Letter to Shareholders

December 31 , 2007

2007 was a year of market volatility and the year ended with the word “subprime” on the tip of everyone’s tongue. Acute concerns about losses resulting from imprudent loans roiled the stock and bond markets during the year and led pundits to conclude that the U.S. economy was headed for recession. These prognostications only served to heighten investor anxiety.

At periods of time when investors are confronted with increasing uncertainties, coupled with extreme angst, it is important to take a step back and review the big picture. Economic activity across the globe remains robust, unemployment in the U.S. and abroad is at low levels, and interest rates are at historically low levels. These fundamental factors may be ignored from time to time as sentiment moves to extremes of pessimism, but eventually we believe these fundamental factors will exert a positive influence on the capital markets.

In 2005 and 2006, stock market volatility, as measured by the CBOE Volatility Index, reached the lowest levels it had witnessed in a generation. In those halcyon days, the stock market experienced one of its longest periods on record without having a 10% correction. In 2007, these trends began to reverse. Volatility increased and the market had a number of harrowing twists and turns. It is important to reiterate our firmly held conviction that diversification and asset allocation are the most effective tools in combating the volatility of an investor’s overall portfolio to optimize long-term returns.

The goal of asset allocation is to blend investments with different returns and volatility characteristics so that the risks inherent in any one asset class may be balanced by investments that may respond to a different set of market factors. While one would always like to have maximum exposure to the best performing asset classes and avoid the worst performing asset classes, history has shown that it is impossible to predict such outcomes in advance. Market leadership frequently rotates from one asset class to another. Since different asset classes have been shown to have different risk and return characteristics that are less than perfectly correlated with each other, the benefits of combining them in a diversified portfolio has been well documented by academics and investors alike.

One of our goals at Forward Funds is to offer a range of non-correlated investment opportunities in nascent and emerging asset classes. This past year we introduced three new funds that further this goal:Forward Asia Ex-Japan Equities Fund, Forward Eastern Europe Equities Fund and Forward International Fixed Income Fund.

Given the strength in the global economy, the foreign markets have performed strongly and have been less exposed to the issues that have recently roiled the U.S. stock and bond markets. The Forward Asia Ex-Japan Equities Fund and the Forward Eastern Europe Equities Fund were launched in December and offer portfolios that invest in emerging market economies to provide investors greater access to new and rapidly growing areas of the global economy.

The idea that international diversification offers benefits to investors has become widely accepted. We believe it is important for investors to continually reexamine the weighting of their investment allocations, especially to non-U.S. securities. While the U.S. stock market represents less than half of the global stock market capitalization as measured by the MSCI All Countries World Index (ACWI), the weighting of international stocks in many investors’ portfolios is rarely greater than a third of investors’ stock allocations. We believe investors may see additional benefits by increasing their allocations to international holdings.

International diversification also may make sense for investors’ fixed income investments. These benefits come from two primary sources-the difference in interest rate cycles outside the U.S. economy, as well as the movements in foreign currencies. We launched the Forward International Fixed Income Fund in October to offer investors access to this emerging asset class. The fund gives investors exposure to a blend of foreign fixed income investments, including exposure to high-yield and emerging markets debt.

Of course, discussion of an appropriate allocation of assets needs to include an assessment of one’s risk tolerance and time horizon. We believe such an evaluation is best undertaken with a financial advisor or investment professional.

We remain deeply committed to helping our shareholders attain true portfolio diversification and achieve their long-term financial goals. We also believe that transparent practices give our investors access to the information they need to make important investment decisions. I invite you to review the information in this report and the performance of the Forward Funds in 2007, and thank you for the continued confidence that you place in our Funds.

Best Regards,

J. Alan Reid Jr.
President
Forward Management, LLC

Please note that the ticker symbols and CUSIPs for these funds will not change.

Small company stocks are generally riskier than large company stocks due to greater volatility and less liquidity. Investing in foreign securities, especially emerging markets will involve certain additional risks, including exchange rate fluctuation, less liquidity, greater volatility and less regulation. Real estate funds will be subject to a higher degree of market risk due to concentration in a specific industry or in geographic regions. Investments in real estate and REITS have various risks including vacancies and devaluation based upon adverse economic or regulatory changes. High-yield bonds involve a greater risk of default and price volatility than U.S. Government and other high quality bonds. High-yield/high-risk bonds can experience sudden and sharp price swings which will affect net asset value. Funds that concentrate in a particular industry will involve a greater degree of risk than a fund with a more diversified portfolio.

There are risks involved with investing, including loss of principal. Past performance does not guarantee future results.

CBOE Volatility Index is an index of implied volatility based on the CBOE’s OEX options. The exchange calculates the implied volatility of eight at-the-money or near-the-money strikes (both puts and calls) with a weighted average time to maturity of 30 days.

The discussions concerning the Funds included in this shareholder report may contain certain forward-looking statements about the factors that may affect performance of the Funds in the future, including the portfolio managers’ outlook regarding economic, market, political, and other factors relevant to investment performance. These statements are based on the portfolio managers’ expectations concerning certain future events and their expected impact on the Funds, and are current only through the date on the cover of this report. Forward-looking statements are inherently uncertain and are not intended to predict the future performance of the Funds. Actual events may cause adjustments in the portfolio managers' strategies from those currently expected to be employed, and the outlook of the portfolio managers is subject to change.