October 6, 2001

Dear Unitholder:

The net asset value of the Fund as of September 30, 2001 was $3,311.08 per unit. This represents a 25.8% loss for the quarter in Canadian dollars. Year to date, we are down 17.5 % in Canadian dollars and 21.7% in U.S. dollars.

It should come as no surprise to anyone that the third quarter was one of the worst quarters in stock market history. The Fund had its third worst quarterly performance ever, declining 28.8%. The other two significantly down quarters occurred in the tough bear markets of 1987 and 1990. We were not alone in our difficulties as, according to the Mutual Fund measuring service Lipper, the average mid-cap fund lost 25% in the third quarter and 34% this year.

During the quarter there was essentially nowhere to hide. Leading large cap indexes like the Dow and the S&P 500 were down 15%. The NASDAQ was down 31% for the quarter which leaves it down an astounding 70% from its March 2000 high. The unweighted Value Line index and the Russell 2000, which help measure smaller stock performance, were down 22% and 21% respectively. It has been similarly difficult around the globe with the Dow Jones World Index down 16%. Even blue chips such as GE and Microsoft were down 24% and 30% in the quarter. In short, we are experiencing a very severe bear market.

Despite stepped up efforts by global central banks to provide liquidity and restore plummeting consumer confidence, economic conditions are unlikely to improve overnight. Excess capacity in many industries is a reality and it will take some time before these excesses are worked off. During this rationalization, thousands of workers will be laid off and hundreds of companies will be merged or face bankruptcy. There is little doubt that we will continue to face a steady stream of negative news in the upcoming months. Fortunately, we have seen many corporate reorganizations already and much of the negative news has been reflected in the stock prices.

As a result, equity valuations are approaching far more normal levels, especially considering the prevailing low rates of interest and inflation. The Fund's portfolio has a price-earnings multiple on next year's earnings of less than 15 times. The 1700 stocks in the Value Line universe have a median multiple of 15. It is important to recognize that these P/E ratios are being calculated on substantially reduced or trough-like earnings for next year.

Clearly, one never knows for certain when P/E multiples have fallen enough. During the last recession and Gulf War in 1990, P/E multiples dropped to 11-12 times but inflation and interest rates were substantially higher at 4.7% and 8.5% respectively. Our feeling is that, on the whole, stocks are cheap and that after recent events, small cap stocks are even cheaper. In fact, Minneapolis-based Leuthold Group recently reported that small cap stocks are currently trading at a 50% discount to big caps. This represents the sharpest discount in nearly three decades.

Over the Fund's more than forty-year history, we have endured several other tough bear markets. They are hard to predict but it is even harder to accurately time when they might end. At this stage, it is important to focus on the longer term because new bull markets are often born out of the shadows of catastrophes and recessions. Furthermore, the United States has repeatedly proven its resilience with an unparalleled ability to bounce back and produce wealth-creating opportunities.

For our taxable Canadian residents there are no realized capital gains so far this year. It is extremely unlikely there will be any allocation at all this year. Feel free to call the office near year-end and we will provide an update.

Formula Growth has launched a website at www.formulagrowth.ca. We hope you find it of use.

Yours truly,