January 8, 2007

Dear Unitholder:

The net asset value of the Fund as of December 31, 2006 was $4,168.33 per unit in Canadian dollars. This represents a 10.1% increase for the year and a 12.6% increase for the fourth quarter in Canadian dollars.

In U.S. dollars, the Fund increased 10.2% for the year and 7.7% during the fourth quarter. The Fund's performance was in line with the average U.S. Small Cap Growth Fund which was up 10.3% for the year and 8.2% in the fourth quarter. Poor performance in the technology sector as well as a lack of representation in the cyclically strong sectors of basic materials, real estate and banks caused our results to lag two of three market indexes listed above for the year. We were more in line with the NASDAQ index which has more similar sector weightings to those of the Fund.

Most U.S. stock market participants are breathing a collective sigh of relief with this year's double digit return. One year ago, U.S. stocks were still stalled and the widespread expectation was that the markets would struggle again in 2006. The severe summer correction seemed to confirm this view until the beginning of a rally that started in August. By the end of 2006, the pundits were surprised and U.S. market investors and commentators are in a more celebratory mood as we enter 2007.

The conventional wisdom now is that U.S. stocks are hot. Everyone knows the venerable Dow Jones made a new all time high last year at the lofty level of 12,500. Small stocks are also viewed as being especially strong given the robust performance of small stock indexes like the Russell 2000. In fact, the Russell 2000 index has outperformed all indices we track over the past six years since the year 2000 bubble.

According to the table on the next page, the Russell 2000 is up a cumulative 56% or 6.6% compounded per year. It is important to note that the Russell 2000 Index is made up by 1000 value stocks and 1000 growth stocks. The overall returns of the Russell 2000 Index have been entirely driven by the very strong performance of the 1000 value stocks. The divergence between value and growth in the Russell Indexes is clearly shown in the table.

The dominance of the value stocks in recent years is little understood by most observers. By comparison, growth stocks have been severely underperforming for most of the last six years. It has mattered little whether it was a large growth stock (the NASDAQ Index) or a small growth stock (the Russell Growth Index). Quite simply, it has been very difficult to make money in growth stocks since the bubble. This is evident in the table as it shows that both the NASDAQ and Russell Growth Indexes have had negative compounded returns since 2000. Clearly growth stocks are long overdue for some very good performance.

Essentially, the only place offering solid returns in the last five or six years has been in value stocks, led by the recovery in deep cyclicals. Unfortunately for all of us, value stocks are not the traditional hunting ground for Formula Growth.

We conclude by suggesting that the strength seen in the value stocks will be hard to sustain given the fact that six years of very good returns, by definition, takes much of the "cheapness" or value out of the so-called value stocks. Growth stocks relative to value stocks are now at unprecedented low levels of valuation. Companies which can be propelled by robust organic growth should see their multiples and valuations expand. High earnings growth rates and a rising P/E multiple is the "double -play" that provides big upside for growth stock performance. We remain unabashedly bullish on the resilient American economy and the growth opportunities it offers. We are confident these opportunities will once again be reflected in the U.S. markets and we will participate fully.

For 2006 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 2007!

Yours truly,