January 8, 2008

Dear Unitholders:

The net asset value of the Fund as of December 31, 2007 was $3,557.24 per unit in Canadian dollars. This represents a 14.7% decrease for the year and an 8.6% decrease for the fourth quarter in Canadian dollars.  Substantial weakness in the US dollar dramatically reduced our reported Canadian dollar returns.  The weak US dollar represented virtually all of this year’s loss as the Fund was up 0.6% in US currency in 2007.

Over the Fund’s forty-seven and half year history, this year’s 15% drop in the US Dollar was exceeded only once; with a 17% decline in 2003.  The strong Canadian dollar has now eroded our results by about 10% a year for the past five years.  Without the impact of currency, the Fund would be $5,619 Canadian per unit today.  We continue to lament that it has not been easy being a Canadian investing in US stocks in this decade.

We are hopeful that this long-term weakness in the US dollar has run its course.  Evidence recently shows that the US dollar has dramatically under-shot purchasing parity with other global currencies.  With regard to the Canadian dollar, the latest estimates from the Organization for Economic Co-operation and Development (OECD) say that purchasing power parity is about 81 cents (US) for the loonie.  The OECD calculation suggests a 25% undervaluation for the US greenback (and the Formula Growth Fund) at these newly derived levels.

The Fund’s positive 0.6% US return for the year was ahead of the small cap Index, the Russell 2000, which declined -2.7% for the year. Unfortunately, our results lagged the larger cap Indexes in the table above (the S&P500 and the NASDAQ), as small caps struggled to keep up with their larger cap counterparts in 2007.  

The table below shows just how hard it was to make any progress in the small cap arena.

Of the 5295 US public stocks monitored by Minneapolis broker, Piper Jaffray, 3930 (or 74%) of them have a market capitalization of less than $2 billion.  As indicated in the table, these same stocks have had horrible performance in 2007.   The theme in 2007 was quite simply, the smaller the company, the worse the stock performance.  This was tough on our portfolio this year as the median market cap of our holdings is $625 million.

We were also not immune to the sub-prime meltdown plaguing the market.  We unfortunately had a handful of stocks that reduced the Fund’s US performance by about 6%.  Frankly, the magnitude of the sub-prime issues and the severity of the continued stock price declines were much more than we anticipated.  We now feel the valuations are ridiculously low and that the stocks will rebound smartly off their lows during 2008 and attain our revised price targets.  Stay tuned.

In conclusion, our performance in 2007 was not what we expected and we anticipate doing better in 2008.  The portfolio is cheap at less than a market multiple and we think the stocks will surprise positively as the year plays out.  Inclusive of the tough year and fourth quarter in 2007, the Fund remains close to all time highs in US currency.  We are pleased that over the past five years we have compounded at 15.7% US per year.  We point out that this is ahead of the S&P500, the NASDAQ and the Russell 2000 as well as the average US small stock growth manager.  We are confident that we can maintain this level of long term performance as indicated by our 13.4% U.S. compounded return since 1960.

For 2007, 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 members of Formula Growth Limited, Manager of Formula Growth Fund, please accept our best wishes for a healthy, happy and prosperous 2008!

Yours truly,