shares; (ii) 1,000 options; and (iii) 375,000 common shares
issuable upon conversion of 37,500 preferred C shares.(23)
    
    Includes: (i) 2,000 restricted common shares; (ii) 1,000 options; and (iii) 625,000 common shares
issuable upon conversion of 62,500 preferred C shares.(24)
    
    Includes: (i) 667 restricted common shares; (ii) 1,000 options; and (iii) 125,000 common shares
issuable upon conversion of 12,500 preferred C shares.(25)
    
    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) 14,667 restricted common
shares; (iv) 7,332 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) 31,161 common shares. 19




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##### Table of Contents



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
    
    
    $
    27.8418,967
    
    
    $
    18.00
    
    
    
    Total all plans  Common shares
    
    
    45,692
    
    
    $
    17.25
    
    
    
    20,667 Preferred shares
    
    
    
    
    
    $
    
  20




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##### Table of Contents



Item 12. Certain Relationships and Related Transactions
 Management Fees
  
 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)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)
 21




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description3.4
    
    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)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)
 22




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description10.8
    
    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
 23




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##### Table of Contents



Item 14. Principal Accountant Fees and Services
  % Approvedby AuditCategory
    
    Year
    
    Fees
    
    CommitteeAudit Fees (1)
    
    
    2006
    
    
    $
    53,500
    
    
    
    100
    %2005
    
    
    $
    115,600
    
    
    
    100
    %Audit-Related Fees
    
    
    2006
    
    
    $
    2005
    
    
    $
    Tax Fees
    
    
    2006
    
    
    $
    5,500
    
    
    
    100
    %2005
    
    
    $
    6,000
    
    
    
    100
    %All Other Fees
    
    
    2006
    
    
    $
    2005
    
    
    $
    
 
 (1)
 Policy for Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
 
 24




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##### Table of Contents



SIGNATURES
  Paragon real estate equity and investment trustBy:

/s/ James C. MastandreaDate: March 26, 2007
    
    James C. MastandreaChief Executive Officer Paragon real estate equity and investment trustBy:

/s/ John J. DeeDate: March 26, 2007
    
    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 26, 2007/s/ John J. Dee

John J. Dee
    
    Trustee, Senior Vice President and Chief
Financial Officer
    
    March 26, 2007/s/ Daryl J. Carter

Daryl J. Carter
    
    Trustee
    
    March 26, 2007/s/ Daniel G. DeVos

Daniel G. DeVos
    
    Trustee
    
    March 26, 2007/s/ Paul T. Lambert

Paul T. Lambert
    
    Trustee
    
    March 26, 2007/s/ Michael T. Oliver

Michael T. Oliver
    
    Trustee
    
    March 26, 2007
 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-1Consolidated Balance Sheet as of December 31, 2006
    
    F-3Consolidated Statements of Operations  Years ended
December 31, 2006 and December 31, 2005
    
    F-4Consolidated Statements of Shareholders Equity  Years ended
December 31, 2006 and December 31, 2005
    
    F-5Consolidated Statements of Cash Flows  Years ended
December 31, 2006 and December 31, 2005
    
    F-6Notes to Consolidated Financial Statements
    
    F-7
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 F-2




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##### Table of Contents



Paragon Real Estate Equity and Investment Trust and Subsidiaries
Consolidated Balance Sheet
December 31, 2006
 AssetsInvestments in equipment:Furniture, fixtures and equipment
    
    
    5,370Accumulated depreciation and amortization
    
    
    (2,110
    )Net investments in equipment
    
    
    3,260Cash
    
    
    212,706Accounts receivable
    
    
    833Other assets
    
    
    15,015Total Assets
    
    $
    231,814Liabilities and Shareholders EquityLiabilities:Accounts payable and accrued expenses
    
    
    27,715Total liabilities
    
    
    27,715Commitments and ContingenciesShareholders equity:Preferred A
Shares  $0.01 par value, 10,000,000 authorized: 277,955Class A cumulative convertible shares issued and outstanding,
$10.00 per share liquidation preference
    
    
    2,780Preferred C
Shares  $0.01 par value, 300,000 authorized: 244,444Class C cumulative convertible shares issued and outstanding,
$10.00 per share liquidation preference
    
    
    2,444Common
Shares  $0.01 par value, 100,000,000 authorized; 442,565
shares issued and outstanding
    
    
    4,426Additional paid-in capital
    
    
    30,552,606Accumulated deficit
    
    
    (26,381,645
    )Treasury shares, at cost, 38,130 shares
    
    
    (800,735
    )Unearned compensation and trustees fees
    
    
    (2,875,777
    )Subscriptions receivable Preferred C Shares
    
    
    (300,000
    )Total shareholders equity
    
    
    204,099Total Liabilities and Shareholders Equity
    
    $
    231,814
  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 31,2006
    
    
    2005RevenuesInterest and other
    
    $
    5,225
    
    
    $
    20,596Total revenues
    
    
    5,225
    
    
    
    20,596ExpensesDepreciation and amortization
    
    
    1,074
    
    
    
    921General and administrative
    
    
    451,410
    
    
    
    1,476,710Total expenses
    
    
    452,484
    
    
    
    1,477,631Loss from continuing operations
    
    
    (447,259
    )
    
    
    (1,457,035
    )Gain on sale of marketable securities
    
    
    777
    
    
    
    60,500Discontinued operations:Income from discontinued operations of
residential properties before allocation to
minority interest
    
    
    12,448
    
    
    
    26,585Income allocated to minority interest
    
    
    (12,324
    )
    
    
    (26,546
    )Net loss attributable to Common Shareholders
    
    
    (446,358
    )
    
    
    (1,396,496
    )Net loss attributable to Common Shareholders per
Common Share: Basic and Diluted
    
    $
    (1.01
    )
    
    $
    (3.12
    )Weighted average number of Common Shares
outstanding: Basic and Diluted
    
    
    442,561
    
    
    
    447,977Comprehensive loss:Net loss
    
    $
    (446,358
    )
    
    $
    (1,396,496
    )Other comprehensive loss:Unrealized gain (loss) on marketable securities
    
    
    
    
    
    
    176Comprehensive loss
    
    $
    (446,358
    )
    
    $
    (1,396,320
    )
  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, 2006 and 2005
 Accumulatedothercomprehensiveincome, netunrealized gainClass A
    
    Class C
    
    
    
    
    
    Subscriptions
    
    
    
    
    
    (loss) on
    
    
    
    
    
    
    
    UnearnedPreferred
    
    Preferred
    
    Common
    
    Receivable Class C
    
    Additional Paid-in
    
    marketable
    
    
    
    Cost of Shares
    
    Compensation andShares
    
    Shares
    
    Shares
    
    Preferred Shares
    
    Capital
    
    securities
    
    Accumulated Deficit
    
    held in Treasury
    
    trustees fees
    
    TotalBalance at December 31, 2004
    
    $
    2,785
    
    
    
    3⁄4
    
    
    $
    332,406
    
    
    
    3⁄4
    
    
    $
    28,333,203
    
    
    $
    51,273
    
    
    
    ($24,561,494
    )
    
    
    ($800,735
    )
    
    
    ($2,591,434
    )
    
    $
    766,004Restricted common share grants issued
    
    
    
    
    
    
    
    
    
    
    5,500
    
    
    
    
    
    
    
    92,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (98,000
    )
    
    
    3⁄4Restricted common share grants cancelled
    
    
    
    
    
    
    
    
    
    
    (8,500
    )
    
    
    
    
    
    
    (99,969
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108,469
    
    
    
    3⁄4Restricted common share grants issued for
rent
    
    
    
    
    
    
    
    
    
    
    2,500
    
    
    
    
    
    
    
    49,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,500Conversion of preferred shares to common
shares
    
    
    (3
    )
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3⁄4Unrealized loss on marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50,524
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50,524
    )Amortization of unearned compensation and trustee fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92,896
    
    
    
    92,896Allocation of G&A cost to discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,703
    
    
    
    
    
    
    
    
    
    
    
    22,703Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,396,496
    )
    
    
    
    
    
    
    
    
    
    
    (1,396,496
    )Balance at December 31, 2005
    
    $
    2,782
    
    
    
    3⁄4
    
    
    $
    331,916
    
    
    
    3⁄4
    
    
    $
    28,374,727
    
    
    $
    749
    
    
    
    ($25,935,287
    )
    
    
    ($800,735
    )
    
    
    ($2,488,069
    )
    
    
    ($513,917
    )Allocate 1% LP Operating Profit to REIT
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (124
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (124
    )Adjustment to cancel intercompany
accounts due to Paragon RE, LP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3⁄4Unrealized loss on marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (749
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (749
    )75:1 Reverse stock split
    
    
    
    
    
    
    
    
    
    
    (327,497
    )
    
    
    
    
    
    
    327,497
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3⁄4Issue 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 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
    )
    
    $
    204,099
  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 31,2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (446,358
    )
    
    $
    (1,396,496
    )Adjustments to reconcile net loss to net cash used in
continuing operations:Compensation costs paid through amortization of
Restricted Common Shares
    
    
    71,716
    
    
    
    92,896Stock based compensation
    
    
    68,832
    
    
    
    Rent expense incurred through the issuance of
restricted shares
    
    
    
    
    
    
    51,500Depreciation and amortization
    
    
    1,074
    
    
    
    921Income from discontinued operations, net of
allocation to minority interest
    
    
    (124
    )
    
    
    (39
    )Gain on sale of marketable securities
    
    
    (777
    )
    
    
    (60,500
    )Net change in assets and liabilities:Other assets
    
    
    108,455
    
    
    
    (68,166
    )Accounts payable and accrued expenses
    
    
    (132,089
    )
    
    
    (4,372
    )Net cash used in continuing operations
    
    
    (329,271
    )
    
    
    (1,384,256
    )Cash flows from investing activities:Purchase of equipment
    
    
    
    
    
    
    (3,070
    )Cash proceeds from sale of marketable securities
    
    
    1,953
    
    
    
    98,000Net cash from investing activities
    
    
    1,953
    
    
    
    94,930Cash flows from financing activities:Cash proceeds from issuance of Preferred C shares
    
    
    200,000
    
    
    
    Net cash from financing activities
    
    
    200,000
    
    
    
    Net decrease in cash
    
    
    (127,318
    )
    
    
    (1,289,326
    )CashBeginning of period
    
    
    340,024
    
    
    
    1,629,350End of period
    
    $
    212,706
    
    
    $
    340,024
  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, 2006
 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
 F-8




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##### Table of Contents



Cash
  Other Assets
  Revenue Recognition
  Stock-Based Compensation
 Share-Based
Payment Accounting for Stock Issued to Employees
  For the twelve month period endedDecember 31, 2005Net loss attributable to Common Shareholders
    
    $
    (1,396,496
    )Add: Stock-based employee compensation expense
included in reported net loss, net of related tax effects
    
    
    92,896Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects
    
    
    (141,564
    )Pro forma net loss attributable to Common Shareholders
    
    $
    (1,445,164
    )Net loss attributable to Common Shareholders per
Common Share:Basic and Diluted  as reported
    
    $
    (3.12
    )Basic and Diluted  pro forma
    
    $
    (3.23
    )
 F-9




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##### Table of Contents



Income Taxes
    Fair Value of Financial Instruments
  Recent Accounting Pronouncements
  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
 F-11




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##### Table of Contents





Restricted Common Shares




Unvested Restricted Common SharesWeighted-AverageNumber of
    
    Grant-DateShares
    
    Fair ValueUnvested at January 1, 2005
    
    
    175,117
    
    
    $
    11.63Vested
    
    
    (2,667
    )
    
    $
    13.50Issued 2005
    
    
    2,667
    
    
    $
    10.50Unvested at December 31, 2005
    
    
    175,117
    
    
    $
    11.54Vested
    
    
    (2,667
    )
    
    $
    10.50Unvested at December 31, 2006
    
    
    172,450
    
    
    $
    11.55






Options




F-12




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##### Table of Contents









2005Risk-free interest rate
    
    3.40% and 4.05%Volatility
    
    168.9% and 175.5%Dividend yield
    
    
    0.00
    %Life expectancy
    
    5 - 10      years




Options OutstandingWeighted-AverageWeighted-
    
    
    RemainingAverage
    
    
    Contractual
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Term
    
    
    Intrinsic ValueShares
    
    
    Price
    
    
    (in years)
    
    
    (1)Balance at January 1, 2005
    
    
    11,125
    
    
    $
    63.75
    
    
    
    2.2Granted
    
    
    1,333
    
    
    
    10.50
    
    
    
    1.2Exercised
    
    
    
    
    
    
    Canceled/forfeited/expired
    
    
    (3,067
    )
    
    
    88.50
    
    
    
    2.0Balance at December 31, 2005
    
    
    9,391
    
    
    
    48.00
    
    
    
    1.8Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Canceled/forfeited/expired
    
    
    
    
    
    
    Balance at December 31, 2006
    
    
    9,391
    
    
    $
    48.00
    
    
    
    1.8
    
    
    $
    0.00Vested and exercisable as Of
December 31, 2006
    
    
    8,059
    
    
    $
    52.44
    
    
    
    1.3
    
    
    $
    0.00Vested and expected to vest
as Of December 31, 2006
    
    
    9,391
    
    
    $
    48.11
    
    
    
    1.8
    
    
    $
    0.00





(1)


F-13




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##### Table of Contents



Warrants
   Note 6  Loss Per Share
  For the year ended December 31,2006
    
    
    2005NumeratorNet loss attributable to Common Shareholders
    
    $
    (446,358
    )
    
    $
    (1,396,496
    )DenominatorWeighted average Common Shares outstanding
at December 31, 2006 and December 31, 2005
- Basic and Diluted
    
    
    442,561
    
    
    
    447,977Basic and Diluted EPSNet loss attributable to Common
Shareholders - Basic and Diluted
    
    $
    (1.01
    )
    
    $
    (3.12
    )
 Note 7  Dividends/Distributions
  Note 8  Income taxes
  For the year ended December 31,2006
    
    
    2005Current
    
    $
    
    
    
    $
    Deferred
    
    
    
    
    
    
    Total tax provision
    
    $
    
    
    
    $
    
 F-14




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##### Table of Contents



For the year ended December 31,2006
    
    
    2005Tax / (Benefit) at Federal statutory rate
    
    $
    (136,000
    )
    
    $
    (468,000
    )State income tax / (benefit), net of Federal tax effect
    
    
    (25,000
    )
    
    
    (88,000
    )Adjustment to net operating and capital loss carryforwards
    
    
    
    
    
    
    Change in valuation allowance
    
    
    161,000
    
    
    
    421,000Other
    
    
    
    
    
    
    135,000Tax provision
    
    $
    
    
    
    $
    
  At December 31,2006
    
    
    2005Deferred tax assets:Net operating loss carryforwards
    
    $
    5,164,000
    
    
    $
    5,003,000Capital loss carryforward
    
    
    262,000
    
    
    
    262,000Provision for loss on marketable securities
    
    
    
    
    
    
    Accrual and other temporary variances
    
    
    
    
    
    
    Valuation allowance
    
    
    (5,426,000
    )
    
    
    (5,265,000
    )Deferred tax liabilities
    
    
    
    
    
    
    Net deferred tax assets
    
    $
    
    
    
    $
    
   Year Expiring
    
    Net Operating Loss
    
    
    Capital Loss2008
    
    $
    
    
    
    $
    649,0002012
    
    
    458,000
    
    
    
    2018
    
    
    739,000
    
    
    
    2019
    
    
    115,000
    
    
    
    2020
    
    
    2,025,000
    
    
    
    2021
    
    
    177,000
    
    
    
    2022
    
    
    592,000
    
    
    
    2023
    
    
    6,085,000
    
    
    
    2024
    
    
    819,000
    
    
    
    2025
    
    
    1,374,000
    
    
    
    2026
    
    
    400,000
    
    
    
    Total loss carryforwards
    
    $
    12,784,000
    
    
    $
    649,000
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##### Table of Contents



Note 9  Commitments and Contingencies
 Employment Agreements
 th
  Note 10  Related Party Transactions
 Richton Trail Acquisition and Management Fees
   F-16




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##### Table of Contents



Note 11  Supplemental Information to Statements of Cash Flows
 For the year ended December 31,2006
    
    
    2005Interest paid
    
    $
    39,714
    
    
    $
    163,017
 Supplemental Disclosure of Noncash Investing Activities and Financing Activities
 For the year ended December 31,2006
    
    
    2005Preferred C shares issued in lieu of salaries
    
    $
    200,000
    
    
    $
    Preferred C shares issued in lieu of trustee fees
    
    $
    250,000
    
    
    $
    Transfer of
1% ownership interest in Paragon Real Estate, LP, net
    
    $
    824,699
    
    
    $
    
 F-17