-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IazuOCc4yOvNHIBHkRYuptxvcRDW60n1BexTJUw93bly2cACXtCfiCpja5i19MSm ceAVfQA6VD7WBmWj9lzWpw== 0001162044-07-000134.txt : 20070309 0001162044-07-000134.hdr.sgml : 20070309 20070309140128 ACCESSION NUMBER: 0001162044-07-000134 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070309 DATE AS OF CHANGE: 20070309 EFFECTIVENESS DATE: 20070309 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARADIGM FUNDS CENTRAL INDEX KEY: 0001196878 IRS NUMBER: 000000000 STATE OF INCORPORATION: OH FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-21233 FILM NUMBER: 07683761 BUSINESS ADDRESS: STREET 1: NINE ELK STREET CITY: ALBANY STATE: NY ZIP: 12207 BUSINESS PHONE: 5184313516 0001196878 S000005314 Paradigm Value Fund C000014505 Paradigm Value Fund PVFAX 0001196878 S000005315 Paradigm Opportunity Fund C000014506 Paradigm Opportunity Fund PFOPX 0001196878 S000005316 Paradigm Select Fund C000014507 Paradigm Select Fund PFSLX N-CSR 1 paradigmncsr2006annual123106.htm Paradigm Funds

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES

Investment Company Act file number 811-21233


PARADIGM FUNDS

(Exact name of registrant as specified in charter)


Nine Elk Street, Albany, NY               12207-1002

(Address of principal executive offices)        (Zip code)         


Robert A. Benton

Nine Elk Street, Albany, NY 12207-1002

(Name and address of agent for service)


Registrant's telephone number, including area code: (518) 431-3500


Date of fiscal year end: December 31


Date of reporting period: December 31, 2006


Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).  The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection and policymaking roles.


A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public.  A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number.  Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609.  The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.

 

Item 1.  Reports to Stockholders.


 

Paradigm Funds


Paradigm Value Fund

Paradigm Opportunity Fund

Paradigm Select Fund

For Investors Seeking Long-Term Capital Appreciation



ANNUAL REPORT

 

December 31, 2006
















Table of Contents


Paradigm Value Fund



Letter to Shareholders

          2

Sector Allocation

                      3

Performance Information

                      4


Paradigm Select Fund



Letter to Shareholders

           5

Sector Allocation

                       6

Performance Information

                       7


Paradigm Opportunity Fund



Letter to Shareholders

            8

Sector Allocation

                        9

Performance Information

                      10


Paradigm Funds




Schedule of Investments

                      11

Statement of Assets and Liabilities

                      19

Statement of Operations

                      19

Statement of Changes in Net Assets

                      20

Financial Highlights                                                                                          22



NOTES TO FINANCIAL STATEMENTS

     

                      25


OTHER INFORMATION

                                  29


DISCLOSURE OF EXPENSES

                      30


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   

          31



2006 Annual Report  1



Paradigm Value Fund

Letter to Shareholders


2006 turned out to be a good year for the equity markets, though there was considerable volatility along the way. After a very strong start through April, the markets weakened significantly as concern over continuing interest rate increases and a weakening housing sector dominated the good news of moderating energy costs. However, when the Federal Reserve stopped raising short-term rates at their August meeting and it seemed less likely that they would push the economy into a recession, equities responded with a strong upward move that lasted through year-end. For the record, once again it was the small caps that led the way, returning 23.48% as measured by the Russell 2000 Value Index compared to a 15.79% gain for the S&P 500.


The Paradigm Value Fund also had a very good year, generating a 19.19% return, though underperforming the Russell 2000 Value Index (the fund's benchmark) by 4.29%. We continued our strategy of focusing on well run conservatively managed small cap companies while taking advantage of opportunities to add value with differential sector weightings relative to the benchmark. Regardless of our sector exposure, however, we rigorously searched for firms with good return on capital, strong balance sheets, improving operating performance and a general lack of investor interest.


In 2006, the fund's two best performing sectors were Other Energy and the Other category, where our selections generated returns of 59.30% and 52.57%, respectively. The fund also generated positive contributions from the Producer Durables and Materials and Processing sectors, where we held overweight positions relative to the Russell benchmark. The most significant factor contributing to the fund’s underperformance was stock selection in the Technology and Health Care sectors. Some of our top gainers included Foster Wheeler, a repeat top performer from 2005 that continued to see strong demand for their engineering and construction services from the petroleum, petrochemical and liquefied natural gas industries. Another holding, Frontier Oil Corp., experienced strong operating profit growth from their ability to refine heavier and cheaper grades of crude oil, maximizing refinery margins.


The previous comments are of course backward looking, but more importantly, what we see for 2007 is a year of slower economic growth as the lagging impact of the 2006 interest rate increases continues to take effect. We do not believe that a recession is on the horizon and also do not expect the Federal Reserve to ease interest rates during the year. We feel that our stock selection process is well suited to a slower growth economic environment, but also realize that in the year ahead our small capitalization universe may be challenged by any defensive rotation of funds into large cap equities.  Nonetheless, the team at Paradigm does not intend to change their methods or goals and continues to strive to add value over the long-term with superior stock selection.



2006 Annual Report  2



We continue to focus our analysis on the strength of the company's business franchise, the ability of the management team, the near term prospects for improving returns and relative valuation, while maintaining an emphasis on overall financial strength. We believe we have successfully used this formula over the years and believe it will continue to generate returns for our investors in the long-term.


All of us at Paradigm appreciate your trust and confidence and look forward to continuing to reward it in the future.


Sincerely,


[paradigmncsr2006annual123001.jpg]

John B. Walthausen, CFA


PARADIGM VALUE FUND

Sector Allocation (Unaudited)

(As a Percentage of Common Stock Held)


[paradigmncsr2006annual123002.jpg]


2006 Annual Report  3



Paradigm Value Fund


PERFORMANCE INFORMATION  

(Unaudited)


[paradigmncsr2006annual123003.jpg]

Average  Annual Rate of Return (%) for The Periods Ended December 31, 2006

(Fund Inception January 1, 2003)


December 31, 2006 NAV $48.55



  

Since

 

          

     1 Year(A)

      3 Year(A)

          Inception (A)

Paradigm Value Fund

     19.19%

      23.46%   

            31.90%

S&P 600 Index(B)              

     15.11%  

      15.01%   

            20.54%

Russell 2000 Value Index(C)     

     23.48%   

      16.48%    

            23.32%


(A)1 Year, 3 Years and Since Inception returns include change in share prices and in each case includes reinvestment of any dividends and capital gain distributions.
 

(B) The S&P 600 index is a small capitalization benchmark index made up of 600 domestic stocks chosen for market size, liquidity and industry group representation whose composition is different from the Fund.
 

(C) The Russell 2000® Value Index is an unmanaged index of small-capitalization stocks with lower price-to-book ratios and lower forecasted growth values than the total population of small-capitalization stocks whose composition is different from the Fund.  
 

For purposes of the graph and the accompanying table, it is assumed that all dividends and distributions were reinvested.

 

PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.  INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.  RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.  CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAT THE PERFORMANCE DATA QUOTED.  TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH END, PLEASE CALL 1-800-239-0732 OR VISIT OUR WEBSITE AT www.paradigm-funds.com.



2006 Annual Report  4



Paradigm Select Fund

Letter to Shareholders


2006 turned out to be a good year for the equity markets, though there was considerable volatility along the way. After a very strong start through April, the markets weakened significantly as concern over continuing interest rate increases and a weakening housing sector dominated the good news of moderating energy costs. However, when the Federal Reserve stopped raising short-term rates at their August meeting and it seemed less likely that they would push the economy into a recession, equities responded with a strong upward move that lasted through year-end. For the record, once again it was the small caps that led the way, returning 18.37% as measured by the Russell 2000 index compared to a 15.79% gain for the S&P 500.


The Paradigm Select Fund also had a very good year, generating a 21.67% return, 3.30% better than the Russell 2000 Index, which is this fund's benchmark. We continued our strategy of focusing on well run conservatively managed small to mid-cap companies while taking advantage of opportunities to add value with differential sector weightings compared to the benchmark. Regardless of our sector exposure, however, we rigorously search for firms with good return on capital, strong balance sheets, improving operating performance and a general lack of investor interest.


In 2006, the fund outperformed the Russell 2000 Index in seven of the twelve sectors, with Consumer Discretionary and Auto & Transportation being the fund's two best performing sectors. Our selections in Healthcare and Producer Durables also generated strong index beating performance, while Consumer Staples and Materials and Processing were our weakest areas and underperformed relative to the index. Some of our top gainers included Continental Airlines, where we were able to identify declining fuel costs and increasing load factors and add this company to the portfolio at a very reasonable valuation. Another holding, MEMC Electronic Materials, benefited from fixed manufacturing capacity for silicon wafers and polysilicon while demand surged from the electronics and solar power industries, driving a 59.13% return for this stock.


The previous comments are of course backward looking, but more importantly, what we see for 2007 is a year of slower economic growth as the lagging impact of the 2006 interest rate increases continues to take effect. We do not believe that a recession is on the horizon and also do not expect the Federal Reserve to ease interest rates during the year. We feel that our stock selection process is well suited to a slower economic growth environment, but also realize that in the year ahead our small/mid capitalization universe may be challenged by any defensive rotation of funds into large cap equities.  Nonetheless, the team at Paradigm does not intend to change their methods or goals and continues to strive to add value over the long-term with superior stock selection.



2006 Annual Report  5



We continue to focus our analysis on the strength of the company's business franchise, the ability of the management team, the near term prospects for improving returns and relative valuation, while maintaining an emphasis on overall financial strength. We have successfully used this formula over the years and believe it will continue to generate returns for our investors in the long-term.


All of us at Paradigm appreciate your trust and confidence and look forward to continuing to reward it in the future.


Sincerely,


[paradigmncsr2006annual123004.jpg]

John B. Walthausen, CFA


PARADIGM SELECT FUND

Sector Allocation (Unaudited)

(As a Percentage of Common Stock Held)


[paradigmncsr2006annual123005.jpg]



2006 Annual Report  6



Paradigm Select Fund


PERFORMANCE INFORMATION  

(Unaudited)


[paradigmncsr2006annual123006.jpg]


Average  Annual Rate of Return (%) for The Periods Ended December 31, 2006

(Fund Inception January 1, 2005)


December 31, 2006 NAV $26.48


 

                                                                                        Since      

          1 Year(A)

            Inception(A)

Paradigm Select Fund      

                       21.67%

              16.77%

Russell 2000 Index(B)                            18.37%

  11.25%


(A) 1 Year and Since Inception returns include change in share prices and in each case includes reinvestment of any dividends and capital gain distributions.
 

(B) The Russell 2000® Index consists of the smallest 2,000 companies in the Russell 3000 Index (which represents approximately 98% of the investable U.S. equity market). The Index is an unmanaged index generally considered as the premier of small capitalization stocks.
 

For purposes of the graph and the accompanying table, it is assumed that all dividends and distributions were reinvested.
 

PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.  INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.  RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.  CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAT THE PERFORMANCE DATA QUOTED.  TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH END, PLEASE CALL 1-800-239-0732 OR VISIT OUR WEBSITE AT www.paradigm-funds.com.



2006 Annual Report  7



Paradigm Opportunity Fund

Letter to Shareholders


The Paradigm Opportunity Fund (the "Fund") generated a return of 11.39% for 2006 compared to 18.37% for its small cap benchmark, the Russell 2000 Index.  Since its inception two years ago, the Fund has generated an annualized return of 9.51% compared to 11.25% for the Russell 2000 Index.  


The United States equity markets performed strongly in 2006 but with a high degree of volatility.  The Russell 2000 Index of small cap stocks outperformed the S&P 500 by 2.58% marking seven out of eight years of outperformance with only last year's modest 0.34% relative gain in the large cap camp.  Small cap value trumped growth for the sixth time in seven years with the Russell 2000 Value Index outperforming its Growth counterpart by 10.13%.  


The Russell 2000 Index of small cap stocks surged to an all-time high in early May then retreated to negative territory by late July.  The early year gains were driven by better than expected economic and corporate profit growth.  The market sell-off was primarily due to investor concerns related to inflationary pressures, higher energy prices, a correction in the housing market, and slowing economic and corporate profit growth.  The investment community was fixated on macroeconomic predictions with company fundamentals taking a backseat.  After bottoming in late July, the markets rallied strongly through the balance of the year driven primarily by an end to the Fed's two plus year tightening cycle, investor optimism that a soft economic landing was in store, and increased M&A activity.  


The Fund also experienced a tale of two performances in 2006.  For the first half of the year, the Fund declined 2.72% compared to an 8.21% advance in the Russell 2000 Index.  For the second half of 2006, the Fund generated a return of 14.50% compared to 9.38% for the Russell 2000 Index.  Highlights for the year were strong stock selection in the Technology and Health Care sectors, which accounted for an approximate average of 50% of the Fund's assets in 2006.  The top 5 individual contributors to returns were MRO Software, Sciele Pharmaceuticals, Parametric Technology, MCG Capital, and Comtech Telecommunications.  MRO Software was acquired.


Strength in the Technology and Health Care sectors was overshadowed by a higher than average cash balance early in the year that limited the Fund's participation in the January rally.  In addition, the Fund's under weight allocation to Producer Durables, Materials & Processing, and Utilities and stock selection in the Consumer Discretionary and Other Energy sectors hurt performance.



2006 Annual Report  8



Consensus forecasts call for a soft economic landing, stable to improving near record profit margins, and continued, albeit decelerating, corporate profit growth in 2007.  If this plays out, multiple expansion is required to drive above average market returns.  Four straight positive years capped off by a strong fourth quarter with the Russell 2000 and Dow achieving all-time highs leaves no room for negative economic shocks or a decline in corporate profits.   

The Fund remains committed to identifying under valued and under followed securities with attractive growth characteristics and catalysts that will result in capital appreciation.  We will continue to focus on stock selection and feel there remains opportunities within the Health Care and Technology sectors.  

Sincerely,
[paradigmncsr2006annual123007.jpg]
Jason Ronovech, CFA


PARADIGM OPPORTUNITY FUND

Sector Allocation (Unaudited)

(As a Percentage of Common Stock Held)


[paradigmncsr2006annual123008.jpg]


2006 Annual Report  9



Paradigm Opportunity Fund


PERFORMANCE INFORMATION  

(Unaudited)


[paradigmncsr2006annual123009.jpg]

Average  Annual Rate of Return (%) for The Periods Ended December 31, 2006

(Fund Inception January 1, 2005)


December 31, 2006 NAV $23.21



  Since

 

                                       

                      1 Year(A)

                      Inception(A)

Paradigm Opportunity Fund

          11.39%

                9.51%

Russell 2000 Value Index(B)     

          

          23.48%

              13.71%

Russell 2000 Index(C)

                                  18.37%

              11.25%


(A)1 Year and Since Inception returns include change in share prices and in each case includes reinvestment of any dividends and capital gain distributions.

 

(B)The Russell 2000® Value Index is an unmanaged index of small-capitalization stocks with lower price-to-book ratios and lower forecasted growth values than the total population of small-capitalization stocks whose composition is different from the Fund.  

 

(C)The Russell 2000® Index consists of the smallest 2,000 companies in the Russell 3000 Index (which represents approximately 98% of the investable U.S. equity market). The Index is an unmanaged index generally considered as the premier of small capitalization stocks.

 

For purposes of the graph and the accompanying table, it is assumed that all dividends and distributions were reinvested.

 

PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.  INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.  RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.  CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAT THE PERFORMANCE DATA QUOTED.  TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH END, PLEASE CALL 1-800-239-0732 OR VISIT OUR WEBSITE AT www.paradigm-funds.com.



2006 Annual Report  10



Paradigm Value Fund

 

 

 

     
   

 Schedule of Investments

   

December 31, 2006

 Shares/Principal Amount

 

 Market Value

% of Net Assets

     

 COMMON STOCKS

    

 Agricultural Chemicals

    

             4,000

LESCO Inc. *

 

 $          34,600

0.06%

      

 Air Transportation, Scheduled

    

           53,000

Frontier Airlines Holdings, Inc. *

 

           392,200

0.69%

      

 Aircraft Engines & Engine Parts

    

             6,900

Sequa Corp. Class A *

 

           793,914

1.40%

      

 Ball & Roller Bearings

    

           63,600

NN Inc.

 

           790,548

1.39%

      

 Canned, Frozen & Preserved Fruit, Veg & Food Specialties

  

           28,500

Corn Products International Inc.

 

           984,390

1.73%

      

 Chemical & Allied Products

    

           29,500

Arch Chemicals Inc.

 

           982,645

 

           15,300

Innospec Inc.

 

           712,215

 
   

         1,694,860

2.99%

      

 Commercial Printing

    

           21,800

Cadmus Communications Corp.

 

           532,356

0.94%

      

 Communications Services

    

           55,700

LodgeNet Entertainment Corp. *

 

         1,394,171

2.46%

      

 Computer Communications Equipment

    

           26,600

Black Box Corp.

 

         1,116,934

1.97%

      

 Construction - Special Trade Contractors

    

             6,800

Layne Christensen Co. *

 

           223,244

0.39%

      

 Construction Machinery & Equip

    

           66,700

A.S.V. Inc. *

 

         1,085,209

1.91%

      

 Crude Petroleum & Natural Gas

    

           20,000

Evolution Petroleum Corp. *

 

             60,000

 

           46,300

Harvest Natural Resources Inc. *

 

           492,169

 

           11,500

Whiting Petroleum Corp. *

 

           535,900

 
   

         1,088,069

1.92%

      

 Cutlery, Handtools & General Hardware

    

           31,500

Simpson Manufacturing Co., Inc.

 

           996,975

1.76%

      

 Deep Sea Foreign Transportation of Freight

    

             8,900

Seacor Holdings Inc. *

 

           882,346

1.55%

      

 Electric Services

    

             4,900

Cleco Corp.

 

           123,627

0.22%

      

 Electrical Industrial Apparatus

    

           30,500

Woodward Governor Co.

 

         1,211,155

2.13%

      

 Electromedical & Electrotherapeutic Apparatus

    

           67,500

Cholestech Corp. *

 

         1,244,025

2.19%

      

 Electronic Components & Accessories

    

           49,000

AVX Corp.

 

           724,710

1.28%

      

 Electronic Components, NEC

    

           90,350

Spectrum Control Inc. *

 

           872,781

1.54%

      

 Fire, Marine & Casualty Insurance

    

           25,700

Alfa Corp.

 

           483,417

0.85%

      

 Food and Kindred Products

    

           41,300

Flowers Foods Inc.

 

         1,114,687

1.96%

      

 Games, Toys & Children's Vehicles (No Dolls & Bicycles)

    

           34,000

JAKKS Pacific Inc. *

 

           742,560

1.31%

      

 Glass Products

    

           54,000

Apogee Enterprises Inc.

 

         1,042,740

1.84%

      

 Greeting Cards

    

           28,935

CSS Industries Inc.

 

         1,023,431

1.80%



*Non-Income Producing Securities.

The accompanying notes are an integral part of these

financial statements.



2006 Annual Report  11



Paradigm Value Fund

 

 

 

     
   

 Schedule of Investments

   

December 31, 2006

 Shares/Principal Amount

 

 Market Value

% of Net Assets

     

 COMMON STOCKS

   

 Heavy Construction Other Than Bldg Const - Contractors

   

           16,900

Foster Wheeler Ltd. *

 

 $         931,866

1.64%

      

 Household Furniture

    

           54,600

Tempur Pedic International Inc. *

 

         1,117,116

1.97%

      

 Industrial Instruments For Measurement, Display and Control

  

           11,000

K-Tron International Inc. *

 

           821,370

1.45%

      

 Industrial Trucks, Tractors, Trailers & Stackers

    

           11,400

Cascade Corp.

 

           603,060

1.06%

      

 Insurance Carriers

    

           23,000

Pre-Paid Legal Services Inc.

 

           899,990

1.59%

      

 Life Insurance

    

             2,400

National Western Life Insurance Co. *

 

           552,336

0.97%

      

 Magnetic & Optical Recording Media

    

           17,300

Imation Corp.

 

           803,239

1.42%

      

 Mining & Quarrying of Nonmetallic Minerals (No Fuels)

    

           70,800

USEC Inc. *

 

           900,576

1.59%

      

 Miscellaneous Chemical Products

    

           31,400

WD-40 Co.

 

         1,094,918

1.93%

      

 Miscellaneous Electrical Machinery, Equipment & Supplies

  

           15,900

United Industrial Corp. +

 

           806,925

1.42%

      

 Miscellaneous Industrial & Commercial Machinery & Equipment

  

           32,200

Curtiss-Wright Corp.

 

         1,193,976

2.10%

      

 Motor Vehicle Parts & Accessories

    

           42,800

Superior Industries International Inc.

 

           824,756

 

           25,300

Drew Industries Inc. *

 

           658,053

 
   

         1,482,809

2.61%

      

 Office Furniture

    

           17,000

MITY Enterprises Inc. *

 

           304,300

0.54%

      

 Petroleum Refining

    

             6,000

Suncor Energy Inc.

 

           473,460

0.83%

      

 Pharmaceutical Preparations

    

           47,000

Alpharma Inc.

 

         1,132,700

2.00%

      

 Plastic Materials, Synth Resins & Non-vulcan Elastomers

    

           19,300

Rogers Corp. *

 

         1,141,595

2.01%

      

 Public Building & Related Furniture

    

           39,759

Virco Manufacturing Corp. *

 

           310,120

0.55%

      

 Railroads, Line-Haul Operating

    

           27,900

Kansas City Southern  * +

 

           808,542

1.42%

      

 Real Estate Dealers (For Their Own Account)

    

             2,900

Texas Pacific Land Trust

 

           629,300

1.11%

      

 Refrigeration & Service Industry Machinery

    

           35,700

Standex International Corp.

 

         1,075,641

1.90%

      

 Semiconductors & Related Devices

    

          112,000

Leadis Technology Inc. *

 

           525,280

 

          127,000

White Electronic Designs Corp. *

 

           690,880

 
   

         1,216,160

2.14%

      

 Services - Automotive Repair, Service & Parking

    

           17,800

Monro Muffler Brake Inc.

 

           624,780

1.10%

      

 Services - Business Services

    

           51,400

CBIZ Inc. *

 

           358,258

0.63%

      

 Services - Computer Integrated Systems Design

    

           42,500

Imergent Inc. *

 

         1,217,200

2.15%

     


*Non-Income Producing Securities.

+Portion of securities are pledged as collateral on short positions.

The accompanying notes are an integral part of these

financial statements.


2006 Annual Report  12



Paradigm Value Fund

 

 

 

     
   

 Schedule of Investments

   

December 31, 2006

 Shares/Principal Amount

 

 Market Value

% of Net Assets

     

 COMMON STOCKS

   

 Services - Educational Services

   

           68,800

Nobel Learning Communities Inc. *

 

 $         787,760

1.39%

      

 Services - Equipment Rental & Leasing

    

           34,600

Rent-A-Center Inc. *

 

         1,021,046

 

           51,000

Interpool Inc.

 

         1,191,360

 
   

         2,212,406

3.90%

      

 Services - Hospitals

    

           31,800

Rehabcare Group Inc. *

 

           472,230

0.83%

      

 Services - Personal Services

    

           25,000

CPI Corp.

 

         1,162,250

2.05%

      

 Sporting & Athletic Goods

    

           62,600

Escalade Inc.

 

           671,698

1.18%

      

 Surgical & Medical Instruments & Apparatus

    

           33,100

Cantel Medical Corp. *

 

           535,889

0.94%

      

 Telephone Communications

    

           28,500

D&E Communications Inc.

 

           360,525

 

          113,100

iBasis Inc. *

 

           961,350

 
   

         1,321,875

2.33%

      

 Trucking (No Local)

    

           26,000

Arkansas Best Corp.

 

           936,000

1.65%

      

 Water, Sewer, Pipeline, Comm & Power Line Construction

  

           13,250

Preformed Line Products Co.

 

           467,062

0.82%

      

 Wholesale - Machinery, Equipment & Supplies

    

           44,900

Kaman Corp.

 

         1,005,311

1.77%

      

 Wholesale - Medical, Dental & Hospital Equipment & Supplies

  

           36,500

Owens & Minor Inc.

 

         1,141,355

2.04%

      

 Wood Household Furniture

    

           24,000

Ethan Allen Interiors Inc.

 

           866,640

1.55%

      

 Total for Common Stock (Cost $42,901,889)

 

 $    52,673,662

92.83%

      

 Cash Equivalents

    

       3,792,507

SEI Daily Income Treasury Government CL B 4.82% **

         3,792,507

6.68%

 

           (Cost $3,792,507)

    
      

 Total Investment Securities

 

       56,466,169

99.51%

 

           (Cost $46,694,396)

    
      

Other Assets In Excess of Liabilities

 

           276,749

0.49%

   

   

 

 Net Assets

  

 $    56,742,918

100.00%

      

 Securities Sold Short

    

 Common Stock

    

           15,000

American Vanguard Corp.

 

 $         238,500

 

           10,000

Lincare Holdings Inc.

 

           398,400

 

           15,000

Titan International Inc.

 

           302,250

 
 

   Total Securities Sold Short (Proceeds - $912,409)

 $         939,150

1.66%



*Non-Income Producing Securities.

**Variable Rate Security; the rate shown was the rate at

December 31, 2006.

The accompanying notes are an integral part of these

financial statements.


2006 Annual Report  13



Paradigm Select Fund

 

 

 

     
   

 Schedule of Investments

   

December 31, 2006

 Shares/Principal Amount

 

 Market Value

% of Net Assets

     

 COMMON STOCKS

   

 Blankbooks, Looseleaf Binders & Bookbinding & Related Work

  

             2,600

John H. Harland Company

 

 $         130,520

1.96%

     

 Books: Publishing or Publishing & Printing

   

             3,000

Scholastic Corp. *

 

           107,520

1.61%

     

 Canned, Frozen & Preserved Fruit, Veg & Food Specialties

  

             2,600

Lancaster Colony Corp.

 

           115,206

1.73%

     

 Cement, Hydraulic

   

             2,800

Eagle Materials Inc.

 

           121,044

1.81%

     

 Communications Equipment

   

                500

Checkpoint Systems Inc. *

 

             10,100

0.15%

     

 Crude Petroleum & Natural Gas

   

                700

Denbury Resources Inc. *

 

             19,453

0.29%

     

 Drilling Oil & Gas Wells

   

             3,700

Parker Drilling Co. *

 

             30,229

0.45%

     

 Electric & Other Services Combined

   

             6,000

CMS Energy Corp. *

 

           100,200

 

             2,400

Pepco Holdings Inc.

 

             62,424

 
   

           162,624

2.44%

     

 Electric Services  

   

           15,600

Dynegy Inc. *

 

           112,944

 

             4,100

Energy East Corp.

 

           101,680

 

             1,800

NSTAR

 

             61,848

 
   

           276,472

4.14%

     

 Electrical Industrial Apparatus

   

             3,300

Woodward Governor Co.

 

           131,043

1.96%

     

 Electronic Components & Accessories

   

             4,900

AVX Corp.

 

             72,471

1.09%

     

 Engines & Turbines

   

             3,600

Brunswick Corp.

 

           114,840

1.72%

     

 Fabricated Rubber Products

   

                800

Carlisle Companies Inc.

 

             62,800

 

             1,300

West Pharmaceutical Services, Inc.

 

             66,599

 
   

           129,399

1.94%

     

 Fire, Marine & Casualty Insurance

   

                400

Alleghany Inc. *

 

           145,440

 

             1,900

Harleysville Group Inc.

 

             66,158

 
   

           211,598

3.17%

     

 Food & Kindred Products

   

             4,050

Flowers Foods Inc.

 

           109,309

1.64%

     

 Heavy Construction Other Than Bldg Const - Contractors

   

                200

Foster Wheeler, Ltd. *

 

             11,028

0.17%

     

 Household Furniture

   

             6,000

Tempur Pedic International Inc. *

 

           122,760

1.84%

     

 Industrial Instruments For Measurement, Display, and Control

  

             2,900

Esterline Technologies Corp. *

 

           116,667

1.75%

     

 Insurance Agents, Brokers & Service

   

             3,900

Arthur J Gallagher & Co.

 

           115,245

1.73%

     

 Life Insurance

   

             7,600

Phoenix Companies Inc.

 

           120,764

1.81%

     

 Machine Tools, Metal Cutting Types

   

             1,900

Kennametal Inc.

 

           111,815

1.68%

     

 Magnetic & Optical Recording Media

   

             2,200

Imation Corp.

 

           102,146

1.53%



*Non-Income Producing Securities.

The accompanying notes are an integral part of these

financial statements.


2006 Annual Report  14



Paradigm Select Fund

 

 

 

     
   

 Schedule of Investments

   

December 31, 2006

 Shares/Principal Amount

 

 Market Value

% of Net Assets

     

 COMMON STOCKS

   

 Meat Packing Plants

   

             2,900

Hormel Foods Corp.

 

 $         108,286

1.62%

     

 Miscellaneous Electrical Machinery, Equipment, & Supplies

  

             2,000

United Industrial Corp.

 

           101,500

1.52%

     

 Miscellaneous Industrial & Commercial Machinery & Equipment

  

             3,300

Curtiss-Wright Corp.

 

           122,364

1.83%

     

 Motor Vehicles Parts & Accessories

   

             3,400

CLARCOR Inc.

 

           114,954

 

           14,900

Visteon Corp. *

 

           126,352

 
   

           241,306

3.62%

     

 Newspapers: Publishing or Publishing & Printing

   

             4,900

Journal Communications, Inc.

 

             61,789

 

             1,300

Media General, Inc.

 

             48,321

 
   

           110,110

1.65%

     

 Office Furniture

   

             2,400

HNI Corp.

 

           106,584

1.60%

     

 Petroleum Refining

   

                200

Suncor Energy Inc.

 

             15,782

0.24%

     

 Plastic Materials, Synth Resins & Nonvulcan Elastomers

   

             1,800

Rogers Corp. *

 

           106,470

1.60%

     

 Plastics Products

   

             1,800

AptarGroup Inc.

 

           106,272

1.59%

     

 Prefabricated Metal Buildings & Components

   

             1,000

NCI Building Systems Inc. *

 

             51,750

0.78%

     

 Radiotelephone Communications

   

             4,300

USA Mobility Inc.

 

             96,191

 

             2,400

Telephone & Data Systems Inc. *

 

           119,040

 
   

           215,231

3.22%

     

 Railroad, Line-Haul Operating

   

             3,900

Kansas City Southern *

 

           113,022

1.69%

     

 Retail - Catalog & Mail-Order Houses

   

             1,700

CDW Corp.

 

           119,544

1.79%

     

 Retail - Department Stores

   

             3,200

Dillard's Inc.

 

           111,904

1.68%

     

 Retail - Shoe Stores

   

             3,900

Payless Shoesource Inc. *

 

           127,998

1.92%

     

 Security Brokers, Dealers & Flotation Companies

   

                500

Calamos Asset Management Inc.

 

             13,415

0.20%

     

 Semiconductors & Related Devices

   

             3,400

Cabot Microelectronics Corp. *

 

           115,396

1.73%

     

 Services - Advertising Agencies

   

             1,300

Catalina Marketing Corp.

 

             35,750

0.54%

     

 Services - Business Services

   

             1,700

Moneygram International Inc.

 

             53,312

 

             6,900

Premiere Global Services Inc.*

 

             65,136

 
   

           118,448

1.77%

     

 Services - Computer Integrated Systems Design

   

             5,500

Convergys Corp. *

 

           130,790

 

             4,000

Tyler Technologies Inc. *

 

             56,240

 
   

           187,030

2.80%

     

 Services - Equipment Rental & Leasing, NEC

   

             3,900

Rent-A-Center Inc. *

 

           115,089

1.72%

     

 Services - Help Supply Services

   

             6,400

Labor Ready Inc. *

 

           117,312

1.76%



*Non-Income Producing Securities.

The accompanying notes are an integral part of these

financial statements.


2006 Annual Report  15



Paradigm Select Fund

 

 

 

     
   

 Schedule of Investments

   

December 31, 2006

 Shares/Principal Amount

 

 Market Value

% of Net Assets

     

 COMMON STOCKS

   

 Services - Hospitals

   

             2,200

Magellan Health Services Inc. *

 

 $          95,084

1.42%

     
     

 Services - Personal Services

   

             3,500

Jackson Hewitt Tax Service Inc.

 

           118,895

1.78%

     

 Soap, Detergents, Cleaning Preparations, Perfumes, Cosmetics

  

             2,700

Church & Dwight Co., Inc.

 

           115,155

1.73%

     

 Special Industry Machinery (No Metalworking Machinery)

  

             3,600

Pentair Inc.

 

           113,040

1.69%

     

 Special Industry Machinery

   

             2,300

Varian Semiconductor Equipment Associates Inc. *

           104,696

1.57%

     

 Steel Works, Blast Furnaces & Rolling Mills

   

             4,500

Commercial Metals Co.

 

           116,100

1.74%

     

 Sugar & Confectionery Products

   

             3,427

Tootsie Roll Industries Inc.

 

           112,063

1.68%

     

 Telephone Communications

   

             2,300

Centurytel Inc.

 

           100,418

1.50%

     

 Wholesale - Electronic Parts & Equipment

   

             4,900

Avnet Inc. *

 

           125,097

1.87%

     

 Total for Common Stock (Cost $5,145,845)

 

 $      5,903,364

88.46%

     
     

 Cash Equivalents

   

          748,450

SEI Daily Income Treasury Government CL B 4.82% **

           748,450

11.21%

 

           (Cost $748,450)

   
     

 Total Investment Securities

 

         6,651,814

99.67%

 

           (Cost $5,894,295)

   
     

Other Assets in Excess of Liabilities

 

             22,190

0.33%

   

   

 

 Net Assets

  

 $      6,674,004

100.00%



*Non-Income Producing Securities.

**Variable Rate Security; the rate shown was the rate at

December 31, 2006.

The accompanying notes are an integral part of these

financial statements.


2006 Annual Report  16



Paradigm Opportunity Fund

 

 

 

     
   

 Schedule of Investments

   

December 31, 2006

 Shares/Principal Amount

 

Market Value

% of Net Assets

     

 COMMON STOCKS  

   

 Arrangement of Transportation of Freight & Cargo

   

             3,800

EGL Inc. *

 

 $        113,164

3.04%

     

 Business Software &Services

   

             7,300

Aspen Technology Inc. *

 

             80,446

2.16%

     

 Computer Communications Equipment

   

           19,800

Adaptec Inc. *

 

             92,268

2.48%

     

 Crude Petroleum & Natural Gas

   

             1,800

Unit Corp. *

 

             87,210

2.35%

     

 In Vitro & In Vivo Diagnostic Substances

   

           10,900

Trinity Biotech plc *

 

             93,413

2.51%

     

 Laboratory Analytical Instruments

   

             7,200

PerkinElmer Inc.

 

           160,056

4.30%

     

 Mining & Quarrying of Nonmetallic Minerals (No Fuels)

   

             3,500

Amcol International Corp.

 

             97,090

2.61%

     

 Miscellaneous Food Preparation & Kindred Products

   

             1,500

Green Mountain Coffee Roasters Inc. *

 

             73,845

1.99%

     

 National Commercial Banks

   

             3,000

First Midwest Bancorp Inc.

 

           116,040

3.12%

     

 Oil & Gas Field Machinery & Equipment

   

             1,200

Hydril Co. *

 

             90,228

2.43%

     

 Orthopedic, Prosthetic & Surgical Appliances & Supplies

   

             5,600

American Medical Systems Holdings Inc. *

 

           103,712

 

             3,000

Respironics Inc. *

 

           113,250

 
   

           216,962

5.83%

     

 Pharmaceutical Preparations

   

             4,700

K V Pharmaceutical Co. *

 

           111,766

 

             4,000

Sciele Pharma Inc. *

 

             96,000

 
   

           207,766

5.59%

     

 Radio & TV Broadcasting & Communications Equipment

   

             1,900

Comtech Telecommunications Corp. *

 

             72,333

 

             5,200

ViaSat Inc. *

 

           155,012

 
   

           227,345

6.11%

     

 Real Estate Investment Trusts

   

             7,800

Highland Hospitality Corp.

 

           111,150

2.99%

     

 Retail - Miscellaneous Shopping

   

             4,500

Big 5 Sporting Goods Corp.

 

           109,890

2.95%

     

 Retail - Retail Stores

   

             2,400

Petsmart Inc.

 

             69,264

1.86%

     

 Retail - Shoe Stores

   

             4,500

Foot Locker Inc.

 

             98,685

2.65%

     

 Retail - Variety Stores

   

             2,500

BJ's Wholesale Club Inc. *

 

             77,775

2.09%

     

 Search, Detection, Navagation, Guidance, Aeronautical Systems

  

             2,200

FLIR Systems Inc. *

 

             70,026

1.88%

     

 Services - Commercial Physical & Biological Research

   

             3,300

PRA International *

 

             83,391

2.24%

     

 Services - Computer Integrated Systems Design

   

             9,300

Radiant Systems Inc. *

 

             97,092

2.61%

     

 Services-Computer Processing & Data Preparation

   

             4,400

Per-Se Technologies Inc. *

 

           122,232

3.29%

     

 Services - Motion Picture Theaters

   

             4,700

Regal Entertainment Group

 

           100,204

2.69%



*Non-Income Producing Securities.

The accompanying notes are an integral part of these

financial statements.


2006 Annual Report  17



Paradigm Opportunity Fund

 

 

 

     
   

 Schedule of Investments

   

December 31, 2006

 Shares/Principal Amount

 

Market Value

% of Net Assets

     

 COMMON STOCKS  

   

 Service - Prepackaged Software

   

           12,900

Epicor Software Corp. *

 

 $        174,279

 

             3,100

Hyperion Solutions Corp. *

 

           111,414

 

           16,600

Indus International Inc. *

 

             62,914

 

           10,200

Parametric Technology Corp. *

 

           183,804

 

             2,200

Transaction Systems Architects Inc. *

 

             71,654

 
   

 $        604,065

16.25%

     

 Surgical & Medical Instruments & Apparatus

   

             2,400

Orthofix International NV *

 

           120,000

3.24%

     

 Wholesale - Drugs, Proprietaries & Druggists' Sundries

   

             5,300

Axcan Pharma Inc. *

 

             75,472

2.03%

     

 Total for Common Stock (Cost $3,010,187)

 

 $      3,395,079

91.29%

     

 CLOSED-END INVESTMENT COMPANY

   

             4,500

MCG Capital Corporation

 

             91,440

2.46%

 

           (Cost $66,914)

   
     

 Cash Equivalents

   

         508,276

SEI Daily Income Treasury Government CL B 4.82% **

           508,276

13.67%

 

           (Cost $508,276)

   
     

 Total Investment Securities

 

        3,994,795

107.42%

 

           (Cost $3,585,377)

   
     

Liabilities In Excess of Other Assets

 

          (275,968)

-7.42%

   

   

 

 Net Assets

  

 $      3,718,827

100.00%



*Non-Income Producing Securities.

**Variable Rate Security; the rate shown was the rate at

December 31, 2006.

The accompanying notes are an integral part of these

financial statements.

 


2006 Annual Report  18



Paradigm Funds

 

 

 

 

 

      

Statement of Assets and Liabilities

Value

 

Select

 

Opportunity

     December 31, 2006

Fund

 

Fund

 

Fund

           

Assets:

       

     Investment Securities at Market Value*

 $56,466,169

 

 $  6,651,814

 

 $  3,994,795

        

     Cash

102,510

 

                  -

 

                  -

     Deposit at Brokers

944,955

 

                  -

 

                  -

     Dividend Receivable

24,432

 

2,524

 

5,443

     Interest Receivable

24,355

 

3,127

 

2,190

     Receivable for Fund Shares Sold

662,577

 

25,000

 

0

               Total Assets

   58,224,998

 

     6,682,465

 

     4,002,428

Liabilities:

       

     Securities Sold Short, at Market Value (Proceeds - $912,409)

939,150

 

                  -

 

                  -

     Payable to Advisor

92,155

 

8,461

 

4,730

     Payable for Dividends

54,332

 

                  -

 

                  -

     Payable for Fund Shares Redeemed

134,717

 

                  -

 

                  -

     Payable for Securities Purchased

261,726

 

                  -

 

278,871

               Total Liabilities

1,482,080

 

8,461

 

283,601

Net Assets

 $56,742,918

 

 $  6,674,004

 

 $  3,718,827

Net Assets Consist of:

       

     Paid In Capital

 $47,098,735

 

 $  5,923,326

 

 $  3,312,254

     Accumulated Undistributed Realized Gain (Loss) on Investments - Net

      (100,849)

 

          (6,841)

 

          (2,845)

     Unrealized Appreciation in Value

       

          of Investments Based on Cost - Net

     9,745,032

 

       757,519

 

       409,418

Net Assets

 $56,742,918

 

 $  6,674,004

 

 $  3,718,827

        

Net Asset Value and Offering Price (Note 2)

 $        48.55

 

 $        26.48

 

 $        23.21

        

* Investments at Identified Cost

 $46,694,396

 

 $  5,894,295

 

 $  3,585,377

        

  Shares Outstanding (Unlimited number of shares

     1,168,639

 

       252,005

 

       160,210

          authorized without par value)

       
        

 Statement of Operations

       

    For the year ended December 31, 2006

       
        
        

Investment Income:

       

     Dividends

 $     294,279

 

 $      34,274

 

 $      29,620

     Interest

108,360

 

         10,919

 

         15,047

          Total Investment Income

402,639

 

         45,193

 

         44,667

Expenses:

       

     Investment Advisor Fees

798,258

 

56,561

 

67,790

     Dividend Expense on Securities Sold Short

2,678

 

                  -

 

                  -

     Interest Expense

8,750

 

                  -

 

                  -

          Total Expenses

809,686

 

56,561

 

67,790

     Less: Expenses Waived

                  -

 

                  -

 

(16,947)

          Net Expenses

809,686

 

56,561

 

50,843

        
        

Net Investment Loss

(407,047)

 

(11,368)

 

(6,176)

        

Realized and Unrealized Gain (Loss) on Investments:

       

     Net Realized Gain on Investments

3,158,617

 

187,917

 

89,363

     Net Realized Gain on Short Positions

46,670

 

                  -

 

                  -

     Net Change in Unrealized Appreciation/Depreciation on Investments

4,005,680

 

573,918

 

293,121

     Net Change in Unrealized Appreciation on Short Positions

(63,366)

 

                  -

 

                  -

Net Realized and Unrealized Gain on Investments

     7,147,601

 

       761,835

 

       382,484

        

Net Increase in Net Assets from Operations

 $  6,740,554

 

 $     750,467

 

 $     376,308



The accompanying notes are an integral part of these

financial statements.



2006 Annual Report  19



Paradigm Funds

 

 

 

 

 

 

 

 

         

Statements of Changes in Net Assets

Value Fund

 

Select Fund

 
         
 

1/1/2006

 

1/1/2005

 

1/1/2006

 

1/1/2005*

 
 

to

 

to

 

to

 

to

 
 

12/31/2006

 

12/31/2005

 

12/31/2006

 

12/31/2005

 

From Operations:

        

     Net Investment Income (Loss)

 $   (407,047)

 

 $   (198,525)

 

 $     (11,368)

 

 $      (6,182)

 

     Net Realized Gain on Investments and Short Positions

3,205,287

 

1,208,085

 

187,917

 

             985

 

     Change in Net Unrealized Appreciation

3,942,314

 

2,649,198

 

573,918

 

      183,601

 

     Increase in Net Assets from Operations

6,740,554

 

3,658,758

 

750,467

 

      178,404

 

From Distributions to Shareholders:

        

      Net Investment Income

                 -

 

                 -

 

                  -

 

                 -

 

      Net Realized Gain from Security Transactions

(2,842,085)

 

(1,056,140)

 

      (168,833)

 

         (9,211)

 

      Total Distributions to Shareholders

(2,842,085)

 

(1,056,140)

 

      (168,833)

 

         (9,211)

 

From Capital Share Transactions:

        

     Proceeds From Sale of Shares

37,434,212

 

9,866,980

 

     3,551,778

 

    2,749,506

 

     Proceeds from Redemption Fees (Note 2)

11,050

 

                 -

 

                  -

 

                 -

 

     Shares Issued on Reinvestment of Dividends

2,787,753

 

1,025,297

 

       168,833

 

          9,211

 

     Cost of Shares Redeemed

(11,390,456)

 

(4,021,340)

 

      (149,198)

 

     (406,953)

 

     Net Increase from Shareholder Activity

28,842,559

 

6,870,937

 

     3,571,413

 

    2,351,764

 
         

Net Increase in Net Assets

32,741,028

 

9,473,555

 

     4,153,047

 

    2,520,957

 
         

Net Assets at Beginning of Period  

24,001,890

 

14,528,335

 

2,520,957

 

                 -

 
         

Net Assets at End of Period

 $56,742,918

 

 $24,001,890

 

 $  6,674,004

 

 $ 2,520,957

 
         

Accumulated Undistributed Net Investment Income

 $               -

 

 $               -

 

 $               -

 

 $              -

 
         

Share Transactions:

        

     Issued

797,945

 

245,658

 

       138,973

 

      131,401

 

     Reinvested

57,420

 

23,823

 

6,376

 

             410

 

     Redeemed

(246,214)

 

(97,330)

 

          (6,218)

 

       (18,937)

 

Net Increase in Shares

609,151

 

172,151

 

       139,131

 

      112,874

 

Shares Outstanding Beginning of Period

559,488

 

387,337

 

       112,874

 

                 -

 

Shares Outstanding End of Period

1,168,639

 

559,488

 

       252,005

 

      112,874

 
         

*Commencement of operations.

        



The accompanying notes are an integral part of these

financial statements.
 


2006 Annual Report  20



Paradigm Funds

 

 

 

 

     

Statements of Changes in Net Assets

Opportunity Fund

 
     
 

1/1/2006

 

1/1/2005*

 
 

to

 

to

 
 

12/31/2006

 

12/31/2005

 

From Operations:

    

     Net Investment Income (Loss)

 $       (6,176)

 

 $        3,609

 

     Net Realized Gain on Investments and Short Positions

89,363

 

         27,181

 

     Change in Net Unrealized Appreciation

293,121

 

        116,297

 

     Increase in Net Assets from Operations

376,308

 

        147,087

 

From Distributions to Shareholders:

    

      Net Investment Income

                 -

 

          (3,538)

 

      Net Realized Gain from Security Transactions

        (85,969)

 

        (27,166)

 

      Total Distributions to Shareholders

        (85,969)

 

        (30,704)

 

From Capital Share Transactions:

    

     Proceeds From Sale of Shares

         59,941

 

     3,147,652

 

     Proceeds from Redemption Fees (Note 2)

                 -

 

                  -

 

     Shares Issued on Reinvestment of Dividends

         85,969

 

         30,704

 

     Cost of Shares Redeemed

         (5,980)

 

          (6,181)

 

     Net Increase from Shareholder Activity

       139,930

 

     3,172,175

 
     

Net Increase in Net Assets

430,269

 

3,288,558

 
     

Net Assets at Beginning of Period  

3,288,558

 

                  -

 
     

Net Assets at End of Period

 $ 3,718,827

 

 $  3,288,558

 
     

Accumulated Undistributed Net Investment Income

 $               -

 

 $               -

 
     

Share Transactions:

    

     Issued

          2,576

 

        153,082

 

     Reinvested

3,704

 

           1,435

 

     Redeemed

            (269)

 

             (318)

 

Net Increase in Shares

          6,011

 

        154,199

 

Shares Outstanding Beginning of Period

       154,199

 

                  -

 

Shares Outstanding End of Period

       160,210

 

        154,199

 
     

*Commencement of operations.

    



The accompanying notes are an integral part of these

financial statements.
 


2006 Annual Report  21



Paradigm Value Fund

 

 

 

 

    
         

Financial Highlights - Paradigm Value Fund

       
         

Selected data for a share outstanding throughout the period:

1/1/2006

 

1/1/2005

 

1/1/2004

 

1/1/2003 *

 
 

to

 

to

 

to

 

to

 
 

12/31/2006

 

12/31/2005

 

12/31/2004

 

12/31/2003

 
             

Net Asset Value - Beginning of Period

 $        42.90

 

 $        37.51

 

 $        28.83

 

 $      20.00

 

Net Investment Loss **

(0.47)

 

(0.40)

 

(0.44)

 

(0.33)

 

Net Gains on Securities (realized and unrealized)

8.69

 

7.75

 

9.69

 

12.52

 

    Total from Investment Operations

8.22

 

7.35

 

9.25

 

12.19

 
             

Distributions (From Net Investment Income)

                 -

 

                 -

 

                 -

 

                -

 

Distributions (From Capital Gains)

(2.58)

 

(1.96)

 

(0.57)

 

(3.36)

 

    Total Distributions

(2.58)

 

(1.96)

 

(0.57)

 

(3.36)

 

Proceeds from Redemption Fee (Note 2)

0.01

 

                 -

 

                 -

 

                -

 
             
             

Net Asset Value - End of Period

 $        48.55

 

 $        42.90

 

 $        37.51

 

 $      28.83

 

Total Return ***

19.19%

 

19.61%

 

32.09%

 

60.89%

 
             

Ratios/Supplemental Data

           

Net Assets - End of Period

 $56,742,918

 

 $24,001,890

 

 $14,528,335

 

 $4,212,913

 
             

Ratio of Expenses to Average Net Assets,

           

  Excluding Dividends on Securities Sold Short

           

  and Interest Expense

2.00%

 

2.00%

 

1.99%

 

2.00%

 

Ratio of Dividend Expense on Securities Sold Short

           

  and Interest Expense to Average Net Assets

0.02%

 

0.06%

 

0.04%

 

               -  

 

Ratio of Expenses to Average Net Assets

2.02%

 

2.06%

 

2.03%

 

2.00%

 

Ratio of Net Investment Loss to Average Net Assets

-1.02%

 

-0.98%

 

-1.34%

 

-1.28%

 
             

Portfolio Turnover Rate

69.95%

 

67.39%

 

91.66%

 

138.81%

 
             
         
         
         

* Commencement of operations.

        

** Per share amount calculated using the average shares method.

       

*** Total return in the above table represents the rate that the investor would

     

have earned or lost on an investment in the fund assuming reinvestment of dividends.

     

Returns do not reflect the deduction of taxes a shareholder would pay on Fund

     

distributions or redemption of Fund shares.

        



The accompanying notes are an integral part of these

financial statements.



2006 Annual Report  22



Paradigm Select Fund

 

 

 
    

Financial Highlights - Paradigm Select Fund

   
    

Selected data for a share outstanding throughout the period:

1/1/2006

 

1/1/2005*

 

to

 

to

 

12/31/2006

 

12/31/2005

     

Net Asset Value - Beginning of Period

 $          22.33

 

 $          20.00

Net Investment Loss **

(0.08)

 

(0.08)

Net Gains on Securities (realized and unrealized)

4.92

 

2.49

Total from Investment Operations

4.84

 

2.41

     

Distributions (From Net Investment Income)

                    -

 

                    -

Distributions (From Capital Gains)

(0.69)

 

(0.08)

    Total Distributions

(0.69)

 

(0.08)

Proceeds from Redemption Fee (Note 2)

                    -

 

                    -

     
     

Net Asset Value - End of Period

 $          26.48

 

 $          22.33

Total Return ***

21.67%

 

12.06%

     

Ratios/Supplemental Data

    

Net Assets - End of Period

 $    6,674,004

 

 $    2,520,957

     

Ratio of Expenses to Average Net Assets

1.50%

 

1.50%

Ratio of Net Investment Loss to Average Net Assets

-0.30%

 

-0.36%

     

Portfolio Turnover Rate

72.15%

 

68.56%

     
     
     
    

* Commencement of operations.

   

** Per share amount calculated using the average shares method.

   

*** Total return in the above table represents the rate that the investor would

  

have earned or lost on an investment in the fund assuming reinvestment of dividends.

  

Returns do not reflect the deduction of taxes a shareholder would pay on Fund

  

distributions or redemption of Fund shares.

   



The accompanying notes are an integral part of these

financial statements.



2006 Annual Report  23



Paradigm Opportunity Fund

 

 

 

 

     

Financial Highlights - Paradigm Opportunity Fund

    
     

Selected data for a share outstanding throughout the period:

1/1/2006

 

1/1/2005*

 
 

to

 

to

 
 

12/31/2006

 

12/31/2005

 
     

Net Asset Value - Beginning of Period

 $          21.33

 

 $          20.00

 

Net Investment Income (Loss) **

(0.04)

 

0.04

 

Net Gains (Loss) on Securities (realized and unrealized)

2.47

 

1.49

 

Total from Investment Operations

2.43

 

1.53

 
     

Distributions (From Net Investment Income)

0.00

 

(0.02)

 

Distributions (From Capital Gains)

(0.55)

 

(0.18)

 

    Total Distributions

(0.55)

 

(0.20)

 

Proceeds from Redemption Fee (Note 2)

                    -

 

                    -

 
     

Net Asset Value - End of Period

 $          23.21

 

 $          21.33

 

Total Return ***

11.39%

 

7.65%

 
     

Ratios/Supplemental Data

    

Net Assets - End of Period

 $    3,718,827

 

 $    3,288,558

 
     

Before Reimbursement

    

    Ratio of Expenses to Average Net Assets

2.00%

 

2.00%

 

    Ratio of Net Investment Loss to Average Net Assets

-0.68%

 

-0.11%

 

After Reimbursement

    

    Ratio of Expenses to Average Net Assets ****

1.50%

 

1.69%

 

    Ratio of Net Investment Income (Loss) to Average Net Assets ****

-0.18%

 

0.21%

 
     

Portfolio Turnover Rate

122.62%

 

129.06%

 
     
     
     
     

* Commencement of operations.   

    

** Per share amount calculated using the average shares method.

    

*** Total return in the above table represents the rate that the investor would have earned or lost on an

 

investment in the fund assuming reinvestment of dividends.

    

Returns do not reflect the deduction of taxes a shareholder would pay on Fund

   

distributions or redemption of Fund shares.

    

**** Such percentages reflect an expense waiver by the Advisor.

    



The accompanying notes are an integral part of these

financial statements.

 


2006 Annual Report  24



NOTES TO FINANCIAL STATEMENTS

 

PARADIGM FUNDS

 

December 31, 2006



1.) ORGANIZATION

The Paradigm Funds (the "Trust”) is an open-end management investment company organized in Ohio as a business trust on September 13, 2002 that may offer shares of beneficial interest in a number of separate series, each series representing a distinct fund with its own investment objectives and policies.  The Paradigm Value Fund (“Value”) commenced operations on January 1, 2003. The Paradigm Value Fund's investment objective is long-term capital appreciation. The Paradigm Opportunity Fund (“Opportunity”) and Paradigm Select Fund (“Select”) both commenced operations on January 1, 2005 with long-term capital appreciation as their objective. The Advisor to Value, Opportunity and Select (collectively the “Funds”) is Paradigm Funds Advisor LLC (the “Advisor”).


2.) SIGNIFICANT ACCOUNTING POLICIES

SECURITY VALUATION:  Securities that are traded on any exchange, including the NASDAQ, are generally valued by a pricing service at the last quoted sale price.  Lacking a last sale price, an equity security is valued at its last bid price except when, in the Advisor's opinion, the last bid price does not accurately reflect the current value of the security. All other securities for which over-the-counter market quotations are readily available are valued at their last bid price. When market quotations are not readily available, when the Advisor determines the last bid price does not accurately reflect the current value or when restricted securities are being valued, such securities are valued as determined in good faith by the Advisor, in conformity with guidelines adopted by and subject to review of the Board of Trustees of the Trust.


Fixed income securities generally are valued on the basis of prices furnished by a pricing service when the Advisor believes such prices accurately reflect the fair market value of such securities.  A pricing service utilizes electronic data processing techniques based on yield spreads relating to securities with similar characteristics to determine prices for normal institutional-size trading units of debt securities without regard to sale or bid prices.  If the Advisor decides that a price provided by the pricing service does not accurately reflect the fair market value of the securities, when prices are not readily available from a pricing service or when restricted or illiquid securities are being valued, securities are valued at fair value as determined in good faith by the Advisor, in conformity with guidelines adopted by and subject to review of the Board of Trustees.  Short term investments in fixed income securities with maturitie s of less than 60 days when acquired, or which subsequently are within 60 days of maturity, are valued by using the amortized cost method of valuation, which the Board of Trustees has determined will represent fair value.


In September 2006, FASB issued Statement on Financial Accounting Standards (SFAS) No. 157 "Fair Value Measurements."  This standard establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosure about fair value measurements.  SFAS No. 157 applies to fair value measurements already required or permitted by existing standards.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.  The changes to current generally accepted accounting principles from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements.  Management has determined it will not have an effect on the financial statements.


In accordance with the Trust's good faith pricing guidelines, the Advisor is required to consider all appropriate factors relevant to the value of securities for which it has determined other pricing sources are not available or reliable as described above.  No single standard for determining fair value controls, since fair value depends upon the circumstances of each individual case.  As a general principle, the current fair value of an issue of securities being valued by the Advisor would appear to be the amount which the owner might reasonably expect to receive for them upon their current sale.  Methods which are in accord with this principle may, for example, be based on (i) a multiple of earnings; (ii) a discount from market of a similar freely traded security (including a derivative security or a basket of securities traded on other markets, exchanges or among dealers); or (iii) yield to maturity with respect to debt issues, or a com bination of these and other methods.


SECURITY TRANSACTIONS AND OTHER: Security transactions are recorded based on a trade date.  Dividend income is recognized on the ex-dividend date.  Interest income is recognized on an accrual basis.  The Funds use the specific identification basis in computing gain or loss on sale of investment securities.  Discounts and premiums on fixed income securities purchased are amortized over the lives of the respective securities. Withholding taxes on foreign dividends have been provided for in accordance with the Funds’ understanding of the applicable country’s tax rules and rates.



2006 Annual Report  25



Notes to the Financial Statements - continued


SHARE VALUATION: The net asset value (the “NAV”) is generally calculated as of the close of trading on the New York Stock Exchange (normally 4:00 p.m. Eastern time) every day the Exchange is open. The NAV is calculated by taking the total value of the Funds’ assets, subtracting its liabilities, and then dividing by the total number of shares outstanding, rounded to the nearest cent. The offering price and redemption price per share is equal to the net asset value per share, except that shares of each fund are subject to a redemption fee of 2% if redeemed within 90 days of purchase. During the year ended December 31, 2006 proceeds from redemption fees were $11,050, $0 and $0 for Value, Select and Opportunity, respectively.


SHORT SALES: A Fund may sell a security it does not own in anticipation of a decline in the fair value of the security. When a Fund sells a security short, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale. A gain, limited to the price at which a Fund sold the security short, or a loss, unlimited in size, will be recognized upon the termination of a short sale. At December 31, 2006, deposits at brokers of $944,955 is restricted and is being held as collateral on short positions.


INCOME TAXES: The Funds’ policy is to continue to comply with the requirements of Subchapter M of the Internal Revenue Code that are applicable to regulated investment companies and to distribute all of their taxable income to their shareholders. Therefore, no federal income tax provision is required.


ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period.  Actual results could differ from those estimates.


DISTRIBUTIONS TO SHAREHOLDERS: Distributions to shareholders, which are determined in accordance with income tax regulations, are recorded on the ex-dividend date. The treatment for financial reporting purposes of distributions made to shareholders during the year from net investment income or net realized capital gains may differ from their ultimate treatment for federal income tax purposes.  These differences are caused primarily by differences in the timing of recognition of certain components of income, expense or realized capital gain for federal income tax purposes.  Where such differences are permanent in nature, they are reclassified in the components of the net assets based on their ultimate characterization for federal income tax purposes.  Any such reclassification will have no effect on net assets, results of operations or net asset values per share of any Fund.  For the fiscal year ended December 31, 2006 net investment l oss of $407,047, $11,368 and $6,176 was reclassified to accumulated undistributed net realized gains for Value, Select and Opportunity, respectively.


3.) INVESTMENT ADVISORY AGREEMENT

Each of the Funds have investment advisory agreements (the "Management Agreements") with the Advisor.  Under the terms of the Management Agreements, the Advisor manages the investment portfolios of the Funds, subject to policies adopted by the Trust’s Board of Trustees. Under the Management Agreements, the Advisor, at its own expense and without reimbursement from the Trust, furnishes office space and all necessary office facilities, equipment and executive personnel necessary for managing the assets of the Funds.  The Advisor also pays the salaries and fees of all of its officers and employees that serve as officers and trustees of the Trust.  For its services, the Advisor receives an annual investment management fee of 2.00% of the average daily net assets from both Value and Opportunity; and 1.50% of the average daily net assets from Select.  As a result of the above calculation, for the year ended December 31, 2006, the Advisor earned management fees totaling $798,258, $67,790 (before the wavier described below) and $56,561 for Value, Opportunity and Select, respectively.  At December 31, 2006, $92,155, $4,730 and $8,461 was due to the Advisor from Value, Opportunity and Select, respectively.  The Advisor has agreed to waive management fees and/or reimburse Opportunity to the extent necessary to maintain total annual operating expenses of the Fund (excluding brokerage fees and commissions, interest and other borrowing expenses, taxes and extraordinary expenses) at 1.50% of its daily net assets through May 1, 2007.  A total of $16,947 was waived for the year ended December 31, 2006.  The Advisor pays all operating expenses of the Funds with the exception of taxes, brokerage fees and commissions, borrowing costs (such as (a) interest and (b) dividend expenses on securities sold short) and extraordinary expenses as defined under accounting principles generally accepted in the United States of America.< /P>



2006 Annual Report  26



Notes to the Financial Statements - continued


Certain officers and a shareholder of the Advisor are also officers and/or a Trustee of the Trust.  These individuals may receive benefits from the Advisor resulting from management fees paid to the Advisor from the Funds.


The Trustees who are not interested persons of the Funds were paid $2,000 for each meeting attended for the year ended December 31, 2006 for the Trust. Under the Management Agreements, the Advisor pays these fees.


4.) APPROVAL OF INVESTMENT ADVISORY AGREEMENT (Unaudited)

On August 11, 2006 the Board of Trustees considered the continuance of the Management Agreements. In renewing the Management Agreements, the Board of Trustees received material from the Advisor (the "Report") addressing the following factors: (i) the investment performance of the Funds and the Advisor; (ii) the nature, extent and quality of the services provided by the Advisor to the funds;  (iii) the cost of the services to be provided and the profits to be realized by the Advisor and its affiliates from the relationship with the Funds; (iv) the extent to which economies of scale will be realized as the funds grow; and (v) whether the fee levels reflect these economies of scale to the benefit of shareholders.


As to the performance of the Funds, the Report included information regarding the performance of each Fund compared to a group of funds of similar size, style and objective where fees and expenses had not been completely waived by the adviser to the funds (the "Peer Group"), as well as a larger group of funds categorized by Morningstar as small cap funds. The report also included comparative performance information for major indexes and other accounts managed by the Advisor. The Trustees noted that Value continued to perform well in relation to its benchmark and its peers.  In regards to Select, the Trustees noted that the Fund continued to perform well, outperforming  its Peer Group's returns.  The report also indicated that Select outperformed its benchmark, the Russell 2000 Index, with regards to return since inception and year-to-date return.  In regards to Opportunity, the Trustees noted that the Fund's performance did not fare as well as the other Funds, lagging its Peer Group's year-to-date returns and total 12 month returns. The report also indicated that Opportunity’s performance lagged behind that of the Russell 2000 Value Index.  However, the Trustees acknowledged that there was a new portfolio manager hired at the end of 2005.  In addition, the Trustees recognized that Opportunity’s performance was improving.  The Trustees concluded that each Fund's performance was either consistent with or above performance expectations.


As for the nature, extent and quality of the services provided by the Advisor, the Trustees analyzed the Advisor's experience and capabilities.  The representatives of the Advisor reviewed and discussed with the Board the Advisor's ADV, and the Code of Ethics certifications. They summarized the information provided to the Board regarding matters such as the Advisor's financial condition and investment personnel of the Advisor.  They also discussed the portfolio managers' backgrounds and investment management experience.  Furthermore, they reviewed the Advisor's financial information and discussed the firm's ability to meet its obligations under the Agreements.  The Board concluded that the nature and extent of the services provided by the Advisor were consistent with their expectations, and that the quality of services was acceptable.  The Trustees also concluded that the Advisor has the resources to provide quality advisory serv ices to the Funds.


As to the costs of the services to be provided, the Board reviewed the fees under the Agreements compared to the Peer Groups.  The report indicated each of the Funds’ expense ratios was either within the range of its peers or lower.  The report also included information regarding fees charged to other clients of the Advisor.  They concluded that the advisory fees were reasonable, and that the shareholders were receiving value for the fees being paid.  The Board also reviewed a profit and loss analysis prepared by the Advisor that detailed the expenses paid by the Advisor on behalf of each Fund, and the total revenue derived by the Advisor from the Funds. The Trustees noted that the Advisor did not utilize the affiliated broker and received no soft dollar benefits.  The Trustees concluded that the Advisor was not overly profitable, and that an in depth discussion regarding economies of scale would be premature based on the cu rrent size of the Funds.  It was the consensus of the Trustees, including the independent Trustees, that renewal of the Management Agreements would be in the best interests of the Funds and their shareholders.



2006 Annual Report  27



Notes to the Financial Statements – continued


5.) INVESTMENTS

For the year ended December 31, 2006, purchases and sales of investment securities other than U.S. Government obligations and short-term investments were as follows:


                                                               Value                     Select                Opportunity                                                            

Purchases

        $48,000,180

                $5,373,950

          $4,463,566  

Sales

        $26,481,959

                $2,645,152

          $3,763,367  


There were no purchases or sales of U.S. Government obligations.


For federal income tax purposes, at December 31, 2006 the cost of securities on a tax basis and the composition of gross unrealized appreciation (the excess of value over tax cost) and depreciation (the excess of tax cost over value) were as follows:


                                                                          Value                      Select                Opportunity                                               

Cost of Investments

  

         $46,795,245

                 $5,901,136

           $3,588,222


Proceeds from Short Investments

                         $912,409

                                         $0

                                   $0

Gross Unrealized Appreciation

                      $9,920,322

                   $772,168

              $437,416

Gross Unrealized Depreciation

                        ($276,139)

                    ($21,490)

                           ($30,843)

Net Unrealized Appreciation

     on Investments

                                  $9,644,183

                   $750,678

              $406,573


6.) CAPITAL SHARES

At December 31, 2006, the Trust was authorized to issue an unlimited number of shares of beneficial interest. The following are the shares issued and paid in capital outstanding for the Funds:  


                                                                         Value                     Select                  Opportunity                                               

Shares Issued

    and outstanding

                                  1,168,639  

                  252,005

                         160,210

Paid in Capital

                                           $47,098,735

              $5,923,236

                    $3,312,254


7.) CONTROL OWNERSHIP

The beneficial ownership, either directly or indirectly, of more than 25% of the voting shares of a fund creates a presumption of control of the Fund, under section 2(a)(9) of the Investment Company Act of 1940. At December 31, 2006, Charles Schwab & Co., Inc. held through an omnibus account, in aggregate, 35.68% of Value, and therefore  may be deemed to control the Fund. Candace King Weir held, in aggregate, 94.15% of Opportunity, and therefore may be deemed to control the Fund.  Also, Bruce Barth held, in aggregate, 40.00% of Select, and therefore may be deemed to control the Fund.


8.) DISTRIBUTIONS TO SHAREHOLDERS

The tax character of distributions paid during the fiscal years 2006 and 2005 were as follows:


                                                       Fiscal Year Ended          Fiscal Year Ended

                                                      December 31, 2006         December 31, 2005

PARADIGM VALUE FUND

Ordinary Income

                      $            -0-

                                   $            -0-

Short-term Capital Gain

                                                      32,020

                               90,235  

Long-term Capital Gain

                                                  2,810,065

                             965,905  

 

                                                $2,842,085

                         $1,056,140


PARADIGM SELECT FUND

Ordinary Income

  

                      $        -0-

                        $        -0-

Short-term Capital Gain

  

                          51,457

                  9,211

Long-term Capital Gain

  

            117,376

                                  -0-

                       

                      $168,833

                        $    9,211


PARADIGM OPPORTUNITY FUND

Ordinary Income

                      $        -0-  

                        $   3,538

Short-term Capital Gain                                                    72,635

               27,166

Long-term Capital Gain

                                                  13,334

                     -0-

 

$85,969

                       $  30,704

 


2006 Annual Report  28



Notes to the Financial Statements – continued


As of December 31, 2006, the components of distributable earnings/(accumulated losses) on a tax basis were as follows:


  

Value

Select

Opportunity

Undistributed ordinary

income/(accumulated losses)

    $           -0-

       $         -0-

                $         -0-

Undistributed long-term capital

gain/(accumulated losses)

                             -0-

                              -0-

                                       -0-

Unrealized appreciation/(depreciation)

                   9,644,183

          750,678

                   406,573      

 

                 $9,644,183

        $750,678

                 $406,573


The difference between book basis and tax basis unrealized appreciation/(depreciation) is attributable to the tax deferral of losses on wash sales.




AVAILABILITY OF QUARTERLY SCHEDULE OF INVESTMENTS

(Unaudited)



The Funds file their complete schedules of portfolio holdings with the Securities and Exchange Commission ("SEC") for the first and third quarters of each fiscal year on Form N-Q. The Funds’ Forms N-Q are available on the SEC's Web site at http://www.sec.gov.  The Funds’ Forms N-Q may also be reviewed and copied at the SEC's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.


PROXY VOTING GUIDELINES

(Unaudited)


Paradigm Funds Advisor LLC, the Funds’ Advisor, is responsible for exercising the voting rights associated with the securities held by the Funds. A description of the policies and procedures used by the Advisor in fulfilling this responsibility is available without charge on the Funds’ web site at www.paradigm-funds.com. It is also included in the Funds’ Statement of Additional Information, which is available on the Securities and Exchange Commission’s web site at http://www.sec.gov.


Information regarding how the Funds voted proxies, Form N-PX, relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge, upon request, by calling our toll free number(1-800-239-0732). This information is also available on the Securities and Exchange Commission’s web site at http://www.sec.gov.




ADDITIONAL INFORMATION


You will find more information about the Funds at www.paradigm-funds.com.  For shareholder inquiries, please call toll-free in the U.S. at 1-800-239-0732.



2006 Annual Report  29



DISCLOSURE OF EXPENSES (Unaudited)


Shareholders of the Paradigm Funds (the “Funds”) incur ongoing costs. The ongoing costs associated with the Paradigm Value Fund include management fees, interest expense and dividend expense on securities sold short. The ongoing costs associated with the Paradigm Opportunity Fund and Paradigm Select Fund consist solely of management fees.  Although the Funds charge no sales loads or transaction fees, you will be assessed fees for outgoing wire transfers, returned checks and stop payment orders at prevailing rates charged by Mutual Shareholder Services, LLC, the Funds’ transfer agent.  IRA accounts will be charged an $8.00 annual maintenance fee. The following example is intended to help you understand your ongoing costs of investing in the Funds and to compare these costs with similar costs of investing in other mutual funds.  The example is based on an investment of $1,000 invested in the Funds on June 30, 2006 and held through December 31, 2006.


The first line of the table below provides information about actual account values and actual expenses. In order to estimate the expenses a shareholder paid during the period covered by this report, shareholders can divide their account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6) and then multiply the result by the number in the first line under the heading entitled "Expenses Paid During the Period."


The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Funds’ actual expense ratios and an assumed rate of return of 5% per year before expenses, which is not the Funds’ actual return.  The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses paid by a shareholder for the period.  Shareholders may use this information to compare the ongoing costs of investing in the Funds and other funds.  In order to do so, compare these 5% hypothetical examples with the 5% hypothetical examples that appear in other funds' shareholder reports.


PARADIGM VALUE FUND

                                                                    

                                                                Expenses Paid                              

                                                          
                                                                    Beginning                     Ending                     During the Period*

                                                                                                                  

                                                      
                                                                 Account Value           Account Value                June 30, 2006 to

                                                                 June 30, 2006        December 31, 2006           December 31, 2006


Actual                                   $1,000.00                  $1,122.07                           $10.80


Hypothetical                          $1,000.00                  $1,015.02                           $10.26

                                                          

             
                        (5% annual return

before expenses)


*    Expenses are equal to the Fund’s annualized expense ratio of 2.02%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).


PARADIGM SELECT FUND  

                                                                 

                                                                Expenses Paid                              

                                                          
                                                                    Beginning                     Ending                     During the Period*

                                                                                                                  

                                                      
                                                                 Account Value           Account Value                June 30, 2006 to

                                                                 June 30, 2006        December 31, 2006           December 31, 2006


Actual                                   $1,000.00                  $1,121.34                             $8.02


Hypothetical                          $1,000.00                  $1,017.64                             $7.63

                                                          

             
                        (5% annual return

before expenses)


*    Expenses are equal to the Fund’s annualized expense ratio of 1.50%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).


PARADIGM OPPORTUNITY FUND

 

                                                                 

                                                                Expenses Paid                              

                                                          
                                                                    Beginning                     Ending                     During the Period*

                                                                                                                  

                                                      
                                                                 Account Value           Account Value                June 30, 2006 to

                                                                 June 30, 2006        December 31, 2006           December 31, 2006


Actual                                   $1,000.00                  $1,145.03                             $8.11


Hypothetical                          $1,000.00                  $1,017.64                             $7.63

                                                          

            
                        (5% annual return

before expenses)


*    Expenses are equal to the Fund’s annualized expense ratio of 1.50%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).




2006 Annual Report  30



Cohen Fund Audit Services, Ltd.

800 Westpoint Pkwy, Ste 1100


Certified Public Accountants

Westlake, Ohio 44145

Phone: (440) 835-8500

Fax: (440) 835-1093

www.cohenfund.com   


To The Shareholders and

Board of Trustees

Paradigm Funds



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of  Paradigm Funds (the "Funds"), comprising the Paradigm Value Fund, Paradigm Select Fund, and Paradigm Opportunity Fund, as of December 31, 2006, and the related statements of operations for the year then ended and statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the three periods then ended for the Paradigm Value Fund, and for each of the two periods then ended for the Paradigm Select Fund and Paradigm Opportunity Fund.  These financial statements and financial highlights are the responsibility of Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit.  The financial highlights for the periods indicated prior to December 31, 2004 were audited by another indepe ndent accounting firm who expressed an unqualified opinion on those statements and highlights.  


We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2006, by correspondence with the Funds' custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the Funds constituting the Paradigm Funds, as of December 31, 2006, the results of their operations for the year then ended, the changes in their net assets for each of the two years in the period then ended and the financial highlights for each of the three periods then ended for the Paradigm Value Fund and for each of the two periods then ended for the Paradigm Select Fund and Paradigm Opportunity Fund, in conformity with accounting principles generally accepted in the United States of America.




[paradigmncsr2006annual123010.jpg]

Cohen Fund Audit Services, Ltd.

(f.k.a. Cohen McCurdy, Ltd.)

Westlake, Ohio  

February 9, 2007




2006 Annual Report  31



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2006 Annual Report  32



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2006 Annual Report  33



TRUSTEES AND OFFICERS (Unaudited)


The Board of Trustees supervises the business activities of the Trust.  Each Trustee serves as a trustee until the termination of the Trust unless the Trustee dies, resigns, retires or is removed.


The following table provides information regarding each Trustee who is an "interested person" of the Trust, as defined in the Investment Company Act of 1940, and each officer of the Trust.  The Trustee who is an "interested person" of the Trust, as defined in the Investment Company Act of 1940, is indicated by a “2”.


Interested Trustees and Officers









Name, Address1,
and Age

Position with
the Trust

Term of Office and
Length of
Time Served

Principal Occupation(s)
During Past
5 Years

Number of Portfolios
Overseen
By Trustee

Other Directorships Held By
Trustee

Candace King Weir2,
(1944)

President and Trustee

Indefinite Term, Since 2002

Investment Manager of PCM Ventures International, LLC (November 2001 - current) and PCM Ventures II, LLC (June 2003 - current); Investment Manager and principal of PCM Ventures LLC (January 1997 - current); Director and President of Paradigm Capital Management, Inc. (1993 - current); Director and President of C.L. King & Associates, a registered broker dealer (1972 - current); CEO, Portfolio Manager and Member of PCM Advisors LLC (December 2004 - current). CEO and Member of Paradigm Funds Advisor LLC (July 2005 - current).

3

None

Charles J. DiVencenzo, Jr. (1960)

Secretary

Indefinite Term, Since 2006

Senior Vice President and Chief Operating Officer of Paradigm Capital Management, Inc. (January 2006 - current); Vice President of The Hartford (Investment Products Division) (April 1998 - January 2006).

NA

NA

John V. Gulick
(1952)

Chief Compliance Officer

Indefinite Term, Since 2006

Compliance Officer of Paradigm Capital Management, Inc. (April 2005 - current); Senior Compliance Analyst of GE Asset Management, Inc. (February 2001 - March 2005).

NA

NA

Robert A. Benton,
(1954)

Treasurer and Chief Financial Officer

Indefinite Term, Since 2002

Senior Vice President and Chief Financial Officer of C.L. King & Associates, a registered broker dealer (February 2001 - current); Senior Vice President and Chief Financial Officer of Paradigm Capital Management, Inc. (February 2001 - March 2004).

NA

NA


Independent Trustees









Name, Address1,
and Age

Position with
the Trust

Term of Office and
Length of
Time Served

Principal Occupation(s)
During Past
5 Years

Number of Portfolios
Overseen
By Trustee

Other Directorships Held By
Trustee

Carl A. Florio, CPA3,
(1948)

Independent Trustee

Indefinite Term, Since 2005

Eastern Regional President of First Niagara Bank (2005 - current); President and Chief Executive Officer of Hudson River Bank & Trust Company (1996 - 2005).

3

Director, Amer. Bio Medica; Director, Hudson River Bank & Trust Co. Foundation

Lewis Golub4,
(1931)

Independent Trustee

Indefinite Term, Since 2002

Chairman of the Board, Golub Corporation - DBA Price Chopper Supermarkets (1950 - current).

3

Director, Racemark Int’l; Director, TaylorMade Inc.; Director, DOT Foods, Inc.

Anthony J. Mashuta,
(1956)

Independent Trustee

Indefinite Term,
Since 2004

President and Chairman of the Board of Cool Insuring Agency, Inc. (1988 - current).

3

Director, Proctor’s Theatre


1 The address of each trustee and officer is c/o Paradigm Funds, Nine Elk Street, Albany, NY 12207.

 

2 Candace King Weir is considered an "interested person" as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended, by virtue of her affiliation with the Trust's investment advisor, Paradigm Funds Advisor LLC.

 

3 Carl A. Florio is a member of the Board of Directors of a non-profit foundation that recently retained Paradigm Capital Management, Inc. to manage a portion of the foundation's assets. Candace King Weir is a Director and the President of Paradigm Capital Management, Inc.; and an interested Trustee of the Trust; and CEO of the Trust's investment advisor, Paradigm Funds Advisor LLC.

 

4 Lewis Golub is a limited partner in PCM Partners, LP II.  As of December 31, 2006  he owned 0.80%% of the PCM Partners, LP II partnership, the value of which was $2.3 million.  Candace King Weir is the general partner of PCM Partners, LP II; an interested Trustee of the Trust; and CEO of the Trust's investment advisor, Paradigm Funds Advisor LLC.

 

The Statement of Additional Information includes additional information about the Fund’s Trustees and may be obtained without charge  by calling 1-800-239-0732.




Board of Trustees

Carl A. Florio

Lewis Golub

Candace King Weir

Anthony Mashuta


Investment Advisor

Paradigm Funds Advisor LLC

Nine Elk Street

Albany, NY 12207-1002


Counsel

Thompson Hine LLP

312 Walnut Street, 14th Floor

Cincinnati, OH 45202


Custodian

U.S. Bank, NA

425 Walnut Street

P.O. Box 1118

Cincinnati, OH  45201


Dividend Paying Agent,

Shareholders' Servicing Agent,

Transfer Agent

Mutual Shareholder Services

8000 Town Centre Dr., Suite 400

Broadview Hts., OH 44147


Fund Administrator

Premier Fund Solutions, Inc.

480 N. Magnolia Avenue, Suite 103

El Cajon, CA 92020


Independent Registered Public Accounting Firm

Cohen Fund Audit Services, Ltd.

(FKA Cohen McCurdy Ltd.)

800 Westpoint Pkwy., Suite 1100

Westlake, OH 44145-1524





This report is provided for the general information of the shareholders of the Paradigm Funds.  This report is not intended for distribution to prospective investors in the Funds, unless preceded or accompanied by an effective prospectus.




Item 2. Code of Ethics.   


The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer and the principal financial officer. The registrant has not made any amendments to its code of ethics during the covered period. The registrant has not granted any waivers from any provisions of the code of ethics during the covered period. A copy of the registrant’s Code of Ethics is filed herewith.


Item 3. Audit Committee Financial Expert.   


The registrant’s Board of Trustees has determined that Carl A. Florio is an audit committee financial expert. Mr. Florio is independent for purposes of this Item 3.

 

Item 4. Principal Accountant Fees and Services.   


(a-d)  The following table details the aggregate fees billed for each of the last two fiscal years for audit fees, audit-related fees, tax fees and other fees by the principal accountant to the registrant. The principal accountant has provided no services to the adviser or any entity controlled by, or under common control with the adviser that provides ongoing services to the registrant.


 

FYE  12/31/06

FYE  12/31/05

Audit Fees

$25,925

$22,500

Audit-Related Fees

$0

$675

Tax Fees

$7,350

$6,050

All Other Fees

$2,150

$2,360

Nature of Tax Fees: preparation of Excise Tax Statement and 1120 RIC.

Nature of All Other Fees: Review of Semi-Annual Report.


(e) (1) The audit committee approves all audit and non-audit related services and, therefore, has not adopted pre-approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.


(e) (2)  None of the services described in paragraph (b) through (d) of this Item were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

  

(f)  All of the principal accountant’s hours spent on auditing the registrant’s financial statements were attributed to work performed by full-time permanent employees of the principal accountant.  


(g)  The following table indicates the aggregate non-audit fees billed by the registrant’s principal accountant for services to the registrant , the registrant’s investment adviser (not sub-adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant,  for the last two years.  


Non-Audit Fees

FYE  12/31/06

FYE  12/31/05

Registrant

$9,500

$8,420

Registrant’s Investment Adviser

$0

$0


(h)  The principal accountant provided no services to the investment adviser or any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant.


Item 5. Audit Committee of Listed Companies.  Not applicable.


Item 6.  Schedule of Investments.   Schedule filed with Item 1.


Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.  Not applicable.


Item 8. Portfolio Managers of Closed End Management Investment Companies. Not applicable.


Item 9.  Purchases of Equity Securities by Closed-End Management Investment Companies and Affiliated Purchasers.  Not applicable.


Item 10.  Submission of Matters to a Vote of Security Holders.  


The registrant has not adopted procedures by which shareholders may recommend nominees to the registrant’s board of trustees.


Item 11.  Controls and Procedures.  


(a)

The registrant’s president and chief financial officer concluded that the disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “Act”)) were effective as of a date within 90 days of the filing date of this report, based on the evaluation of these controls and procedures required by Rule 30a-3(b) under the Act.


(b)

There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the registrant’s second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.


Item 12.  Exhibits.  


 (a)(1)

Code of Ethics. Filed herewith.


(a)(2)

Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.


(b) Certification  pursuant to Section 906 Certification of the Sarbanes-Oxley Act of 2002. Filed herewith







 SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Paradigm Funds



By : /s/ Candace King Weir                                                                          

Candace King Weir

President



Date:               3-9-2007                                                                                                                             




Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



By : /s/ Candace King Weir                                                                          

Candace King Weir

President



Date:               3-9-2007                                                                                                                             

 




By : /s/ Robert A. Benton                                                                             

Robert A. Benton

Chief Financial Officer



Date:               3-7-2007                                                                                                                             






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M2<(!(\:%%9L1Q_M$>$I4F==/UD")-[;D@4D;@OR@RY8Y8<#)QD]` M2"#XUWVN7$7_``BG@+6=6M'<0M<2-Y*I*3]TE5=``"IR6&,\@#D^D0^&M!MM M4.J0:)IL6H%V9^"_@EX<\)7ZZC.TFJW\3H]O+<+M6!@@!*H#@DMN8% ML[?EQRI9O3***`"BBB@#+\1Z!8^*?#]YHNI+(;2Z0*_EMM92"&5@?4,`>G!!]"*]1[#3[2U>1(T= MH(50LJ+M0'`Y"KP!V'`JY10`4444`%%%%`!1110`4444`%%%%`!1110`4444 M`%%%%`!1110`4444`%%%%`!1110`4444`%%%%`!1110`4444`%%%%`!1110` M4444`%%%%`!1110`4444`%%%%`!1110`4444`%%%%`!1110`4444`%%%%`!1 M110`4444`%%%%`!1110`4444`%%%%`!1110`4444`%%%%`!1110`4444`%%% M%`!1110`4444`%%%%`!1110`4444`%%%%`!1110`4444`%%%%`!1110`4444 M`%%%%`!1110`4444`%%%%`!1110`4444`%%%%`!1110`4444`%%%%`!1110` M4444`%%%%`!1110`4444`%%%%`!1110`4444`%%%%`!1110`4444`%%%%`!1 - -110`4444`%%%%`'_V3\_ ` end EX-99.CODE ETH 12 paradigmprincipalcode.htm Principal Officers Code

    PARADIGM FUNDS


    CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND

    SENIOR FINANCIAL OFFICERS


    I.

    Covered Officers/Purpose of the Code


    This code of ethics (this “Code”) for Paradigm Funds (the “Trust”) applies to the Trust’s Principal Executive Officer and Principal Financial Officer (the “Covered Officers” each of whom is set forth in Exhibit A) for the purpose of promoting:

    • honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

    • full, fair, accurate, timely and understandable disclosure in reports and documents that the Trust files with, or submits to, the Securities and Exchange Commission (“SEC”) and in other public communications made by the Trust;

    • compliance with applicable laws and governmental rules and regulations;

    • the prompt internal reporting of violations of this Code to an appropriate person or persons identified in this Code; and

    • accountability for adherence to this Code.


    Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest.


    II.

    Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest


    Overview.  A “conflict of interest” occurs when a Covered Officer’s private interests interfere with the interests of, or the Covered Officer’s service to, the Trust.  For example, a conflict of interest would arise if a Covered Officer, or a member of the Covered Officer’s family, receives improper personal benefits as a result of the Covered Officer’s position with the Trust.


    Certain conflicts of interest arise out of the relationships between Covered Officers and the Trust and already are subject to conflict of interest provisions in the Investment Company Act of 1940 (“Investment Company Act”) and the Investment Advisers Act of 1940 (“Investment Advisers Act”).  For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Trust because of their status as “affiliated persons” of the Trust.  This Code does not, and is not intended to, repeat or replace any compliance programs and procedures of the Trust or the investment adviser designed to prevent, or identify and correct, violations of the Investment Company Act and the Investment Advisers Act.  










    Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the Trust and the investment adviser or the administrator of which a Covered Officer is also an officer or employee.  As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties, whether formally for the Trust and/or for the adviser or the administrator, be involved in establishing policies and implementing decisions that will have different effects on the adviser or the administrator and the Trust.  The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Trust and the adviser or the administrator and is consistent with the performance by the Covered Officers of their duties as officers of the Trust.  Thus, if performed i n conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically.  In addition, it is recognized by the Trust’s Board of Trustees (“Board”) that the Covered Officers may also be officers or employees of one or more investment companies covered by other codes.  


    Other conflicts of interest are covered by this Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act.  The following list provides examples of conflicts of interest under this Code, but Covered Officers should keep in mind that these examples are not exhaustive.  The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Trust.


    Each Covered Officer must:

    • not use personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Trust whereby the Covered Officer would benefit personally to the detriment of the Trust;

    • not cause the Trust to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Trust;

    • not use material non-public knowledge of portfolio transactions made or contemplated for the Trust to trade personally or cause others to trade personally in contemplation of the market effect of such transactions;

    • report at least annually any affiliations or other relationships related to conflicts of interest that the Trust’s Trustees and Officers Questionnaire covers.


    There are some conflict of interest situations that should always be discussed with the compliance officer of the Trust appointed by the Board (the “Compliance Officer”), if material.  Examples of these include:

    • service as a director on the board of any public company;

    • the receipt of any non-nominal gifts;


    -2-






    • the receipt of any entertainment from any company with which the Trust has current or prospective business dealings unless such entertainment is business-related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any questions of impropriety;

    • any ownership interest in, or any consulting or employment relationship with, any of the Trust’s service providers, other than its investment adviser, principal underwriter, administrator or any affiliated person thereof; and

    • a direct or indirect financial interest in commissions, transaction charges or spreads paid by the Trust for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer’s employment, such as compensation or equity ownership.


    III.

    Disclosure and Compliance

    • Each Covered Officer should familiarize himself with the disclosure requirements generally applicable to the Trust.

    • Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the Trust to others, whether within or outside the Trust, including to the Trust’s directors and auditors, and to governmental regulators and self-regulatory organizations.

    • Each Covered Officer should, to the extent appropriate within the Covered Officer’s area of responsibility, consult with other officers and employees of the Trust and of the adviser or the administrator with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Trust files with, or submits to, the SEC and in other public communications made by the Trust.

    • It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations.  


    IV.

    Reporting and Accountability


    Each Covered Officer must:

    • upon adoption of this Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Board , in substantially the form set forth on Exhibit B, that the Covered Officer has received, read, and understands this Code;

    • annually thereafter affirm to the Board, in substantially the form set forth on Exhibit C, that the Covered Officer has complied with the requirements of this Code;

    • not retaliate against any other Covered Officer or any employee of the Trust or their affiliated persons for reports of potential violations that are made in good faith; and


    -3-






    • notify the Compliance Officer for the Trust promptly if the Covered Officer knows of any violation of this Code.  Failure to do so is itself a violation of this Code.  

    The Compliance Officer for the Trust is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation.  However, any approvals or waivers sought by a Covered Officer will be considered by the Audit Committee (the “Committee”), which will make recommendations to the Board.


    The Trust will follow these procedures in investigating and enforcing this Code:

    • the Compliance Officer for the Trust will take all appropriate action to investigate any potential violations reported to the Compliance Officer;

    • the Compliance Officer will review with the outside legal counsel to the Trust the findings and conclusions of such investigation;

    • if, after such investigation and review, the Compliance Officer believes that no violation has occurred, the Compliance Officer is not required to take any further action;

    • any matter that the Compliance Officer believes is a violation will be reported to the Committee;

    • if the Committee concurs that a violation has occurred, it will inform and make a recommendation to the Board, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures (including changes to this Code); notification of the violation to appropriate personnel of the investment adviser or the administrator or its board; or a recommendation to take disciplinary action against the Covered Officer, which may include, without limitation, dismissal;

    • the Board will be responsible for granting waivers, as appropriate; and

    • any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules.


    V.  

    Other Policies and Procedures


    This Code shall be the sole code of ethics adopted by the Trust for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder.  Insofar as other policies or procedures of the Trust, the Trust’s adviser, principal underwriter, the administrator or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code.  The Trust’s and its investment adviser’s and principal underwriter’s codes of ethics under Rule 17j-1 under the Investment Company Act are separate requirements applying to the Covered Officers and others, and are not part of this Code.  


    -4-








    VI.  

    Amendments


    Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the Board, including a majority of independent trustees.


    VII.  

    Confidentiality


     To the extent possible, all records, reports and other information prepared, maintained or acquired pursuant to this Code will be treated as confidential, it being understood that it may be necessary or advisable, that certain matters be disclosed to third parties (e.g., to the board of directors or officers of the adviser or the administrator).  


    VIII.  

    Internal Use


    This Code is intended solely for the internal use by the Trust and does not constitute an admission, by or on behalf of the Trust, as to any fact, circumstance, or legal conclusion.





    Date: December 12, 2003



    EX-99.CERT 13 ex99cert.htm EX99CERT

    Exhibit 99.CERT


    CERTIFICATIONS


    I, Candace King Weir, certify that:


    1.

    I have reviewed this report on Form N-CSR of Paradigm Funds;


    2.

    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


    3.

    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;


    4.

    The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:


    a)

    designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

    b)

    designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

    c)

    evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and

    d)

    disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


    5.

    The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):


    a)

    all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and

    b)

    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.




    Date:           3-9-2007                                        /s/ Candace King Weir                                                           

    Candace King Weir

    President



    Exhibit 99.CERT


    CERTIFICATIONS


    I, Robert A. Benton, certify that:


    1.

    I have reviewed this report on Form N-CSR of Paradigm Funds;


    2.

    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


    3.

    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;


    4.

    The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:


    a)

    designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

    b)

    designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

    c)

    evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and

    d)

    disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


    5.

    The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):


    a)

    all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and

    b)

    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.




    Date:           3-7-2007                                        /s/ Robert A. Benton                                                               

    Robert A. Benton

    Chief Financial Officer




    EX-99.906 CERT 14 ex99906cert.htm EX99906CERT

    EX-99.906CERT



    CERTIFICATION

    Candace King Weir, President, and Robert A. Benton, Chief Financial Officer of Paradigm Funds (the “Registrant”), each certify to the best of his or her knowledge that:

    1.

    The Registrant’s periodic report on Form N-CSR for the period ended December 31, 2006 (the “Form N-CSR”) fully complies with the requirements of Sections 15(d) of the Securities Exchange Act of 1934, as amended; and

    2.

    The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

    President

    Chief Financial Officer

    Paradigm Funds

    Paradigm Funds



    /s/ Candace King Weir                                                  /s/ Robert A. Benton                                                

    Candace King Weir

    Robert A. Benton



    Date:        3-9-2007                                                       Date:        3-7-2007                                                  



    A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Paradigm Funds and will be retained by Paradigm Funds and furnished to the Securities and Exchange Commission (the “Commission”) or its staff upon request.


    This certification is being furnished to the Commission solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Form N-CSR filed with the Commission.



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