January 13, 2003

Dear Unitholder:

The net asset value of the Fund as of December 31, 2002 was $2,747.39 per unit in Canadian dollars. This represents a 36% Canadian dollar decrease for the year and a 2.5% increase for the fourth quarter.

For the year, the Fund's 35.5% decline in U.S. dollars lagged the performance of the Dow and the S&P 500. The Fund also under-performed the Russell 2000 Index which declined 21.6%. The Russell 2000 Index was substantially helped by the 1000 stocks in the index representing value stocks (Russell Value Index) which performed very well this year on a relative basis. By contrast, the 1000 stocks that represent growth (the Russell Growth Index) were down more severely with a decline of 30.8%. The Fund's performance was more in-line with the NASDAQ's 31.5% decline and the performance of the average U.S. growth stock manager who lost approximately 30%.

As everyone is no doubt aware, 2002 was the third year of a grizzly bear market which has destroyed the fortunes of many. It was only during the Great Depression of 1929-1932 that the market declined for four consecutive years. The Dow Jones subsequently gained 64% in 1933. We are obviously disappointed with our results on both a relative as well as an absolute basis. With this letter, we will try to shed a little light on what we think has transpired this year and over the past two years. We conclude, however, that bad downswings are an inevitable part of aggressive equity investing just as exciting upswings are. We remain convinced after 42 years, that time is your ally when investing as the short term ups and downs tend to smooth out to create very attractive returns over the long term.

By way of example, we provide four charts on the next page which plot the Fund's quarterly performance for one, five, ten and twenty-year rolling periods. These charts indicate that the Fund has had 44 quarterly negative rolling one-year returns out of 167 rolling periods since it started in June 1960. The Fund has had just 13 negative five-year stretches out of 151 possible rolling five-year periods (one of them currently). There have been no negative ten-year stretches and our twenty-year return more or less centers around 15%. Currently our twenty-year trailing return is 12%.

It is interesting to focus on the ten-year chart. Only nine quarters ago the Fund's rolling ten-year return was 29% compared to our current ten-year return of 10%. What a difference the passage of two and a quarter years has on reported results! This is because of the addition of the poor performance in 2002 and the deletion of two sensational performance years in 1991 and 1992. Going forward, if the Fund were to perform only half as well as the 29% or simply gravitate towards our mean (approximately 15%) over the next ten years, the unit price would rise to $11,000. Our message is if one keeps short term expectations reasonable and stays the course, time will work its magic on returns.

The red line on the chart of the Performance Review Report accompanying this letter shows the severity of the decline since our top in September 2000. Much of this decline occurred in 2002. It has been extremely difficult for U.S. businesses to consistently deliver upon expectations. Like our own performance, the managements of our holdings have been unable to deliver results. This has been due to unrealistic business plans in many cases (with the benefit of hindsight) but, for the most part, due to an extremely challenging profit environment. According to Goldman Sachs, real annualized profit growth for the S&P averaged 12% between 1992 and the end of 1999. The collapse in profits of over 50% since then has been the worst drop since the 1930s.

Profits have collapsed because the long bull market of the nineties led to a tremendous amount of over-capacity in many industries. The absorption of this capacity has created a strong headwind for many companies resulting in little pricing power and considerable margin compression as competition for customers intensifies. Lay-offs, reorganizations and write-offs are the inevitable result which further exacerbate the strain on profits and the ability to deliver upon expectations. Formula Growth clearly over-estimated the number of holdings which would deliver "on plan" results. We simply did not realize the depths to which this current cycle would spiral. In a sense, we expected a flurry of bad news and instead were faced with a blizzard.

The combination of companies missing expectations, geo-political risks and scandals by prominent executives has created an atmosphere of skeptism and uncertainty only seen at other market lows. Recent misguided attempts by many U.S. governmental agencies such as the Federal Communications Commission (FCC), the Federal Aviation Administration (FAA), the Securities and Exchange Commission (SEC) to clean up the mess after the fact has only added to the uncertainty.

Perversely, all this doom and gloom is now good news for investors. In addition to extremely negative sentiment, the valuations of our holdings have been driven to lows reminiscent of other market bottoms. Seventy percent of the holdings in the portfolio have a price earnings ratio of less than 15 times. Forty percent are trading at less than 10 times earnings. The median multiple of book value for our top forty stocks (56% of the money) is just over two times. All of these measures are very inexpensive and position us well for a market rally. For the rally to occur, however, it is important that the perfect storm of the past two years subsides. When the storm does in fact lift, we are confident that our investment style will produce significant returns. Recent quarterly reports from our holdings give us reason to believe that the environment might be improving.

For 2002 there is no capital gain distribution. No T3 forms will be issued to our Canadian resident unitholders. Please do not hesitate to call the office if you need any clarification.

On behalf of the Officers and the Advisory Board of Formula Growth Limited, Manager of Formula Growth Fund, please accept our best wishes for a healthy, happy and prosperous 2003!

Yours truly,