Item  405 of Regulation S-B contained in this form, and no disclosure will be contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB þ.

Indicate by check mark whether the Registrant is a shell company (as defined in rule 12b-2 of the Exchange Act.) Yes þ     No o

Registrant’s revenues for its most recent fiscal year: $10,252.

At March 14, 2008, the Registrant had 442,320 common shares of beneficial interest (including 38,130 shares held in treasury), $0.01 par value, 277,955 Class A Cumulative Convertible Preferred Shares, and 244,444 Class C Cumulative Convertible Preferred Shares. The aggregate market value of the voting common and preferred shares held by non-affiliates of the Registrant was approximately $46,556 based on the closing price of $0.24 per common share on the over-the-counter bulletin board on March 14, 2008. The aggregate market value of the voting preferred shares was valued as if each of the remaining 116,045 preferred shares held by non-affiliates were converted into 0.046 common shares on March 14, 2008.

DOCUMENTS INCORPORATED BY REFERENCE

None

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

 

 

PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
2007 ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS

		Page
PART I
Item 1 Description of Business			2
Item 2 Description of Property			4
Item 3 Legal Proceedings			4
Item 4 Submission of Matters to a Vote of Security Holders			4
PART II
Item 5 Market for Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities			4
Item 6 Management’s Discussion and Analysis or Plan of Operation			6
Item 7 Financial Statements			11
Item 8 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure			11
Item 8a Controls and Procedures			11
Item 8b Other Information			11
PART III
Item 9 Trustees, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act			12
Item 10 Executive Compensation			14
Item 11 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			16
Item 12 Certain Relationships and Related Transactions; Trustee Independence			20
Item 13 Exhibits			20
Item 14 Principal Accountant Fees and Services			23
SIGNATURES			24
EXHIBITS
Exhibit 31.1 Section 302 CEO Certificate
Exhibit 31.2 Section 302 CFO Certificate
Exhibit 32.1 Section 906 CEO & CFO Certificate
EX-31.1
EX-31.2
EX-32.1

PART I

Item 1. Description of Business

Company Overview

Paragon Real Estate Equity and Investment Trust (the “Company,” “Paragon,” “we,” “our,” or “us”)
is a real estate company with its primary focus on searching for and reviewing value-added real estate deals, including land development, retail, office, industrial, hotel, other real estate investment and operating companies, and joint venture investments. In addition in early 2008, the Company began to invest a portion of its available cash in publicly traded shares of other real estate companies. Presently, the Company is a corporate shell, current in its SEC filings that may be used in the future for real estate deals or sold to another company.

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

From 2003 through 2006, we pursued a value-added business plan primarily focused on acquiring well located, under-performing multi-family residential properties, including affordable housing communities, and repositioning them through renovation, leasing, improved management and branding. In 2006, we were unable to complete a $100 million public offering to fund an acquisition of a portfolio of ten apartment communities comprised of 1,478 units located in Texas and Ohio. Without completing the public offering, the Company was not able to meet the listing requirements of the American Stock Exchange (“Amex”) because its book equity was less than the $6 million minimum requirement, it had sustained consecutive years of losses from operations and net losses since its inception in 1994, and its common shares had been selling at a low share price for more than a year. In February 2006, Amex delisted Paragon’s common shares, which then commenced being quoted on the Over-The-Counter Bulletin Board (“OTC Bulletin Board”) and on the pink sheets with the new symbol “PRLE”.

Because our unrestricted cash was not sufficient to allow us to continue operations, in the third quarter of 2006, three independent trustees signed subscription agreements to purchase 125,000 Class C Convertible Preferred Shares for an aggregate contribution of $500,000 cash to maintain the Company as a corporate shell current in its SEC filings so that it may be used in the future for real estate deals or sold to another company. There can be no assurance that we will be able to close a transaction or keep the Company currently filed with the SEC.  Even if our management is successful in closing a transaction, investors may not value the transaction or the current filing status with the SEC in the same manner as we did, and investors may not value the transaction as they would value other transactions or alternatives. Failure to obtain external sources of capital and complete a transaction will materially and adversely affect the Company’s ability to continue operations. In early 2008, the Company began to invest a portion of its available cash in publicly traded shares of other real estate companies.

Real Estate

Paragon Real Estate, LP, an operating partnership of which we were sole general partner and owned a 1.0% interest, owned Richton Trail, a residential apartment community containing 72 units located near Chicago, Illinois. Effective March 31, 2006, the Company transferred its interest in Paragon Real Estate, LP to Hampton Court Associates, the sole limited partner of Paragon Real Estate, LP. Since that date, we have not owned any real estate assets.

Real Estate Tenants

Because we no longer own any real estate, we have no tenants.

Competition

We compete for the acquisition of properties with many entities, including, among others, publicly traded REITs, life insurance companies, pension funds, partnerships and individual investors. Many competitors have substantially greater financial resources than we have. In addition, certain competitors may be willing to accept lower returns on their investments. If competitors prevent us from buying properties that may be targeted for acquisition, our capital appreciation and valuation may be impacted. Because we recently began to invest a portion of our available cash in publicly traded shares of other real estate companies, we compete with other investors for these same shares. We are subject to the fluctuations in market prices of these publicly traded securities.

Employees

The Company has three part-time employees as of March 14, 2008.

Cautionary Statements Regarding Forward-Looking Statements

This annual report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions.  In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “hope,” “predict,” “target,” “potential,” or “continue” or the negative of these terms or other similar expressions.  These forward-looking statements are only our predictions based upon current information and involve numerous assumptions, risks and uncertainties.  Our actual results or actions may differ materially from these forward-looking statements for many reasons.  While it is impossible to identify all of theses factors, the following could cause actual results to differ materially from those estimated by us:

	•		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.

In addition, an investment in the Company involves numerous risks that potential investors should consider carefully, including, without limitation:

	•		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

As of December 31, 2007, we did not own any real estate assets.

Investments in Real Estate, Depreciation and Insurance Coverages

The Company has no investments in real estate at December 31, 2007 and does not require insurance coverage.

Mortgage Loan

The Company does not have any mortgage loans outstanding at December 31, 2007.

Item 3. Legal Proceedings

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

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of 2007.

PART II

Item 5. Market for Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Our common shares began trading on the Amex on October 28, 1999 under the symbol “RPP”. On June 30, 2003 we changed our name to “Paragon Real Estate Equity and Investment Trust” and our new symbol on Amex for our common shares was “PRG”. Amex delisted Paragon’s common shares for failure to meet listing requirements and in February 2006, Paragon’s common shares commenced being quoted on the OTC Bulleting Board and on the pink sheets with the new symbol “PRLE”.

Our Class A Preferred Shares began trading on the Amex on October 28, 1999 under the symbol “RPP.A.” In May 2003, we offered preferred shareholders a one-time incentive to exchange their Class A preferred shares for common shares, which expired June 30, 2003. After the exchange offer was completed, the remaining Class A preferred shares held by investors not affiliated with Paragon had an aggregate market value below $1 million and therefore no longer met the minimum requirement for listing on Amex. Amex suspended trading of the Class A preferred shares and the SEC removed the Class A preferred shares from listing and registration in 2003. Preferred shareholders retain the right to convert each of their shares for 0.046 common shares. The Class A preferred shares are now quoted over-the-counter with the symbol “PRGYP”.

Our Class C Convertible Preferred Shares were issued effective September 29, 2006 to the trustees of the Company who contributed cash and/or services for these shares. The Class C Convertible Preferred Shares are not traded on an exchange.

The following table shows the range of the high and low sale prices for our common shares as reported on Amex through February 14, 2006 and thereafter on the OTC Bulletin Board. The quotations shown represent inter-dealer prices without adjustment for retail markups, markdowns or commissions, and may not reflect actual transactions. Price quotations are stated after giving effect to the reverse share split of 1-for-75 that was effective July 27, 2006.

		High				Low
2007
4th Quarter		$	0.45			$	0.22
3rd Quarter		$	0.51			$	0.29
2nd Quarter		$	0.51			$	0.30
1st Quarter		$	0.53			$	0.38
2006
4th Quarter		$	1.50			$	0.38
3rd Quarter		$	2.25			$	0.52
2nd Quarter		$	5.25			$	0.90
1st Quarter		$	9.75			$	4.50

On March 14, 2008, the last reported sales price of our common shares on the OTC Bulletin Board was $0.24. The number of holders of record of our common shares was 233 as of March 14, 2008 and we estimate we have approximately 1,200 beneficial holders of common interests as of that same date.

Dividend Policy

We have not declared or paid dividends on our common shares since the fourth quarter of 1999, and we do not anticipate paying dividends on our common shares in the foreseeable future. Declaration or payment of dividends, if any, in the future, will be at the discretion of the board of trustees and will depend on our then current financial condition, results of operations, capital requirements and other factors deemed relevant by the board of trustees.

Preferred Share Conversions

No preferred shares were converted during the fourth quarter of 2007.

Issuer Purchases of Equity Securities

The Company did not purchase any equity securities within the fourth quarter of 2007 that were not registered under the Securities Act.

Item 6. Management’s Discussion and Analysis or Plan of Operation

Cautionary Statements Regarding Forward-Looking Statements

This annual report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions.  In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “hope,” “predict,” “target,” “potential,” or “continue” or the negative of these terms or other similar expressions.  These forward-looking statements are only our predictions based upon current information and involve numerous assumptions, risks and uncertainties.  Our actual results or actions may differ materially from these forward-looking statements for many reasons.  While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include:

	•		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.

In addition, an investment in the Company involves numerous risks that potential investors should consider carefully, including, without limitation:

	•		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.

Overview

Paragon Real Estate Equity and Investment Trust (the “Company,” “Paragon,” “we,” “our,” or “us”) is a real estate company with its primary focus on reviewing value-added real estate deals, including land development, retail, office, industrial, hotel, other real estate investment and operating companies, and joint venture investments. Generally, the selling prices of this asset category have been quite high and have impacted the availability and cost of financing. Paragon has also been reviewing the possibility of selling the corporate entity or seeking additional investors. In addition in early 2008, the Company began to invest a portion of its available cash in publicly traded shares of other real estate companies.

As of December 31, 2007, the Company is a public shell current with its SEC filings. The board of trustees intends to keep the Company currently filed with the SEC as a corporate shell that may be used in the future for real estate deals or sold to another company. There can be no assurance that we will be able to close a transaction or keep the Company currently filed with the SEC.  Even if our management is successful in closing a transaction, investors may not value the transaction or the current filing status with the SEC in the same manner as we did, and investors may not value the transaction as they would value other transactions or alternatives. Failure to obtain external sources of capital will materially and adversely affect the Company’s ability to continue operations, as well as its liquidity and financial results.

Brief History

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

Recent Developments in 2007 and Executive Overview

During 2007, the Company continued as a public shell current with its SEC filings. The board of trustees approved investing a portion of the Company’s available cash in shares of publicly traded real estate companies, and the Company began doing so in early 2008.

Results of Operations

The following is a discussion of our results of operations for the years ended December 31, 2007 and 2006 and financial condition, including:

	•		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

During 2007, the Company did not own any real estate assets. Effective March 31, 2006, the

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

Revenues from Operations

Interest and other revenue increased by approximately $5,000 to approximately $10,000 for the year ended December 31, 2007 compared to the year ended December 31, 2006. The increase is primarily due to interest earned on the increase in cash and cash equivalents between the periods. Because our unrestricted cash was not sufficient to allow us to continue operations, in the third quarter of 2006, three independent trustees signed subscription agreements to purchase 125,000 Class C Convertible Preferred Shares for an aggregate contribution of $500,000 cash to maintain the Company as a corporate shell current in its SEC filings so that it may be used in the future for real estate deals or sold to another company.

Expenses from Operations

Total expenses, comprised mostly of general and administrative expenses, decreased from approximately $451,000 for the year ended December 31, 2006 to approximately $372,000 for the year ended December 30, 2007, a net decrease of $79,000. The $372,000 of general and administrative expenses for 2007 included non-cash charges of approximately $282,000 for executive officer salary, trustee fees, and professional fees paid in the form of shares and options. The net decrease in 2007 expenses of $79,000 resulted from fewer overhead costs in 2007 compared to 2006. Accordingly, the following expenses decreased in 2007: Insurance expense by approximately $35,000, legal fees by approximately $15,000, accounting fees by approximately $12,000, and travel costs for visiting properties by approximately $13,000. Payroll expenses also decreased $95,000 in 2007 compared to 2006, as well as other overhead expenses, such as rent, general consulting costs and expenses of maintaining the public entity, which decreased approximately $3,000 net. Because the Company has limited unrestricted cash available, it has not replaced employees who have left and has been reducing other overhead expenses. None of the three part-time employees was paid cash compensation in 2007. These reductions are offset by approximately $94,000 in increased trustee fees, a non-cash expense because the fees were paid in the form of Class C Preferred Shares.

Loss from continuing operations

As a result of the above, loss from continuing operations decreased from approximately $447,000 for the year ended December 31, 2006 to approximately $363,000 for the year ended December 31, 2007.

Gain on sale of marketable securities

The gain on sale of marketable securities of approximately $1,000 for the year ended December 31, 2006 was a result of our sale of 100 common shares of a publicly traded real estate company for approximately $2,000.

Discontinued operations

Discontinued operations includes the revenues and expenses of Richton Trail, the Company’s former real estate asset.

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

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

Net loss attributable to Common Shareholders

Based on the above, the net loss attributable to Common Shareholders decreased from approximately $446,000 for the year ended December 31, 2006 to approximately $363,000 for the year ended December 31, 2007.

Liquidity and Capital Resources

Cash provided by operations, equity transactions, and borrowings from affiliates and lending institutions have generally provided the primary sources of liquidity to the Company. Historically, the Company has used these sources to fund operating expenses, satisfy its debt service obligations and fund distributions to shareholders. Presently, we are dependent on our existing cash, which was provided by three independent trustees contributing $500,000 cash in exchange for Class C Convertible Preferred Shares to maintain the Company as a corporate shell current in its SEC filings so that it may be used in the future for real estate deals or sold to another company. We have been reviewing alternatives, including value-added real estate deals for land development, retail, office, industrial, hotel, other real estate investment and operating companies, and joint venture investments, as well as reverse merging with another company, selling the corporate entity, and seeking additional investors. In early 2008, the Company began to invest a portion of its available cash in publicly traded shares of other real estate companies.

Cash Flows

As of December 31, 2007, our unrestricted cash resources were approximately $421,000. We are dependent on our existing cash contributed by three independent trustees in exchange for Class C Convertible Preferred Shares to meet our liquidity needs because we do not have cash from operations to meet our operating requirements.

During the year ended December 31, 2007, the Company’s cash balance increased by approximately $208,000 from approximately $213,000 at December 31, 2006 to approximately $421,000 at December 31, 2007. During 2007, we received cash of $300,000 from three independent trustees in exchange for Class C Convertible Preferred Shares. Cash of approximately $92,000 was used in continuing operations.

Cash used for continuing operations included general and administrative costs, primarily for maintaining Paragon as a public shell current with its SEC filings so that it may be used in the future for real estate deals or sold to another company.

Future Obligations

Because the Company is a corporate shell that may be used in the future for real estate deals or sold to another company, we have no cash from operations and have reduced our day-to-day overhead expenses and material future obligations. We have reduced overhead expenses by issuing stock for our CEO’s salary and trustee fees, placing our other employees on a part-time unpaid basis, not replacing employees who have left, reducing office space and rent, reducing use of outside consultants, negotiating discounts on prices wherever possible, and foregoing other expenses.

Long Term Liquidity and Operating Strategies

We historically have financed our long term capital needs, including acquisitions, as follows:

	•		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.

Because our unrestricted cash is not sufficient to allow us to continue operations, we have been reviewing other alternatives, including selling the corporate entity and seeking additional investors. In 2007, the Company received final installment payments of $300,000 from three independent trustees for payment of Class C Convertible Preferred Shares. These funds will be used to maintain Paragon as a public shell current with its SEC filings while it searches for and reviews other value added real estate deals. In addition, the Company began in early 2008 to invest a portion of the available cash in shares of publicly traded real estate companies that have share prices at significant discounts to their net asset value.

Current Tax Status

At December 31, 2007, we have net operating losses of approximately $1.9 million. While these losses created a deferred tax asset, a valuation allowance was applied against the asset because of the uncertainty of whether we will be able to use these loss carryforwards, which will expire in varying amounts through the year 2027.

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

Interest Rates and Inflation

Interest rates rose during most of 2007 from the record low rates of the previous few years, and then began to drop again in late 2007 as the Federal Reserve Bank lowered the discount rate. While interest rates are again at record lows, debt financing is only available to the top-tier creditworthy companies. Financial institutions are tightening financial covenant tests and charging higher fees for loans, which will likely lead to a slow down in real estate transactions.

We were not significantly affected by inflation during the periods presented in this report due primarily to the relative low nationwide inflation rates and the Company being a corporate shell with minimal expenses.

Off-Balance Sheet Arrangements

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

Application of Critical Accounting Estimates

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

Valuation Allowance of Deferred Tax Asset

We account for income taxes using the liability method under which deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the period in which the differences are expected to affect taxable income. At December 31, 2007, we had net operating losses totaling approximately $1.9 million. While these losses created a deferred tax asset of approximately $746,000, a valuation allowance of $746,000 was applied against this asset because of the uncertainty of whether we will be able to use these loss carryforwards, which will expire in varying amounts through the year 2027. Pursuant to Internal Revenue Code regulations, we will be limited to using approximately $1.5 million of the prior net operating losses of $13.1 million, and these same regulations also limit the amount of loss used in any one year.

Item 7. Financial Statements

The required audited consolidated financial statements of the Company are included herein commencing on page F-1.

Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

Item 8a. Controls and Procedures

As of December 31, 2007, the date of this report, James M. Mastandrea, our Chief Executive Officer and President, and John J. Dee, our Chief Financial Officer and Senior Vice President, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934. Based upon this evaluation, Messrs. Mastandrea and Dee concluded that, as of December 31, 2007, our disclosure controls and procedures are effective to ensure that material information relating to the Company and our consolidated subsidiaries is recorded, processed, summarized and reported in a timely manner.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our evaluation of internal control over financial reporting includes using the COSO (Committee Of Sponsoring Organizations) framework of the Treadway Commission to identify the risks and control objectives within our Company. We have established policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2007.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Further, there were no significant changes in the internal controls or, to our knowledge, in other factors that could significantly affect such controls subsequent to December 31, 2007.

Item 8b. Other Information

None.

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

The names, ages and positions of our trustees and executive officers are as follows:

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

Board of Trustees and Executive Officers

The business experience, principal occupations and employment, as well as the periods of service, of each of our trustees and executive officers during at least the last five years are set forth below.

James C. Mastandrea has served as President and Chairman of the Board of Trustees since March 4, 2003 and as Chief Executive Officer since April 7, 2003. Since October 2, 2006, he has also been Chairman and Chief Executive Officer of Whitestone REIT, a public though non-traded REIT. Mr. Mastandrea is Chairman and Chief Executive Officer of MDC Realty Corporation, Chicago, Illinois, which he founded in 1978 and has used for the development of over $500 million of real estate projects until 1993. From July 1993 to December 1993, Mr. Mastandrea was President of First Union Real Estate Investments, a NYSE listed real estate investment trust headquartered in Cleveland, Ohio. From January 1994 until his departure in May 1998, he was Chairman of the Board of Trustees and Chief Executive Officer of First Union. During his tenure at First Union, Mr. Mastandrea and his management team substantially grew the assets of the company from $495 million at the beginning of 1994 to $1 billion, along with commensurate growth in net operating income and funds from operations, at the end of his tenure in mid-1998. Mr. Mastandrea is a director of Cleveland State University Foundation Board and a member of the Strategic Planning Committee, a director and a member of the real estate committee of University Circle Inc., Cleveland, Ohio, and a director of the Calvin Business Alliance Board at Calvin College, Grand Rapids, Michigan. He is also a member of Pension Real Estate Association (PREA).

John J. Dee has served as a trustee and Senior Vice President since March 4, 2003, and as Chief Financial Officer since April 7, 2003. Since October 3, 2006, Mr. Dee has also been Chief Operating Officer, Executive Vice President, and Director of Finance at Whitestone REIT, a public though non-traded REIT. Prior to Mr. Dee’s joining Paragon, from 2002 to 2003, he was Senior Vice President and Chief Financial Officer of MDC Realty Corporation, Cleveland, Ohio, an affiliate of MDC Realty Corporation, Chicago, Illinois. From 2000 to 2002, Mr. Dee was Director of Finance and Administration for Frantz Ward, LLP, Cleveland, Ohio, a Cleveland-based law firm with approximately 100 employees. From 1978 to 2000, Mr. Dee held various management positions with First Union Real Estate Investments (NYSE), most recently as Senior Vice President and Chief Accounting Officer from 1996 to 2000. Mr. Dee is licensed as a CPA (non-practicing) in the State of Ohio.

Daryl J. Carter has served as a trustee since June 30, 2003. Mr. Carter is the Founder, Chairman and CEO of Avanath Capital Partners, LLC, an investment firm focused on urban-themed real estate and mortgage investments. Mr. Carter directs the strategy, investments, and overall operations of the firm. Previously, Mr. Carter was an Executive Managing Director of Centerline Capital Group (“Centerline”) a subsidiary of Centerline Holding Company (NYSE), and head of the Commercial Real Estate Group. Mr. Carter was responsible for overseeing the Commercial Real Estate Group’s national origination platform, investment strategy and new business development. He was also the President of American Mortgage Acceptance Corporation, a publicly-held, commercial mortgage lender (AMEX) that was externally managed by Centerline. Mr. Carter became part of Centerline when his company, Capri Capital Finance (“CCF”), was acquired by Centerline in 2005. Mr. Carter co-founded and served as Co-Chairman of both CCF and Capri Capital Advisors in 1992. He was instrumental in building Capri to a diversified real estate firm with $8 billion in real estate equity and debt investments under management. Prior to Capri, Mr. Carter was Regional Vice President at Westinghouse Credit Corporation in Irvine and a Second Vice President at Continental Bank in Chicago. Mr. Carter is a Trustee of the Urban Land Institute, Executive Committee Member of the National Multifamily Housing Association and Vice Chairman of the Commercial Board of Governors of the Mortgage Bankers Association. Mr. Carter serves on the Dean’s Advisory Council of the M.I.T. Sloan School of Management.

Daniel G. DeVos has served as a trustee since March 4, 2003. Mr. DeVos is Chairman of the Board and Chief Executive Officer of DP Fox Ventures, LLC, a diversified management enterprise with investments in real estate, transportation, and sports teams. In addition, Mr. DeVos is the majority owner of the Grand Rapids Rampage (AFL), Grand Rapids Griffins (AHL) and has ownership interests in the Orlando Magic (NBA). Mr. DeVos is a director of Alticor, Inc., the parent of Amway Corporation, located in Ada, Michigan, and the Orlando Magic (NBA). From 1994 to 1998, Mr. DeVos served as a trustee of First Union Real Estate Investments (NYSE).

Paul T. Lambert has served as a trustee since November 1998. Mr. Lambert serves as the Chief Executive Officer of Lambert Capital Corporation. He served on the Board of Directors and was the Chief Operating Officer of First Industrial Realty Trust, Inc. (NYSE) from its initial public offering in October 1994 to the end of 1995. Mr. Lambert was one of the largest contributors to the formation of First Industrial and one of its founding shareholders. Prior to forming First Industrial, Mr. Lambert was managing partner for The Shidler Group, a national private real estate investment company. Prior to joining Shidler, Mr. Lambert was a commercial real estate developer with Dillingham Corporation and, prior to that, was a consultant with The Boston Consulting Group.

Michael T. Oliver has served as a trustee since March 4, 2003. Mr. Oliver is Director of New Business Development at Concierge Asset Management. Mr. Oliver was the State Investment Officer of Real Estate and Private Equity Investments of the Alaska State Pension Board of the Alaska State Pension Fund, Juneau, Alaska, a position he held from August 2000 through September 2005. Mr. Oliver was a consultant from March 1998 to July 2000 to MPAC Capital Markets, Seattle, Washington, and a consultant to several Asian governments concerning laws governing real estate investment trusts. From April 1996 to March 1998, Mr. Oliver was Chairman of RERC Capital

Markets, LLC, Chicago, Illinois. From March 1987 to February 1996, he was Chairman of Heitman/PRA Securities Advisors, Inc. and President of its Real Estate Fund. Prior to March 1987 and since 1967, Mr. Oliver held positions at real estate companies raising capital and making direct investments in real estate, and at investment banking firms analyzing real estate companies and raising capital.

The board of trustees has determined that each of Messrs. Carter, DeVos, Lambert and Oliver do not have a material relationship with Paragon that would interfere with the exercise of independent judgment and are independent as defined by the applicable rules of the SEC. Mr. Oliver is the chairman of Paragon’s audit committee and serves as the committee’s financial expert. Mr. Carter is the chairman of the management, organization and compensation committee. All four independent trustees are on the audit committee and the management, organization and compensation committee.

Code of Ethics

On January 14, 2004, our Board of Trustees adopted a code of conduct and ethics that applies to all officers, trustees and employees of Paragon, including our principal executive officer, principal financial officer and principal accounting officer. The Code of Conduct and Ethics is filed as exhibit 14 to our annual report for the year ended December 31, 2003. Upon written request to the Company, we will provide a copy of our Code of Conduct and Ethics without charge.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers, trustees and persons who own more than 10% of our common shares to file reports of ownership and changes in ownership with the SEC. Officers, trustees and greater than 10% shareholders are required by regulation to furnish us with copies of all Section 16(a) forms they file. Based solely on review of the copies of Form 4s filed by trustees reporting grants of restricted shares and options furnished to us, or written representations that no Annual Statements of Beneficial Ownership of Securities on Form 5 were required to be filed, we believe that for the fiscal year ended December 31, 2007, all Section 16(a) filing requirements applicable to our officers, trustees and greater than 10% shareholders were complied with.

Item 10. Executive Compensation

The following table sets forth the compensation paid to our CEO for the years ended December 31, 2007 and December 31, 2006.

										Restricted Stock				All Other
Name and Position		Year				Salary(1)				Awards(6)			Compensation(6)						Total
James C. Mastandrea			2007			$	0	(2)		$	0			$	0			$	0
Chief Executive Officer,President and Chairman			2006			$	45,000	(3)		$	200,000	(4)		$	50,000	(5)		$	295,000

The following table sets forth the status of equity awards as of December 31, 2007.

Stock Awards

Equity Incentive

Plan Awards:

Option Awards

Market

Number of

Number of

Number of

Number of

Value of

Unearned

Securities

Securities

Shares or

Shares or

Shares, Units

Underlying

Underlying

Units of

Units of

or Other

Unexercised

Unexercised

Option

Option

Stock That

Stock That

Rights That

Options

Options

Exercise

Expiration

Have Not

Have Not

Have Not

Name

Exercisable

Unexercisable

Price

Date

Vested

Vested

Vested

James C. Mastandrea

2,000

(1)

—

$

20.25

1/2/09

2,000

(2)

$

760.00

(3

)

Chief Executive Officer, President and Chairman

Employment Agreements

On April 3, 2006, the Board of Trustees of Paragon authorized modifications to the employment agreement of James C. Mastandrea, President and Chief Executive Officer. The modification agreement allows Mr. Mastandrea to devote time to other business and personal investments while performing his duties for Paragon. The original employment agreement with Mr. Mastandrea provides for an annual salary of $60,000 effective as of March 4, 2003. The initial term of Mr. Mastandrea’s employment is for two years and may be extended for terms of one year through his 70^th birthday. Mr. Mastandrea’s base annual salary may be adjusted from time to time, except that the adjustment may not be lower than the preceding year’s base salary. The employment agreement provides that Mr. Mastandrea will be entitled to base salary and bonus at the rate in effect before any termination for a period of three years in the event that his employment is terminated without cause by us or for good reason by Mr. Mastandrea. Effective September 29, 2006, in lieu of an annual salary of $100,000, Mr. Mastandrea received 44,444 Class C Convertible Preferred Shares for his services as an officer of Paragon through September 29, 2008.

Effective June 30, 2003, we issued 696,078 preferred shares valued at approximately $2.4 million to Messrs. Mastandrea and Dee pursuant to separate restricted share agreements. On June 30, 2003, 534,668 preferred shares were converted at a factor of 0.305 into 163,116 common shares. Under the restricted share agreement for each of Mr. Mastandrea and Mr. Dee, the restricted shares vest upon the later of the following dates:

	•		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.

The number of common shares and the conversion factor have been revised to reflect the 1-for-75 reverse split of the common shares that occurred in July 2006.

Compensation of Trustees

During the year ended December 31, 2007, trustees were not paid any compensation.

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 for 2006.

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.

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

The following table includes certain information with respect to the beneficial ownership of our shares by: (i) each person known by us to own more than 5% in interest of the outstanding shares: (ii) each of the trustees; (iii) each of our executive officers; and (iv) all of the trustees and executive officers as a group. Except as otherwise noted, the person or entity named has sole voting and investment power over the shares indicated.

The table shows ownership as of March 14, 2008.

Total Common Shares

Common 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