Aberforth Smaller Companies Trust plc

Annual Report and Accounts

31 December 2006
 INVESTMENT OBJECTIVE

‘‘The investment objective of Aberforth Smaller

Companies Trust plc (ASCoT) is to
achieve a net asset value total return (with
dividends reinvested) greater than on
the Hoare Govett Smaller Companies
Index (Excluding Investment Companies)
over the long term by investing
in a diversified portfolio
of small UK quoted companies.’’

CONTENTS
Ten Year Investment Record 1
Company Summary 2
Year’s Summary 4
Directors and Corporate Information 6
Aberforth Partners LLP – Information 7
Chairman’s Statement 8
Managers’ Report 10
Portfolio Information 15
Thirty Largest Investments 16
List of Investments 17
Long-Term Record 20
Directors’ Report 22
Corporate Governance Report 28
Directors’ Remuneration Report 32
Directors’ Responsibility Statement 34
Independent Auditors’ Report 34
Income Statement 36
Reconciliation of Movements in Shareholders’ Funds 37
Balance Sheet 38
Cash Flow Statement 39
Notes to the Accounts 40
Shareholder Information 49
Notice of Annual General Meeting 51

THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION.

If you are in any doubt as to the action you should take you should consult your stockbroker,
bank manager, solicitor, accountant or other independent ¢nancial adviser authorised under the
Financial Services and Markets Act 2000 immediately.
If you have sold or otherwise transferred all of your ordinary shares in Aberforth Smaller Companies
Trust plc, please forward this document and the accompanying form of proxy as soon as possible to
the purchaser or transferee or to the stockbroker, bank or other agent through whom the sale or
transfer was or is being effected for delivery to the purchaser or transferee.
TEN YEAR INVESTMENT RECORD

Absolute Performance Relative Performance

(figures are total returns and have been rebased to 100 at 31 Dec 1996) (figures are total returns and have been rebased to 100 at 31 Dec 1996)

Dividends and RPI Growth Premium/Discount

(figures have been rebased to 100 at 31 Dec 1996) (being the difference between Share Price and NAV)

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COMPANY SUMMARY

PERFORMANCE SINCE INCEPTION ON 10 DECEMBER 1990

Absolute Performance (Log Scale)

(figures are total returns and have been rebased to 100 at 10 December 1990)

INVESTMENT UNIVERSE AND BENCHMARK INDEX

ASCoT’s portfolio normally consists of investments in over 80 individual companies drawn from its
investment universe – being companies which would form the constituents of the Hoare Govett Smaller
Companies Index (Excluding Investment Companies) (HGSC (XIC)).
The Company’s performance is measured against the total return on the HGSC (XIC). This comprises the
bottom 10% of all UK quoted companies by market value which at 1 January 2007 consisted of some
505 companies, the largest market capitalisation of which was £1,104 million and the aggregate market
capitalisation of which was £144 billion.

MANAGEMENT FIRM
Aberforth Partners LLP are contracted as the investment managers and secretaries to the Company. Both
of these contracts can be terminated by either party at any time by giving six months’ notice of
termination and further information can be found on page 23. Aberforth Partners LLP manage
£2.3 billion invested in small UK quoted companies and further information on the firm is set out on
page 7.

2
COMPANY SUMMARY

SHAREHOLDERS’ FUNDS AND MARKET CAPITALISATION

At 31 December 2006 Ordinary Shares

Shareholders’ Funds £833.3m
Market Capitalisation £714.4m

CAPITAL STRUCTURE
At 31 December 2006, the Company’s authorised share capital consisted of 333,299,254 Ordinary
Shares of 1p of which 98,809,788 were issued and fully paid. There were no changes during the year.
At 31 December 2006, the Company was not geared and had no debt outstanding. The Company does,
however, have a bank debt facility of £80 million which the Company can use as gearing at any time.

WIND-UP DATE
The Company has no fixed duration. However, in accordance with the Articles of Association, an
ordinary resolution will be proposed at the 2008 Annual General Meeting (and at every third subsequent
Annual General Meeting) that the Company continues to manage its affairs as an investment trust. Further
details are set out on page 22.

ISA STATUS
The Company’s Ordinary Shares are eligible for inclusion in the ‘‘Stocks and Shares’’ component of an
Individual Savings Account.

PEP STATUS
The Company’s Ordinary Shares qualify for investment in a Personal Equity Plan and the Company
intends to maintain this qualification.

AIC
The Company is a member of The Association of Investment Companies (AIC).

3
YEAR’S SUMMARY
Year to 31 December 2006

Total Returns

ASCoT Net Asset Value (with net dividends reinvested) 26.3%

Benchmark Index 28.0%
ASCoT Ordinary Share Price (with net dividends reinvested) 15.0%

Absolute Performance
(figures are total returns and have been rebased to 100 at 31 December 2005)

4
YEAR’S SUMMARY
Year to 31 December 2006

As at As at
31 December 31 December
2006 2005 % Change
Shareholders’ Funds £833.3m £671.2m 24.2
Market Capitalisation £714.4m £632.4m 13.0
Ordinary Share net asset value 843.37p 679.26p 24.2
Benchmark Index (capital only) 4,453.88 3,571.01 24.7
Ordinary Share price 723.0p 640.0p 13.0
Revenue per Ordinary Share 16.40p 14.50p 13.1
Dividends per Ordinary Share 13.40p 11.85p 13.1
Expense ratio 0.97% 0.99% n/a
Portfolio turnover 34.3% 34.2% n/a
Ordinary Share discount2 14.3% 5.8% n/a

Year to Year to
31 December 2006 31 December 2005
Year’s high and low
(on month end values) High Low High Low
Ordinary Share net asset value 843.4p 699.7p 684.6p1 551.2p1
Ordinary Share price 723.0p 609.0p 640.0p 505.5p
Ordinary Share discount2 4.0% 14.3% 5.6% 11.1%

1
Investments valued at mid market prices.
2
Discount calculated on net asset value including current year revenues.

Year to Year to
31 December 31 December
2006 2005
Total return per Ordinary Share
Revenue 16.40p 14.50p
Capital 159.81p 122.27p
Total 176.21p 136.77p

5
DIRECTORS AND CORPORATE INFORMATION

DIRECTORS
D R Shaw, (58) CA (Chairman, appointed as a director on 14 October 1994)
David Shaw is Chairman and was previously Chief Executive of Bridgepoint Capital Limited (formerly known as
NatWest Equity Partners) since 1989. During this period and currently he also sits on the Board of a number of
unlisted companies in which clients managed by Bridgepoint Capital Limited are major investors.
H N Buchan, (62) (appointed 11 November 2003 and is a Member of the Audit and Management
Engagement Committee)
Hamish Buchan is a consultant in the financial sector and is a Director of Personal Assets Trust plc, Standard Life
European Private Equity Trust plc, The Scottish Investment Trust plc and is Chairman of JPMorgan American
Investment Trust plc. He is also Chairman of The Association of Investment Companies. In August 2000, he became a
Director of Aberforth Split Level Trust plc which was placed into members’ voluntary liquidation on 10 November
2003 under a scheme of reconstruction. From 1969 until his retirement in 2000 he was an investment trust analyst
with Wood Mackenzie & Co and its successor firms.
M L A Chiappelli, (62) CA (appointed 17 July 2001 and is Chairman of the Audit and Management
Engagement Committee)
Marco Chiappelli joined the regional newspaper company, Johnston Press plc, in 1974 as Company Secretary and
was Finance Director from 1980 until his retiral in July 2001. Before joining Johnston Press he was an Audit Manager
with Alexander Sloan & Co. He is currently Chairman of the Board of Governors of St Margaret’s School, Edinburgh,
Limited and is a former Chairman of the Group of Scottish Finance Directors and previously a Director of Scottish Radio
Holdings plc.
J E G Cran, (55) ACMA (appointed 17 July 2001 and is a Member of the Audit and Management
Engagement Committee)
Edward Cran was Chief Executive of Cattles plc, a company involved in the consumer credit business, until his retiral
in May 2001. He joined the Board of Cattles plc in 1990 prior to which he held various senior positions in the
credit industry.
Professor P R Marsh, (59) (appointed 16 July 2004)
Paul Marsh is Emeritus Professor of Finance at London Business School. Within London Business School, Paul has
been Deputy Principal, Faculty Dean, Chair of the Finance area, Associate Dean Finance Programmes and an
elected Governor. Paul has advised on several public enquiries, and was previously a Director of Majedie
Investments plc (until 2006) and M&G Group (until 1999). Paul co-designed the FTSE 100 Index and the Hoare
Govett Smaller Companies Index, produced for ABN AMRO at London Business School.
Professor W S Nimmo, (59) (appointed 16 July 2004)
Walter Nimmo was previously Chief Executive and Chairman of the Inveresk Research Group until 2004. He
founded Inveresk Clinical Research in 1988. Currently he sits on the board of a number of private companies.

CORPORATE INFORMATION
INVESTMENT MANAGERS AND BANKERS
SECRETARIES Bank of Scotland
Aberforth Partners LLP 38 St Andrew Square
14 Melville Street Edinburgh EH2 2YR
Edinburgh EH3 7NS
Tel: 0131 220 0733 CUSTODIAN
Email: [email protected] The Northern Trust Company
Website: www.aberforth.co.uk 50 Bank Street
Canary Wharf
REGISTERED OFFICE London E14 5NT
14 Melville Street
Edinburgh EH3 7NS AUDITORS
Ernst & Young LLP
REGISTRARS Ten George Street
Capita Registrars Edinburgh EH2 2DZ
Northern House
Woodsome Park SOLICITORS AND
Fenay Bridge SPONSORS
Huddersfield HD8 0LA Dickson Minto W.S.
Tel: 0870 162 3131 16 Charlotte Square
Website: www.capitaregistrars.com Edinburgh EH2 4DF

6
ABERFORTH PARTNERS LLP – INFORMATION

Aberforth Partners LLP (the ‘‘firm’’) act as Managers and Secretaries to the Company. The predecessor business,
Aberforth Partners, was established in 1990 to provide institutional and wholesale investors with a high level of
resources focused exclusively on small UK quoted companies. Since then funds under management have grown to
£2.3 billion (as at 31 December 2006). The firm is wholly owned by eight partners – five founding partners and two
additional partners, all of whom are investment managers and an eighth partner, Gordon R Young, who is
responsible for the firm’s administration. The seven investment managers work as a team managing the Company’s
portfolio on a collegiate basis. The founding partners have been managing the portfolio since the Company’s
inception in December 1990. The partners each have a personal investment in the Company. The biographical
details of the investment managers are as follows:

Andrew P Bamford (40) BCom (Hons), CA – Andy joined Aberforth Partners in April 2001, became a partner in May
2004, and is responsible for investment research and stock selection in the following areas – Technology Hardware
& Equipment; Travel & Leisure; Health Care Equipment & Services; and Industrial Transportation. Previously he was
with Edinburgh Fund Managers for 7 years, latterly as Deputy Head of UK Small Companies, with specific
responsibility for institutional clients. Prior to joining Edinburgh Fund Managers he was a senior investment analyst
with General Accident for 2 years supporting the head of UK Smaller Companies. Before joining General Accident,
he was a Chartered Accountant with Price Waterhouse.

John M Evans (49) MA (Hons) – John was a founding partner in May 1990 and is responsible for investment research
and stock selection in the following areas – Automobiles & Parts; Construction & Materials; Household Goods;
Leisure Goods; Personal Goods; Fixed Line Telecom; Electricity; Gas, Water & Multiutilities; and Mining. Previously
he was with Ivory & Sime for 11 years where he was latterly responsible for the management of portfolios whose
objectives were income and capital growth from UK equities.

Euan R Macdonald (36) BA (Hons) – Euan joined Aberforth Partners in May 2001, became a partner in May 2004,
and is responsible for investment research and stock selection in the following areas – Industrial Engineering and
Software & Computer Services. Previously he was with Baillie Gifford for 10 years where he managed portfolios
invested in small companies both in Continental Europe and in the UK.

Richard M J Newbery (47) BA (Hons) – Richard was a founding partner in May 1990 and is responsible for
investment research and stock selection in the following areas – Electronic & Electrical Equipment; Beverages; Food
& Drug Retailers; Food Producers; and General Retailers. Previously he was with Ivory & Sime for 9 years where he
managed international portfolios for a range of clients including those with a small company specialisation.

David T M Ross (57) FCCA – David was a founding partner in May 1990 and is responsible for investment research
and stock selection in the following areas – Nonlife Insurance; Life Assurance; Real Estate; and General Financial.
Previously he was with Ivory & Sime for 22 years, the last two of which were as Managing Director. He was a
Director of US Smaller Companies Investment Trust plc and served as a member of the Executive Committee of the
Association of Investment Companies.

David Warnock (49) BCom (Hons), CDipAF – David was a founding partner in May 1990 and is responsible for
investment research and stock selection in the following areas – Chemicals; Forestry & Paper; General Industrials;
and Support Services. Previously he was with Ivory & Sime for 4 years and had responsibility for the management of
investment trusts whose objectives were capital and income growth from equities on a global basis. Prior to joining
Ivory & Sime, he was with 3i for 7 years in both Scotland and the USA.

Alistair J Whyte (43) – Alistair was a founding partner in May 1990 and is responsible for investment research and
stock selection in the following areas – Aerospace & Defence; Media; Oil & Gas Producers; Oil Equipment, Services
& Distribution; and Pharmaceuticals & Biotechnology. Previously he was with Ivory & Sime for 11 years where
latterly he managed portfolios in Asia. Prior to that he managed portfolios with the objective of capital growth from
smaller companies in the UK and internationally.
Further information on Aberforth Partners LLP and its clients is available on its website – www.aberforth.co.uk

7
CHAIRMAN’S STATEMENT

REVIEW OF 2006 PERFORMANCE

Aberforth Smaller Companies Trust plc (ASCoT) achieved a total return of 26.3% for the year to 31 December
2006, which compares with a total return of 28.0% from the Hoare Govett Smaller Companies Index
(Excluding Investment Companies), your Company’s investment benchmark. ASCoT has therefore
under-performed its benchmark for the year. Larger companies, as represented by the FTSE All-Share Index,
registered a total return of 16.8%. Many commentators had forecast that the stockmarket returns from
larger companies would surpass smaller companies in 2006, which clearly has not been the case. As in each of
the last two Annual Reports, your Board and Managers are cautious about extrapolating recent years’
significant returns.
This is the fourth consecutive year of small companies out-performing larger companies and of outstanding
absolute returns. This four year ‘‘run’’ has produced compound annual total returns for ASCoT of 29.2%, for
the investment benchmark of 29.6%, and for larger companies of 18.1%. By comparison, the previous
three years of this millennium (to the end of 2002) witnessed a much better relative performance from ASCoT
when its compound annual returns were plus 4.0%, the benchmark’s were minus 12.3%, and larger
companies’ were minus 14.2%. Taken together, the seven years to the end of 2006 would seem to suggest that
ASCoT’s relative performance is better when stockmarkets are less buoyant. This fits well, intuitively, with your
Managers’ value investment style, though they are reluctant to concede this correlation.

GEARING
It is worth emphasising that ASCoT’s policy has always been to remain as near to fully invested as possible and
our caution has not and will not alter that policy. With the benefit of hindsight, ASCoT might have gone
beyond being fully invested and made use of debt facilities; to have employed gearing during the last
four years would have enhanced returns to Shareholders. However, our continuing cautious stance means that
we do not envisage gearing ASCoT currently. This position is regularly reviewed by your Board and Managers.

DIVIDENDS
Your Board is pleased to recommend a final dividend of 9.15p, which produces total dividends for the year of
13.40p representing an increase of 13.1% on the total for the previous year. Subject to Shareholders’ approval,
the final dividend of 9.15p per share will be paid on 7 March 2007 to Shareholders on the register at the close
of business on 9 February 2007. ASCoT operates a Dividend Reinvestment Plan; the relevant documentation is
available from Aberforth Partners LLP on request, or from their website www.aberforth.co.uk, for those
Shareholders who wish to participate in the plan and are not already doing so.
Your Board believes this 13.1% increase in dividends is an excellent performance and reflects the overall
health of ASCoT’s portfolio. Indeed, to the extent that dividend growth drives share price performance over
time, there is no doubt that some of the stockmarket’s recent strength has been fundamentally supported by
dividend growth, itself a function of good earnings performance and strong cash flow. However, in addition,
the stockmarket’s rating of that dividend stream has risen i.e. the yield has fallen. While dividend growth may
continue to be attractive for some time, it is harder to envisage the rise in capital values continuing to exceed
dividend growth.

CORPORATE GOVERNANCE: BUSINESS REVIEW

During 2005, the Companies Act 1985 was amended to introduce the requirement for companies to
incorporate a ‘‘business review’’ within the Directors’ Report. The review, which can be found on pages 22
to 25, provides further analysis of ASCoT’s business, its performance during the year, principal risks and key
performance indicators.

8
CHAIRMAN’S STATEMENT

SHARE BUY BACK AUTHORITY AND TREASURY SHARES

At the Annual General Meeting in March 2006, the authority to purchase up to 14.99% of ASCoT’s Ordinary
Shares was renewed. No Shares were purchased during the year. Your Board will be seeking a renewal of this
authority at the Annual General Meeting to be held on 1 March 2007. Your Board has established, and keeps
under careful review, the circumstances under which such authority may be utilised. Should these arise,
ASCoT will seek to purchase Ordinary Shares and it is your Board’s current policy to cancel, rather than hold
in treasury, any such shares.

SUMMARY AND OUTLOOK

There will, sooner or later, be more testing stockmarket conditions than those ASCoT has enjoyed these last
four years. I noted last year that ‘‘cheap and abundant debt is causing asset prices to rise and fuelling M&A
activity’’ and I believe I could do worse than repeat this, whilst adding that this cannot go on forever.
Eventually, valuations rise to a level that prohibits debt funded M&A and it seems very likely we are nearer that
point than we were last year. Whilst this may read as lacking conviction, it reflects the facts that economic
conditions remain reasonable, M&A activity seems to be unabated, and therefore returns could well continue
to surprise on the upside for sometime yet. Whatever emerges, your Board is confident that your Managers’
experience and consistency of approach will stand your Company in good stead in the long term.
David R Shaw
Chairman
22 January 2007

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MANAGERS’ REPORT

PERFORMANCE
Small UK quoted companies enjoyed a fourth consecutive year of outstanding absolute and relative returns.
Having risen by 43.0% in 2003, 20.7% in 2004 and 27.8% in 2005, the Hoare Govett Smaller Companies
Index (Excluding Investment Companies) achieved a total return of 28.0% in 2006. This was substantially
ahead of the FTSE All-Share Index’s 16.8% and, indeed, the average returns enjoyed by UK equities over the
longer term. ASCoT shared in this buoyancy, though its 26.3% total return fell short of its benchmark’s.
The UK’s pattern of strong absolute returns in local currencies and small company out-performance was
mirrored by other major stockmarkets. On a constant currency basis, however, a different picture emerges.
Though broadly unchanged against the euro, sterling appreciated by 15% against the US dollar. In sterling
terms, therefore, the capital only return from the S&P 500 Index was actually slightly negative.

INVESTMENT BACKGROUND
The HGSC (XIC)’s 28.0% return was not achieved smoothly. In common with the FTSE All-Share Index and
other indices around the world, the benchmark wobbled between early May and early June, falling by 11.6%
before recovering strongly through the second half. That bout of risk aversion, though the most severe in 2006,
was not an isolated incident. In their reading of the likely interplay of inflation, real economic growth and
interest rates, financial markets on several occasions flirted with the notion that US interest rates might fall in
2007, only to be jilted as inflationary pressures from rampant commodity prices or dollar weakness refused to
abate.
Looking for now beyond these short term fluctuations, familiar imbalances in the global economy persist and
retain their relevance for the investment background. These imbalances moved to centre stage in the wake of
the brief US recession in 2001. Encouraged by low interest rates, the US consumer ran down savings and
borrowed to spend. This spending sustained economic growth not just in the US but also globally. It was
directed towards the cheap goods and services produced by the economies of East Asia and China in
particular. As this relationship developed, the US consumer became more indebted and the US current
account deficit swelled to well over 6% of GDP. The final stage in this symbiotic system was the recycling of
Asian current account surpluses into perceived high return assets, including US government bonds. In this
activity, the East Asian economies were joined by oil exporting countries, which enjoyed a substantial windfall
from the quadrupling of the oil price between the end of 2001 and the middle of 2006.
It might be tempting to adopt a puritanical stance at this point and admonish the American consumer for his
profligacy. However, the fostering of these imbalances has probably resulted in a more buoyant global
economy today than would otherwise have been the case. While a less lopsided world might appeal, its
attainment would not be without risk. In particular, alternative sources of demand would be required should
challenges arise for the US consumer.
Although the 24% drop in the oil price since its mid year peak has relieved some pressure, several such
challenges emerged last year. In response to or in anticipation of ongoing inflationary pressures, the cost of
borrowing continued to rise, with the Fed funds rate increased four times in early 2006 to end the year at
5.25%. There is evidence that this has affected the housing market, which previously played an important role
in fuelling consumer spending through refinancing. Construction activity slowed markedly towards the end of
2006, with new starts down by over 25% year-on-year. Moreover, Americans’ recent fondness for UK-style
variable rate mortgages has accelerated the transmission of higher interest rates to the consumer. Finally, the
dollar’s weakness should at the margin undermine the purchasing power of the US consumer.
These headwinds have given rise to concerns that the American economy might next year slow more quickly
than previously expected or even enter recession. Apparent confirmation for this bearish outlook comes from
the shape of the US yield curve, with long term bond yields sitting below short term yields. This inversion of
the yield curve, which intensified through 2006, has historically proved a useful indicator of an imminent

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MANAGERS’ REPORT

recession. Within this context, it may be possible to rationalise financial markets’ obsession last year with
whether inflationary pressures would relent sufficiently to allow renewed monetary stimulus from lower
interest rates in 2007.
Meanwhile, to judge by the resilience of sterling, the UK remains a haven of relative calm, despite sharing with
the US several structural challenges such as a large current account deficit, an indebted consumer sector and
an inverted yield curve. Inflationary pressures also remain an issue, with data released in December revealing
that the CPI at both the headline and core levels was rising more than expected. Although consumer spending
eased, the housing market was reinvigorated after its pause for breath in early 2005: the Halifax survey
suggested that house prices rose by 10% last year. As the year drew to a close, therefore, speculation
intensified that further monetary tightening, following 2006’s increase in interest rates from 4.5% to 5.0%,
might prove necessary. Perhaps the currency markets are indicating a greater probability that the Bank of
England’s monetary policy committee will successfully deal with inflation than their American counterparts.

INVESTMENT PERFORMANCE
As already noted, the setback in May and June meant that the HGSC (XIC)’s 28.0% total return was not secured
in a smooth fashion. ASCoT’s absolute return followed a similar profile, but its relative return was almost a
mirror image. As history indicates, your Managers’ value investment disciplines often prove out of step with the
mood of the market. These periods have tended to coincide with exuberant stockmarket conditions and can
persist for several quarters. The first four months of 2006 sustained the bullish outlook that held sway in much
of 2005 and saw ASCoT return 9.2% against its benchmark’s 11.6%. However, the increased risk aversion in
the mid year served to dampen some of the exuberance and proved to be a turning point in ASCoT’s relative
fortunes: its 15.6% return over the eight months to the end of the year exceeded the HGSC (XIC)’s 14.8%.
Clearly, however, this upturn was insufficient to recover earlier lost ground. The following paragraphs are
intended to throw some light on the influences on ASCoT’s performance.
. Of the major indices that measure the performance of UK equities, the HGSC (XIC)’s 28.0% return in
2006 was bettered only by the FTSE 250 (XIC), which was up by 32.1% in total return terms. Indeed,
medium sized companies have been the sweet-spot within the UK stockmarket’s recovery over the past
four years, producing a cumulative total return of 197% against 94% for the FTSE All-Share. This
out-performance reflects higher levels of corporate activity and the lure of different industrial exposures
from the FTSE 100, which remains dominated by 15 very large companies that account for half of the
total market capitalisation of the FTSE All-Share and that are concentrated in the banking, oil,
pharmaceutical and telecoms industries. Crucially, ASCoT’s benchmark overlaps with the FTSE 250 and
thus shares in its performance. The HGSC (XIC)’s definition – the lowest tenth by market capitalisation of
the main UK equity market – means that 59% of its total value at the end of 2006 was made up of
constituents of the FTSE 250.
With the alternative small company benchmark, the FTSE SmallCap Index, having returned 133% over
the past four years against 182% for the HGSC (XIC), ASCoT’s choice of benchmark has served it well.
However, as its mid cap constituents have re-rated, your Managers have gradually re-oriented the
portfolio towards smaller companies. Four years ago, FTSE 250 companies accounted for 54% of
ASCoT’s portfolio and for 61% of the benchmark. However, at the end of 2006, ASCoT’s exposure to
FTSE 250 companies had been managed down to 43%, against 59% for the benchmark.
This general theme of strong returns from small and mid cap companies does not extend to AIM, a
market into which ASCoT has not ventured. Following a modest 4.8% total return in 2005, the FTSE AIM
All-Share inched 1.5% higher last year. AIM has struggled over recent years with the laws of supply and
demand, having experienced significant net equity issuance in contrast to the net withdrawals,
i.e. de-equitisation, on the main market. It has also been hampered by greater exposure to early-stage
commodities companies and on-line gaming businesses.

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MANAGERS’ REPORT

Performance Attribution Analysis

12 Months to 31 December 2006
Basis
Points
Stock Selection 325
Sector Selection (315)

Attributable to the portfolio of investments (calculated on a mid-price basis) 10

Impact of mid-price to bid-price 21
Cash (98)
Management Fee (including VAT) charged (99)
Other expenses (6)
Total Attribution based on bid-prices (172)

Note: 100 basis points = 1%. Total Attribution is the difference between the total return of the net asset
value and the Benchmark Index (i.e. net asset value = 26.29%; Benchmark Index = 28.01%; difference
is –1.72% being –172 basis points).

. The table above analyses ASCoT’s relative performance in total return terms. At the portfolio level,
ASCoT was ahead of the benchmark by ten basis points. This figure was the net of a large negative
contribution from sector selection (i.e. either a lower exposure than the benchmark to those sectors that
performed well or a higher exposure to those that performed poorly) and a slightly larger positive from
stock selection (i.e. the portfolio’s investments in a sector performed well against that sector’s benchmark
return). Regular readers of these reports will appreciate that this degree of disparity between the
attributions to stock and sector selection is unusual.
The good stock selection was broadly spread. Of the 28 sectors in which ASCoT’s portfolio was invested
during 2006, 16 generated a positive attribution. In 2005’s report, reference was made to a higher
incidence of profit warnings, specifically to nine stocks that reduced absolute performance by more than
20 basis points. Last year, that number, through good luck and good judgement, fell back to four.
Sector selection has clearly been less favourable. Before proceeding with an explanation, it is worth
reiterating that ASCoT’s sector weightings are not predetermined; rather, they are the outcome of the
analysis of individual businesses: if your Managers cannot identify any attractively valued companies in a
particular sector, they will not commit your capital to that sector.
On this basis, ASCoT entered 2006 cumulatively 10.5% points below the benchmark’s 19.6% weight in
four sectors: Oil & Gas Producers, Mining, Real Estate and General Financials. In the case of the
two resources sectors, your Managers were concerned that 2005’s extraordinary appreciation in the price
of oil and other commodities had been more than fairly reflected in the valuations of many constituent
companies, companies that frequently relied on highly speculative exploration programmes. Meanwhile,
caution with regard to the two financials sectors was founded upon their reliance on the historically low
cost of debt, which, in the case of property, had driven yields down to levels that appeared difficult to
justify without a meaningful pick-up in rental growth. Despite these misgivings, all four sectors
succeeded in outstripping the performance of the benchmark as a whole. With no significant
fundamental improvement discernible, and consistent with their value style, your Managers reacted by
making further reductions. ASCoT entered 2007 13.5% points below the benchmark’s 22.2% weighting
in these sectors.
There must clearly be offsetting over-weight positions. Ironically, the most important of these are the
TMT (technology, media and telecom) sectors, the very area of the market to which ASCoT had so little
exposure seven years ago. The portfolio began 2007 with a weighting in TMT 5.5% points higher than

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MANAGERS’ REPORT

the HGSC (XIC)’s 13.6%. This simply reflected the availability of a number of attractively valued
businesses within what had become relatively unfashionable sectors of the stockmarket. Contrarianism is
a regular feature of your Managers’ investment style. In the short term, it incurs the risk of running against
the prevailing mood of the market and, indeed, TMT exposure contributed negatively in terms of sector
selection last year. However, this was more than offset at the stock selection level and your Managers are
optimistic that further gains can be made either as the stockmarket rediscovers some of its appetite for
TMT or through continued takeover activity.
. De-equitisation, a term coined by Citigroup, has featured regularly in your Managers’ recent reports. In
the broadest sense, it describes the replacement of equity financing with debt financing that has
characterised the UK stockmarket over the past three years. It takes several forms, from high profile cash
takeovers to more prosaic share buy-back programmes. It is particularly important for ASCoT because,
although large companies accounted for the majority of the net £56bn of equity retired from the UK
market in 2006, its impact in proportion to the overall size of the HGSC (XIC) was greater.
Last year, 52 companies in the benchmark were taken over, equivalent to roughly 9% of the 583
constituents at the start of the year. ASCoT experienced a similar hit-rate, with ten portfolio companies
acquired during the year, and also benefited from real or rumoured bid activity affecting several other
holdings. As was the case in the previous two years, private equity firms were eclipsed by other
corporates, the latter being the successful acquirers in nine of ASCoT’s ten completed deals. Three other
holdings made substantial returns of capital, while a further eight engaged in share buy-back
programmes.
. As quoted companies’ appreciation of de-equitisation has grown over recent years – manifest in a greater
willingness to fund acquisitions with debt and make share buy-backs – dividend payments have also
received renewed focus. This trend is even spreading to the TMT arena: only two of the portfolio’s
dozen holdings in the Software & Computer Services sector persist in eschewing dividend payments,
down from four last year. These developments are consistent with the historically high rates of return on
capital that the UK corporate sector is currently enjoying. ASCoT benefited accordingly.
Of its 113 holdings at the year end, it was the policy of 18 not to pay a dividend, while another 11 had
been listed for less than two years, rendering comparisons meaningless. Of the remaining 84, six cut their
dividends, a further seven held them unchanged and 71 reported increases. The median company within
the 84 raised its dividend by 10%, considerably ahead of the rate of growth achieved by UK equities over
the longer term. Although this median figure does not necessarily reflect ASCoT’s actual receipts, since
the portfolio is actively managed and a specific rate of dividend growth is not targeted, the analysis does
indicate the underlying health of a cross-section of ASCoT’s investment universe.

INVESTMENT OUTLOOK
The unbalanced world has been good for equities. Businesses’ revenues have been boosted by an upswing in
overall demand that has lasted for four years. Meanwhile, though challenged by rising utility bills and raw
material prices, costs have benefited from the opportunity to source goods and services more cheaply from
emerging economies. Furthermore, the persistency of low interest rates in much of the developed world, which
were required to stimulate the recovery in demand, has created the de-equitisation phenomenon, allowing
companies to replace expensive equity financing with cheap debt and promoting takeover activity.
A transition to a rebalanced global economy, while inevitable and probably ultimately desirable, will not be
achieved painlessly and without risk. Last year gave some indications that such a transition may be underway,
in particular the still untamed inflationary pressures, the weakening dollar and the threat of a slowdown – or
even recession – in the US economy. It is not clear that other sources of demand, whether Europe or the
emerging economies, are yet sufficient to take up the strain should the US consumer indeed pause for breath.

13
MANAGERS’ REPORT

However, equity markets, judging by their performance last year, appear at ease with these risks. And why
should they not be at ease? Experience suggests that it is dangerous to bet against the US consumer – perhaps
the Fed will have sufficient scope in 2007 to cut interest rates, thus simultaneously reinvigorating the consumer
sector, prolonging de-equitisation and sustaining leveraged investment activity. Your Managers remain less
inclined to overlook the risks.
While these big picture issues can seem rather remote from the world of small UK quoted companies, it is
important to bear in mind that ASCoT’s investments are competing in a global context not just against overseas
businesses for their profits, but also against a myriad of asset classes for the attention of investors. Large
companies, one such asset class to which small companies are commonly compared, are trading on a historic
price earnings ratio of 14.3x, as gauged by the FTSE All-Share Index. Against this, the attraction of small
companies, which the table shows to be valued on 18.5x historic earnings, would appear limited.
However, these overall index valuation measures tend to be skewed by radically different underlying sector
exposures, with the FTSE All-Share Index benefiting from its large weighting in lowly rated banks and
integrated oil companies, and the HGSC (XIC) suffering from its weighting in highly valued property and oil
exploration businesses. These are, however, precisely the areas of the small company universe that your
Managers’ value investment disciplines have led them to avoid, a decision that has yet to benefit ASCoT’s
relative performance.

31 December 2006 31 December 2005

Characteristics ASCoT Benchmark ASCoT Benchmark
Number of Companies 113 505 117 583
Weighted Average Market Capitalisation »450m »570m £406m £486m
Price Earnings Ratio (Historic) 18.9x 18.5x 16.2x 19.0x
Net Dividend Yield (Historic) 2.2% 2.0% 2.3% 2.2%
Dividend Cover (Historic) 2.4x 2.8x 2.7x 2.4x

As the table reveals, the average historic price earnings ratio of ASCoT’s portfolio of 113 companies was
slightly higher than the benchmark’s at the end of 2006. This state of affairs is not without precedent, having
occurred at three previous year-ends over ASCoT’s lifetime. Your Managers believe that it does not betray any
compromise of their investment philosophy. Rather, it reflects the following factors: a more cautious
calculation of earnings particularly within the Real Estate sector; a portfolio of companies that your Managers
consider to have lower financial gearing than the average for the benchmark; and a frequently contrarian
approach, which can involve taking holdings in businesses that, following an operational mishap, are valued
on exaggerated multiples of depressed historic earnings. In attempting to look through such distortions, it can
be helpful to focus on the more robust dividend numbers: some reassurance may be drawn from the fact that
the average yield of ASCoT’s portfolio continues to exceed that of the benchmark.
Accordingly, moving into 2007, your Managers are optimistic that the underlying value inherent in ASCoT’s
portfolio of businesses can provide the basis for superior relative performance. The outcome will, however, be
influenced by sector weightings: the portfolio retains a lower exposure than the benchmark to the resources
and financial sectors, and a high exposure to TMT. While your Managers consider that this positioning remains
appropriate, the precise timing of its vindication is tougher to call. However ASCoT fares in relative terms,
it would seem prudent not to expect a fifth consecutive year of absolute returns in excess of 20% from small
UK quoted companies.

Aberforth Partners LLP

Managers
22 January 2007

14
PORTFOLIO INFORMATION

Summary of Material Portfolio Changes

12 Months to 31 December 2006
Cost Proceeds
Purchases £’000 Sales £’000
Evolution Group + 8,100 Bodycote International /
O 12,288
Delta + 7,749 Vardy (Reg) /
O 11,914
Domino Printing Sciences + 7,534 Virgin Mobile Holdings (UK) /
O 11,784
Hiscox + 7,083 Forth Ports /
O 10,670
Low & Bonar + 6,995 Derwent Valley Holdings /
O 10,431
Foseco 6,480 Bovis Homes Group /
O 9,849
Minerva + 6,252 Venture Production /
O 9,226
Spirent Communications 6,160 First Technology /
O 9,084
Greggs 6,114 Amlin /
O 9,022
Spectris + 5,944 RPS Group /
O 8,540
Mapeley 5,863 Carillion 8,342
Huntleigh Technology + 5,596 Atkins (WS) /
O 7,207
NSB Retail Systems 5,386 TTP Communications /
O 6,945
Kingston Communications (Hull) + 5,013 Psion /
O 6,280
Ark Therapeutics Group + 4,929 London Merchant Securities /
O 5,989
CSR + 4,519 Richmond Foods /
O 5,909
Halfords Group 4,483 Restaurant Group 5,562
Britvic + 3,916 Abbot Group 5,464
Phoenix IT Group 3,799 Go-Ahead Group /
O 5,332
Axis-Shield + 3,775 Wellington Underwriting /
O 5,249
Other Purchases 128,673 Other Sales 97,168

Total for the year 244,363 Total for the year 262,255

The summary of material portfolio changes shows the 20 largest aggregate purchases and sales including transaction
costs. Portfolio turnover for the year was 34.3% (2005: 34.2%)
+ Indicates a company which is a new holding.
/ Indicates a company which has been disposed of completely.
O

FTSE Industry Classification Exposure Analysis

31 December 2005 31 December 2006
Net2 Net
Index Portfolio Purchases/ Appreciation/ Portfolio Index
Weight Weight Valuation (Sales) (Depreciation) Valuation Weight Weight
Sector % % £’000 £’000 £’000 £’000 % %
Oil & Gas 4 4 26,257 (15,740) 9,311 19,828 2 5
Basic Materials 3 2 15,138 2,466 5,149 22,753 3 4
Industrials 31 38 252,175 (21,105) 51,179 282,249 34 32
Consumer Goods 9 5 36,198 (7,518) 16,239 44,919 5 7
Health Care 4 2 12,057 33,190 65 45,312 5 5
Consumer Services 19 23 152,131 (14,127) 40,579 178,583 22 16
Telecommunications 2 2 14,431 (9,211) 10 5,230 1 1
Utilities – – – – – – – –
Financials 20 13 83,014 (5,363) 29,959 107,610 13 22
Technology 8 10 68,159 17,255 9,572 94,986 12 8
Liquidity available for
investment1 n/a 1 3,857 n/a n/a 22,820 3 n/a

100 100 663,417 (20,153) 162,063 824,290 100 100

1
This represents net current assets less the proposed final dividend.
2
This includes transaction costs and special dividends which have been treated as a return of capital.

15
THIRTY LARGEST INVESTMENTS
As at 31 December 2006

Valuation as at % of
31 December Total
2006 Net
No. Company £’000 Assets Business Activity
1 Greggs 22,252 2.7 Retailer of sandwiches, savouries and other
bakery products
2 ITE Group 21,731 2.6 Trade exhibitions
3 Holidaybreak 19,523 2.3 Holiday company
4 BSS Group 19,053 2.3 Distribution of plumbing supplies
5 Headlam Group 18,216 2.2 Distribution of floorcoverings
6 Grainger Trust 17,184 2.1 Property
7 Shanks Group 16,588 2.0 Waste management
8 Brown (N.) Group 16,131 1.9 Home shopping catalogue retailer
9 Interserve 13,948 1.7 Support services
10 Huntsworth 13,659 1.6 Public relations
Top Ten Investments 178,285 21.4

11 RPC Group 13,358 1.6 Manufacture of rigid plastic containers

12 Croda International 13,263 1.6 Manufacture of naturally based
intermediates for personal care and other
products
13 MITIE Group 12,929 1.6 Support and building services
14 Johnson Service Group 12,585 1.5 Workwear rental and sourcing, workplace
services and drycleaning
15 Spirent Communications 12,444 1.5 Telecommunication test equipment
16 Carillion 12,169 1.5 Construction and facilities management
17 Ultra Electronics Holdings 12,093 1.5 Defence electronics and aerospace
18 Anite Group 11,853 1.4 Software and related services
19 e2v technologies 11,674 1.4 Manufacture of electronic components and
sub-systems
20 Restaurant Group 11,003 1.3 Restaurants
Top Twenty Investments 301,656 36.3

21 Catlin Group 10,923 1.3 Insurance

22 Nestor Healthcare Group 10,878 1.3 Healthcare services
23 Halfords Group 10,424 1.3 Retailer of auto, leisure and cycling products
24 Spirax-Sarco Engineering 10,393 1.2 Engineering
25 Centaur Media 10,174 1.2 B2B publishing
26 Mapeley 9,989 1.2 Property
27 Wilmington Group 9,936 1.2 B2B publishing and training
28 Delta 9,490 1.1 Galvanising, manganese products and
industrial supplies
29 Brewin Dolphin Holdings 9,423 1.1 Private client stockbroker
30 Foseco 9,377 1.1 Products for the castings industry
Top Thirty Investments 402,663 48.3
Other Investments (83) 398,807 47.9
Total Investments 801,470 96.2
Net Current Assets 31,861 3.8
Total Net Assets 833,331 100.0

16
LIST OF INVESTMENTS
As at 31 December 2006

31 December 2006
% of % of
Total HGSC
Value Net (XIC)
Holding Security £’000 Assets Index
Oil & Gas Producers 6,912 0.8 3.0
558,747 Premier Oil 6,912 0.8
Oil Equipment & Services 12,916 1.5 1.8
2,189,908 Abbot Group 6,964 0.8
1,847,000 Sondex 5,952 0.7
Chemicals 22,753 2.7 1.8
2,292,700 Croda International 13,263 1.6
5,978,000 Delta 9,490 1.1
Mining 0 0.0 1.8
Construction & Materials 27,749 3.4 3.2
3,067,206 Carillion 12,169 1.5
1,001,200 Clarke (T.) 1,985 0.3
249,500 Heywood Williams Group 267 0.0
6,282,100 Low & Bonar 8,057 1.0
1,486,814 Marshalls 5,271 0.6
Aerospace & Defence 28,409 3.5 1.7
302,000 Chemring Group 4,772 0.6
2,213,120 Hampson Industries 3,209 0.4
1,112,500 Ultra Electronics Holdings 12,093 1.5
1,792,488 UMECO 8,335 1.0
General Industrials 19,785 2.4 0.8
1,460,700 British Polythene Industries 6,427 0.8
5,300,600 RPC Group 13,358 1.6
Electronic & Electrical Equipment 56,570 6.8 4.5
2,181,500 Abacus Group 4,058 0.5
1,988,715 Dialight 4,967 0.6
2,778,100 Domino Printing Sciences 8,897 1.1
2,995,300 e2v technologies 11,674 1.4
1,819,894 Laird Group 7,516 0.9
2,172,000 Oxford Instruments 5,435 0.7
1,442,500 Raymarine 6,783 0.8
924,100 Spectris 7,240 0.8
Industrial Engineering 39,279 4.6 4.5
2,575,300 Castings 6,702 0.8
4,778,300 Foseco 9,377 1.1
1,953,100 Renold 2,148 0.2
8,852,740 Senior 5,644 0.7
1,039,342 Spirax-Sarco Engineering 10,393 1.2
957,900 The Vitec Group 5,015 0.6
Industrial Transportation 8,101 1.0 2.8
7,647,900 Alpha Airports Group 5,354 0.7
815,700 Wincanton 2,747 0.3
Support Services 102,356 12.3 14.3
1,218,900 4imprint Group 5,970 0.7
1,198,200 Acal 4,916 0.6
4,418,000 BSS Group 19,053 2.3
6,224,000 Communisis 5,213 0.6
172,500 Diploma 1,509 0.2
3,478,300 Interserve 13,948 1.7
3,601,000 Johnson Service Group 12,585 1.5
5,224,000 MITIE Group 12,929 1.6
2,437,500 office2office 5,801 0.7
1,281,200 Scott Wilson Group 3,844 0.4
7,275,400 Shanks Group 16,588 2.0

17
LIST OF INVESTMENTS
As at 31 December 2006

31 December 2006
% of % of
Total HGSC
Value Net (XIC)
Holding Security £’000 Assets Index
Automobiles & Parts 0 0.0 0.2
Beverages 4,368 0.5 0.6
15,500 Barr (A.G.) 177 0.0
1,440,100 Britvic 4,191 0.5
Food Producers 13,002 1.6 2.5
517,200 Cranswick 4,657 0.6
1,482,300 Robert Wiseman Dairies 8,345 1.0
Household Goods 27,549 3.3 1.6
2,962,023 Headlam Group 18,216 2.2
1,778,400 McBride 3,472 0.4
820,300 Redrow 5,861 0.7
Leisure Goods 0 0.0 0.7
Personal Goods 0 0.0 1.2
Health Care Equipment & Services 22,560 2.7 2.2
2,041,900 Biocompatibles International 2,363 0.3
994,600 ClinPhone 1,939 0.2
1,530,100 Huntleigh Technology 7,287 0.9
6,475,000 Nestor Healthcare Group 10,878 1.3
1,095,500 Pinnacle Staffing Group 93 0.0
Pharmaceuticals & Biotechnology 22,752 2.7 2.4
1,908,700 Acambis 1,966 0.2
2,328,800 Alizyme 1,979 0.2
5,209,332 Ark Therapeutics Group 4,819 0.6
4,000,700 Asterand 240 0.0
1,224,718 Axis-Shield 3,334 0.4
9,785,900 Innovata 2,471 0.3
12,700,000 Medical Solutions 826 0.1
3,814,000 Protherics 2,822 0.4
7,041,244 Vernalis 4,295 0.5
Food & Drug Retailers 22,252 2.7 0.4
517,492 Greggs 22,252 2.7
General Retailers 53,544 6.5 7.9
2,075,500 Blacks Leisure Group 8,250 1.0
5,720,100 Brown (N.) Group 16,131 1.9
6,103,400 Game Group 6,866 0.8
2,840,200 Halfords Group 10,424 1.3
1,766,181 John David Group (The) 5,475 0.7
1,571,900 Nord Anglia Education 4,118 0.5
447,100 ScS Upholstery 2,280 0.3
Media 60,274 7.1 3.7
50,100 Bloomsbury Publishing 126 0.0
7,339,300 Centaur Media 10,174 1.2
8,527,900 Chime Communications 4,648 0.5
13,831,498 Huntsworth 13,659 1.6
12,561,311 ITE Group 21,731 2.6
4,250,600 Wilmington Group 9,936 1.2
Travel & Leisure 42,513 5.1 4.2
2,547,050 Holidaybreak 19,523 2.3
1,237,400 Luminar 9,021 1.1
3,332,200 Regent Inns 2,966 0.4
3,575,400 Restaurant Group 11,003 1.3

18
LIST OF INVESTMENTS
As at 31 December 2006

31 December 2006
% of % of
Total HGSC
Value Net (XIC)
Holding Security £’000 Assets Index
Fixed Line Telecommunications 5,230 0.6 1.4
7,340,700 Kingston Communications (Hull) 5,230 0.6
Utilities 0 0.0 0.1
Nonlife Insurance 40,629 4.9 4.4
6,731,100 Beazley Group 9,188 1.1
2,129,247 Catlin Group 10,923 1.3
641,000 Domestic & General Group 7,942 1.0
7,489,600 Highway Insurance Holdings 5,842 0.7
2,411,600 Hiscox 6,734 0.8
Life Insurance 1,343 0.2 0.4
426,300 Hansard Global 1,343 0.2
Real Estate 41,953 5.1 10.5
2,472,500 Grainger Trust 17,184 2.1
251,600 Mapeley 9,989 1.2
2,322,800 Minerva 9,338 1.1
1,004,139 Unite Group 5,442 0.7
General Financial 23,685 2.8 6.9
5,121,300 Brewin Dolphin Holdings 9,423 1.1
6,364,282 Evolution Group 8,178 1.0
4,161,680 Henderson Group 5,733 0.7
29,400 Rathbone Brothers 351 0.0
Software & Computer Services 65,708 7.9 6.5
2,885,000 Alphameric 1,370 0.2
14,678,100 Anite Group 11,853 1.4
2,558,583 Computacenter 6,838 0.8
3,000,103 Dicom Group 6,908 0.8
2,128,100 Macro 4 4,469 0.5
1,143,200 Micro Focus International 2,369 0.3
6,380,300 Microgen 3,382 0.4
6,690,200 Northgate Information Solutions 5,754 0.7
23,606,700 NSB Retail Systems 8,026 1.0
3,479,857 Parity 2,679 0.3
2,394,400 Phoenix IT Group 7,297 0.9
2,461,500 RM 4,763 0.6
Technology Hardware & Equipment 29,278 3.5 2.0
684,900 CSR 4,453 0.6
3,401,721 Filtronic 6,208 0.7
21,928,000 Spirent Communications 12,444 1.5
9,645,184 Zetex 6,173 0.7
Investments as shown in the Balance Sheet 801,470 96.2 100.0
Net Current Assets 31,861 3.8 0.0
Total Net Assets 833,331 100.0 100.0
All investments are in ordinary shares

19
LONG-TERM RECORD

HISTORIC TOTAL RETURNS

Discrete Annual Returns (%)
Period NAV1 Index2 Share Price3
1 year to 31 December 2006 26.3 28.0 15.0
1 year to 31 December 2005 24.9 27.8 25.1
1 year to 31 December 2004 28.7 20.7 35.2
1 year to 31 December 2003 37.1 43.0 25.4
1 year to 31 December 2002 -9.7 -23.3 1.7
1 year to 31 December 2001 7.9 -13.0 17.7
1 year to 31 December 2000 15.6 1.2 4.2
1 year to 31 December 1999 49.5 56.2 62.5
1 year to 31 December 1998 -6.1 -5.7 -14.2
1 year to 31 December 1997 5.3 9.2 -1.4
1 year to 31 December 1996 22.3 18.7 20.5
1 year to 31 December 1995 23.2 16.1 21.0
1 year to 31 December 1994 -2.6 -3.1 -7.0
1 year to 31 December 1993 50.9 41.6 57.6
1 year to 31 December 1992 2.8 6.4 3.4
1 year to 31 December 1991 32.1 18.3 29.4

Compound Cumulative
Annual Returns (%) Returns (%)
Share Share
Periods to 31 December 2006 NAV1 Index2 Price3 NAV1 Index2 Price3
2 years from 31 December 2004 25.6 27.9 20.0 57.7 63.6 43.9
3 years from 31 December 2003 26.6 25.4 24.8 103.1 97.4 94.6
4 years from 31 December 2002 29.2 29.6 25.0 178.4 182.4 144.1
5 years from 31 December 2001 20.3 16.7 19.9 151.5 116.6 148.2
6 years from 31 December 2000 18.1 11.1 19.6 171.2 88.4 192.3
7 years from 31 December 1999 17.7 9.7 17.2 213.4 90.6 204.5
8 years from 31 December 1998 21.3 14.6 22.1 368.5 197.7 394.9
9 years from 31 December 1997 17.9 12.1 17.4 339.8 180.6 324.5
10 years from 31 December 1996 16.6 11.9 15.4 363.2 206.5 318.4
11 years from 31 December 1995 17.1 12.5 15.8 466.3 263.8 404.3
12 years from 31 December 1994 17.6 12.8 16.3 597.7 322.4 510.2
13 years from 31 December 1993 15.9 11.5 14.3 579.4 309.4 467.7
14 years from 31 December 1992 18.1 13.4 16.9 925.5 479.6 794.8
15 years from 31 December 1991 17.0 12.9 16.0 954.6 516.7 825.4
16 years from 31 December 1990 17.9 13.2 16.8 1,293.1 629.8 1,097.8
16.1 years from inception
on 10 December 1990 17.8 13.1 16.1 1,297.5 623.6 1,073.8

1
Represents Net Asset Value (Fully Diluted Net Asset Value prior to 1 April 2003) with net dividends reinvested since 2 July 1997, prior to which
gross dividends were reinvested.
2
Represents capital appreciation on the Hoare Govett Smaller Companies Index (Excluding Investment Companies) with net dividends reinvested
(prior to 1 January 1997 in its ‘‘Extended’’ version and prior to 2 July 1997 with gross dividends reinvested).
3
Represents Ordinary Share price with net dividends reinvested since 2 July 1997, prior to which gross dividends were reinvested.

20
LONG-TERM RECORD

TEN YEAR CAPITAL SUMMARY

Equity Net Asset
Total Shareholders’ Value per Share
assets Borrowings funds Share1 Price Discount2
As at
31 December £m £m £m p p %
2006 833.3 — 833.3 843.4 723.00 14.3
2005 671.2 — 671.2 679.3 640.00 5.8
20043 547.2 — 547.2 553.7 522.00 5.7
20034 431.5 — 431.5 436.7 395.75 9.4
2002 275.9 — 275.9 326.3 325.25 0.3
2001 315.3 — 315.3 371.6 328.75 11.5
2000 300.9 — 300.9 352.7 287.00 18.6
1999 280.6 14.2 266.4 313.0 283.50 9.4
1998 205.3 22.3 183.0 214.4 180.50 15.8
1997 227.6 16.6 211.0 235.7 217.50 7.7
19965 222.6 14.4 208.2 231.2 228.50 1.2
1
The calculation of Net Asset Value per Share is explained in the Shareholder Information section on page 50. This represents the Fully Diluted
Net Asset Value prior to 1 April 2003.
2
The Discount calculation is the percentage difference between the Company’s Ordinary Share price and the underlying Net Asset Value
per Share which includes current year revenues.
3
2004 figures have been restated in line with the financial statements.
4
In 2003 the Company raised £61,876,000 through the issue of Shares pursuant to the scheme of reconstruction of Aberforth Split Level Trust plc.
5
In 1996 the Company raised £64,743,000 (net of expenses) through a ‘‘C’’ Share issue.

TEN YEAR REVENUE SUMMARY GEARING RATIO

Available Revenue Dividends

Year to for Ordinary per Ordinary per Ordinary Expense Actual
31 December Shareholders Share net1 Share net ratio2 gearing3
£’000 p p % %
2006 16,209 16.40 13.40 0.97 96.2
2005 14,325 14.50 11.85 0.99 98.3
20044 13,085 13.24 11.00 0.99 97.0
20035 10,026 11.59 10.10 0.98 96.3
2002 8,855 10.57 9.50 1.04 99.1
2001 9,134 10.93 9.10 0.98 96.8
2000 8,716 10.48 8.65 1.00 95.1
1999 8,045 9.72 7.60 1.00 104.9
1998 7,237 8.75 7.30 1.09 114.6
1997 7,385 8.97 7.05 1.08 108.0
19966,7 5,447 7.61 5.50 1.16 107.9
1
The calculation of earnings per Ordinary Share is based on the revenue from ordinary activities after taxation and the weighted average number
of Ordinary Shares in issue.
2
Ratio of operating costs (excluding transaction costs taken to capital reserve-realised) against average Shareholders’ funds (calculated per AIC
guidelines).
3
Total investments divided by Shareholders’ funds. From inception until October 1998 the Company used gearing largely to help mitigate the
dilutionary effect of the Warrants that were in issue.
4
2004 figures have been restated in line with the financial statements.
5
In 2003 the Company raised £61,876,000 through the issue of Shares pursuant to the scheme of reconstruction of Aberforth Split Level Trust plc.
6
In 1996 the Company raised £64,743,000 (net of expenses) through a ‘‘C’’ share issue.
7
In relation to the year to 31 December 1996 and due to an accounting policy change to allocate both management and interest expenses on the
basis of 37.5% to the Revenue Account and 62.5% to Capital Reserves, the Company also paid a Special Dividend of 0.60p per Ordinary Share.

21
DIRECTORS’ REPORT

The Directors have pleasure in submitting the Annual Report and Accounts of the Company for the year
to 31 December 2006.

BUSINESS REVIEW
INTRODUCTION
During 2005, the Companies Act 1985 was amended to introduce the requirement for companies to
incorporate a ‘‘business review’’ within the Directors’ Report for financial years beginning on or after
1 April 2005. The following review is designed to provide Shareholders with a fuller insight into the
operations of the Company.
INVESTMENT OBJECTIVE AND STYLE
The investment objective of ASCoT is to achieve a net asset value total return (with dividends reinvested)
greater than on the Hoare Govett Smaller Companies Index (Excluding Investment Companies) (HGSC
(XIC)) over the long term by investing in a diversified portfolio of small UK quoted companies.
Aberforth Partners LLP act as Managers and Secretaries to the Company. The Company aims to achieve
its objective by investing in securities of companies which are or which would be constituents of the
Hoare Govett Smaller Companies Index (Excluding Investment Companies). Small companies are those
having a market capitalisation, at time of purchase, equal to or lower than the largest company in the
bottom 10% of the main UK equity market or companies in the Hoare Govett Smaller Companies Index
(Excluding Investment Companies). The upper market capitalisation limit to this index at 1 January 2007
(the date of the last annual index rebalancing) was £1,104 million. This market capitalisation limit will
change from time to time owing to movements in the stockmarket. The portfolio is diversified and will
normally consist of investments in over 80 individual companies. In seeking investments the Managers’
approach will be fundamental in nature involving regular contact with the management of prospective
and existing investments, in conjunction with rigorous financial analysis of these companies. The
emphasis within the portfolio will reflect the desire to invest in companies whose shares represent
relatively attractive value within a given stockmarket environment.
The Board believes that small UK quoted companies continue to provide opportunities for capital growth
over the long term. Any material changes to the Company’s investment objective will be subject to
Shareholder approval.
CORPORATE STRUCTURE, GOVERNANCE AND REGULATION
The Company is an investment company as defined in Section 266 of the Companies Act 1985 and
manages its affairs as to qualify as an investment trust under Section 842 of the Income and Corporation
Taxes Act 1988 (Section 842). It has a fixed share capital although, subject to Shareholder approval
sought annually, it may purchase its own Shares. The Company is listed and its Shares trade on
The London Stock Exchange. Furthermore the Company is subject to the laws and regulations relating to
UK listed companies.
It is the responsibility of the Board to ensure that there is effective stewardship of the Company’s affairs.
In common with the majority of investment trusts, the Company has no executive directors nor any
employees. However, the Board has engaged external firms to undertake the investment management,
secretarial and custodial activities of the Company. The Corporate Governance Report within this annual
report contains a thorough review of the Company’s stance on corporate governance.
CONTINUATION OF THE COMPANY
The Company has no fixed duration. However, in accordance with the Company’s Articles of
Association an ordinary resolution will be proposed at the 2008 Annual General Meeting (and, if passed,
at every third subsequent Annual General Meeting) that the Company continues to manage its affairs as
an investment trust.
If such resolution is not passed, the Directors will prepare and submit to Shareholders (for approval by
special resolution) proposals for the unitisation or appropriate reconstruction of the Company. In putting
forward such proposals the Directors will seek, inter alia, to provide Shareholders with a means whereby
they can defer any liability to capital gains tax on their investment at that time. If these proposals are not
approved, Shareholders will, within 180 days of the relevant Annual General Meeting, have the
opportunity of passing an ordinary resolution requiring the Company to be wound up.

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DIRECTORS’ REPORT

INVESTMENT TRUST STATUS

The Company is exempt from corporation tax on capital profits, provided it complies with Section 842.
In summary, Section 842 requires that:
. the Company’s revenue (including dividend and interest income but excluding profits/losses on sale
of investments) should be derived wholly or mainly from shares and securities;
. the Company must not retain in respect of each accounting period more than 15% of its income
from shares and securities;
. no investment in a company may represent more than 15% by value of the Company’s investment
portfolio at time of purchase;
. realised profits on sale of shares and securities may not be distributed by way of a dividend; and
. the Company must not be a close company.
The Company has been approved by HM Revenue & Customs as an investment trust, under Section 842,
up to 31 December 2005. It is the opinion of the Directors that the Company has subsequently
conducted its affairs so as to enable it to continue to seek such approval. The Company will continue to
seek approval under Section 842 each year.
MANAGEMENT
Aberforth Partners LLP, a limited liability partnership, provides investment management, administration
and company secretarial services to the Company. These services can be terminated by either party at
any time by giving six months’ notice of termination. Compensation fees would only be payable in
respect of this six month period if termination were to occur sooner. Aberforth Partners LLP receive a
quarterly management fee, payable in advance, equal to 0.2% of the total net assets of the Company.
However, the total fee paid each year may be slightly higher or lower than 0.8% depending on the
movements in the value of the Company’s assets during the year. The Company also pays a quarterly
secretarial fee, payable in advance, which amounted to £14,892 (excluding VAT) per quarter during
2006. The secretarial fee is adjusted annually in line with the Retail Prices Index. Both these fees are
subject to VAT which is currently irrecoverable by the Company.
The Board considers the Company’s investment management and secretarial arrangements on an
ongoing basis and a formal review is conducted annually by the Audit and Management Engagement
Committee (the Committee). The Committee specifically considers the following topics in its review:
investment performance in relation to the investment policy and strategy; the continuity of personnel
managing the assets and reporting to the Board; the level of service provided in terms of the accuracy and
timeliness of reports to the Board; and, the frequency and quality of both verbal and written
communications with Shareholders. Following the most recent review the Board, upon the
recommendation of the Committee, is of the opinion that the continued appointment of Aberforth
Partners LLP as investment managers, on the terms agreed, is in the best interests of Shareholders as a
whole.
CAPITAL STRUCTURE, GEARING AND SHARE BUY-BACKS
At 31 December 2006, the Company’s authorised share capital consisted of 333,299,254 Ordinary
Shares of 1p of which 98,809,788 were issued and fully paid. There were no changes in the year. Subject
to the requirement that purchases by the Company of its own shares will only be made at a level that
enhances the net asset value (NAV), the principal objective of any such purchase will be to seek to
sustain as low a discount between the Company’s NAV and share price as seems possible. Accordingly,
it is the Board’s intention to use the share purchase facility within guidelines established from time to
time by the Board.
At 31 December 2006, the Company was not geared and had no debt outstanding. The Company does,
however, have a bank debt facility of £80 million which the Company can use as gearing at any time.

23
DIRECTORS’ REPORT

RETURN AND DIVIDENDS

The total return attributable to Shareholders for the year amounted to £174,113,000 (2005 –
£135,135,000). The net asset value per ordinary share at 31 December 2006 was 843.37p (2005 –
679.26p).
Your Board is pleased to recommend a final dividend of 9.15p, which produces total dividends for the
year of 13.40p representing an increase of 13.1% on the total for the previous year. Subject to
Shareholders’ approval, the final dividend of 9.15p per share will be paid on 7 March 2007 to
Shareholders on the register at the close of business on 9 February 2007.
£’000 £’000
Revenue return for the year available for dividends 16,209
Dividends in respect of the revenue available:
Interim dividend of 4.25p per Ordinary Share paid 1 September 2006 4,199
Proposed final dividend of 9.15p per Ordinary Share payable 7 March 2007
to Shareholders on the Register at close of business on 9 February 2007 9,041 13,240
2,969

KEY PERFORMANCE INDICATORS

The Board assesses the Company’s performance in meeting its objective against the following key
performance indicators:
(i) Net asset value total return
(ii) Share price total return
(iii) Performance attribution
(iv) Share price discount
(v) Revenue and dividend position
A record of these measures is shown on pages 12, 20 and 21.
In addition to the above, the Board considers the performance of the Company against its benchmark and
its investment trust peer group.
REVIEW OF PERFORMANCE, ACTIVITY DURING THE YEAR AND THE INVESTMENT OUTLOOK
A comprehensive review can be found in the Chairman’s Statement and Managers’ Report.

PRINCIPAL RISKS AND RISK MANAGEMENT

The Directors have established an ongoing process for identifying, evaluating and managing the
significant risks faced by the Company. This process was in operation during the year and continues in
place up to the date of this report.
The Board believes that the Company has a relatively low risk profile in the context of the investment
trust industry. This belief arises from the fact that the Company has a simple capital structure; invests only
in small UK quoted companies; has never been exposed to derivatives and does not presently intend any
such exposure; and outsources all the main operational activities to recognised, well-established firms.
Investment in small companies is generally perceived to carry more risk than investment in large
companies. While this is reasonable when comparing individual companies, it is much less so when
comparing the volatility of returns from diversified portfolios of small and large companies. The Board
believes the Company’s portfolio is diversified. In addition, since returns from small and large companies
are not perfectly correlated, there is an opportunity for investors to reduce risk by holding portfolios of
both small and large companies together.

24
DIRECTORS’ REPORT

As the Company’s investments consist of small UK quoted companies, the principal risks facing the
Company are market related and include market price, interest rate, and liquidity risk. An explanation of
these risks and how they are managed is contained in Note 17 to the Accounts. Additional risks faced by
the Company, together with the approach taken by the Board towards them, have been summarised as
follows:
(i) Investment objective – is to achieve a net asset value total return (with dividends reinvested) greater
than on the Hoare Govett Smaller Companies Index (Excluding Investment Companies) over the
long term by investing in a diversified portfolio of small UK quoted companies. The performance of
the investment portfolio will often not match the performance of the benchmark. However, the
Board’s aim is to achieve the investment objective over the long term whilst managing risk by
ensuring the investment portfolio is managed appropriately. The Corporate Governance Report
provides additional information regarding the various areas considered by the Board.
(ii) Investment policy – a risk facing the Company is inappropriate sector and stock selection leading to
underperformance relative to the benchmark. The Managers have a clearly defined investment
philosophy and manage a diversified portfolio. Furthermore, performance against the benchmark
and the peer group is regularly monitored by the Board. The Company may also be affected by
events or developments in the economic environment generally, for example inflation or deflation,
recession and movements in interest rates.
(iii) Share price discount – investment trust shares tend to trade at discounts to their underlying net asset
values. As mentioned above, the Company has a share buy back policy and, if utilised, this may
help to minimise the level of discount.
(iv) Regulatory risk – breach of regulatory rules could lead to suspension of the Company’s share price
listing, financial penalties or a qualified audit report. Breach of Section 842 could lead to the
Company being subject to capital gains tax. The Board receives quarterly compliance reports from
the Secretaries to monitor compliance with regulations.
(v) Operational/Financial risk – failure of the Managers’ accounting systems or that of other third party
service providers could lead to an inability to provide accurate reporting and monitoring, or
potentially lead to the misappropriation of assets. The Board reviews regular reports on the internal
controls of the Managers and other key third party providers.
In summary, the Board regularly considers risks associated with the Company, the measures in place to
monitor them and the possibility of any other risks that may arise.

OTHER MATTERS
GOING CONCERN
After making enquiries, the Directors consider that the Company has adequate resources to continue in
operational existence for the foreseeable future notwithstanding the Resolution on the Company’s
continuance as detailed above. For this reason, they continue to adopt the going concern basis in
preparing the accounts.
DIRECTORS
The Directors who held office at 31 December 2006 and their interests in the Shares of the Company as
at that date were as follows:
Ordinary Shares
Directors Nature of Interest 2006 2005
D R Shaw Beneficial 25,000 20,000
H N Buchan Beneficial 19,474 14,330
M L A Chiappelli Beneficial 25,000 20,000
J E G Cran Beneficial 27,137 26,659
Prof P R Marsh Beneficial 15,000 10,000
Prof W S Nimmo Beneficial 16,444 11,800

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DIRECTORS’ REPORT

There has been no change in the beneficial or non-beneficial holdings of the Directors between
31 December 2006 and 22 January 2007.
The Company maintains appropriate insurance cover in respect of legal action against its Directors.
Following changes to the law relating to a company’s ability to indemnify its directors, the Company
recently entered into a deed of indemnity with each Director to cover any liabilities that may arise to a
third party, other than the Company, for negligence, default or breach of trust or duty. The Directors are
not indemnified in respect of liabilities to the Company or costs incurred in connection with criminal
proceedings in which the Director is convicted or required to pay any regulatory or criminal fines.
As stated in the separate Corporate Governance Report, the Board wishes to go beyond the minimum
requirements of the Company’s Articles of Association, the AIC and The Combined Code by having all
Directors seek re-election every year. Therefore, all Directors retire at the Annual General Meeting to be
held on 1 March 2007. All Directors offer themselves for re-election and biographical details for each are
shown on page 6.
ELECTRONIC VOTING
Your Board is again pleased to offer electronic proxy voting, including CREST voting capabilities, in
connection with the forthcoming Annual General Meeting. You may therefore complete the enclosed
form of proxy and return it to Capita Registrars, the Company’s registrar, or alternatively, you may
register your vote on-line by visiting the Capita Registrars’ website at www.capitaregistrars.com. In order
to register your vote on-line, you will need to enter your name, postal code and ICV code which is given
on the form of proxy. If you are a member of CREST, you may register the appointment of a proxy by
using the CREST electronic appointment service. For further details refer to the CREST manual.
Completion of a form of proxy or the appointment of a proxy electronically will not stop you attending
the meeting and voting in person should you so wish.
ANNUAL GENERAL MEETING
Purchase of Own Shares
The current authority of the Company to make market purchases of up to 14.99% of the issued
Ordinary Shares of the Company expires at the end of the Annual General Meeting. Resolution 11, as set
out in the Notice of the Annual General Meeting, seeks renewal of such authority until the
Annual General Meeting in 2008. The price paid for Shares will not be less than the nominal value of
1p per Share nor more than 105% of the average of the middle market quotations for the Shares for the
five business days immediately preceding the date of purchase. Any Shares purchased under the
authority will be automatically cancelled, rather than being held in treasury, thereby reducing the
Company’s issued share capital. There are no outstanding options/warrants to subscribe for equity shares
in the capital of the Company.
As mentioned above, subject to the requirement that purchases by the Company of its own shares will be
made only at a level which enhances NAV, the principal objective of any such purchase will be to seek
to sustain as low a discount between the Company’s NAV and share price as seems possible.
Accordingly, it is the Board’s intention to use the share purchase facility within guidelines established
from time to time by the Board.
SUBSTANTIAL SHARE INTERESTS
The Board has been informed of the following substantial interests in the issued share capital of the
Company as at 22 January 2007.

Percentage
Interested person Held
Newton Investment Management Limited 8.6
Barclays PLC 5.6
Legal & General Investment Management 3.3

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DIRECTORS’ REPORT

CREDITORS PAYMENT POLICY

The Company’s creditors payment policy is to agree terms of payment before business is transacted, to
ensure suppliers are aware of these terms and to settle bills in accordance with them. The Company did
not have any trade creditors at the year end.
FINANCIAL INSTRUMENTS
The Company’s financial instruments comprise its investment portfolio, cash balances, overdrafts,
debtors and creditors that arise directly from its operations such as sales and purchases awaiting
settlement and accrued income. The main risks that the Company faces arising from its financial
instruments are disclosed in Note 17 to the accounts.
AUDITORS
Ernst & Young LLP have expressed their willingness to continue in office as auditors and a resolution
proposing their re-appointment will be put to the forthcoming Annual General Meeting.
DISCLOSURE OF INFORMATION TO AUDITORS
The Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they
are each aware, there is no relevant audit information of which the Company’s Auditors are unaware;
and each Director has taken all steps that he ought to have taken as a Director to make him aware of any
relevant audit information, and to establish that the Company’s Auditors are aware of that information.
DONATIONS
The Company did not make any political or charitable donations during the year (2005 – £nil).

By Order of the Board

Aberforth Partners LLP, Secretaries
14 Melville Street, Edinburgh EH3 7NS
22 January 2007

27
CORPORATE GOVERNANCE REPORT

The Board is committed to achieving and demonstrating high standards of corporate governance. The
Board has considered the principles and recommendations of the AIC Code of Corporate Governance
(the AIC Code) by reference to the AIC Corporate Governance Guide for Investment Companies
(the AIC Guide). The AIC Code, as explained by the AIC Guide, addresses all the principles set out in
Section 1 of The Combined Code published in July 2003, as well as setting out additional principles and
recommendations on issues that are of specific relevance to the Company.
The Board has consequently decided to base this report on the principles and recommendations of the
AIC Code, including reference to the AIC Guide (which incorporates The Combined Code). The Board
considers that this provides more relevant information to shareholders, whilst meeting the Board’s
obligations under The Combined Code and paragraph 9.8.6 of the Listing Rules.
The Company has complied with the recommendations of the AIC Code and the relevant provisions of
Section 1 of The Combined Code, except as set out below.
The Combined Code includes provisions relating to the role of the chief executive, executive directors’
remuneration and the need for an internal audit function. For reasons set out in the AIC Guide, and in the
pre-amble to The Combined Code, the Board considers that these provisions are not relevant to the
Company as it is an externally managed investment company.
This report outlines how the principles and recommendations of the AIC Code were applied, unless
otherwise stated, throughout the financial year. The Directors are also aware that there are many other
published guidelines relating to corporate governance and, whilst these receive due consideration, the
Board does not consider it appropriate to address them individually in the Annual Report. The Board is
always available to discuss corporate governance issues with Shareholders.
THE BOARD
It is the responsibility of the Board to ensure that there is effective stewardship of the Company’s affairs.
Strategic issues and all operational matters of a material nature are determined by the Board. A formal
schedule of matters reserved for decision of the Board has been adopted. The Board of Directors
comprises six non-executive Directors of which Mr Shaw acts as Chairman. The Company has no
executive Directors nor any employees. However, the Board has engaged external firms to undertake the
investment management, secretarial and custodial activities of the Company. Documented contractual
arrangements are in place between the Company and these firms, which clearly set out the areas where
the Board has delegated authority to them.
The Board meets at least quarterly to review the overall business of the Company and to consider the
matters specifically reserved for it. Detailed information is provided by the Managers and Secretaries for
these meetings and at regular intervals to enable the Directors to monitor compliance with the
investment objective and the investment performance of the Company compared to its benchmark index.
The Directors also review several key areas including the Company’s investment activity over the quarter
relative to its investment policy; the stockmarket environment; the revenue and balance sheet position;
gearing; performance in relation to comparable investment trusts; share price discount (both absolute
levels and volatility) and relevant industry issues. The Board also receives regular reports from the
Managers analysing and commenting on the composition of the Company’s share register and monitors
significant changes to shareholders.
The Board also holds an annual strategy session to consider, amongst other matters, the Company’s
objective and investment focus and style.

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CORPORATE GOVERNANCE REPORT

The following table sets out the number of Directors’ meetings (including Committee meetings) held
during the financial year and the number of meetings attended by each Director (whilst a Director or
Committee member). During the financial year, four Board meetings and three Audit and Management
Engagement Committee meetings were held.
Audit and Management
Board of Directors Engagement Committee
Director Held Attended Held Attended
D R Shaw, Chairman 4 3 – –
H N Buchan 4 4 3 3
M L A Chiappelli1 4 4 3 3
J E G Cran 4 4 3 3
Prof P R Marsh 4 4 – –
Prof W S Nimmo 4 4 – –
1
Chairman of the Audit and Management Engagement Committee.

The Board, being comprised entirely of independent non-executive Directors, has not appointed a
Remuneration nor a Nomination Committee. Directors’ fees and the appointment of new Directors are
considered by the Board as a whole. The Board has also decided not to nominate a Deputy Chairman or
a senior independent director although Mr. Chiappelli, as chairman of the Audit and Management
Engagement Committee, fulfils this role when necessary, for example, taking the lead in the annual
evaluation of the Chairman.
The Board conducts an annual review of its composition having regard to the present and future needs of
the Company, and the Board’s structure, including the balance of expertise and skills brought by
individual Directors and their length of service, where continuity and experience can add significantly to
the strength of the Board. If it is deemed appropriate to make new appointments, any gaps in skills or
expertise are taken into account in the search process. Potential directors are then invited to meet the
members of the Board prior to a decision on their appointment being made by the Board as a whole. To
date, the Board has not found it necessary to appoint external search consultants nor use open
advertising.
The Board carefully considers the various guidelines for determining the independence of non- executive
Directors, placing particular weight on the view that independence is evidenced by an individual being
independent of mind, character and judgement. An individual can therefore be considered to be
independent even though their length of service exceeds nine years. No limit on the overall length of
service of any of the Directors, including the Chairman, has therefore been imposed. All Directors are
considered to be independent notwithstanding that Mr Shaw has sat on the Board for more than
nine years. The Board has decided to go beyond the minimum requirements of the Articles of Association
and the AIC Code by having all Directors retire at each AGM and, if appropriate, seek re-election.
The Board undertakes a formal annual self-assessment of its collective performance on a range of issues
including the Board’s role, processes and interaction with the Managers. The Directors also evaluate
collectively the performance of each Director by way of an evaluation questionnaire. The Board then
considers the results of this exercise, together with other relevant discussion areas. The appraisal of the
Chairman is led by Mr. Chiappelli as Chairman of the Audit and Management Engagement Committee.
The Board believes that each Director continues to be effective, bringing a wealth of knowledge and
experience to the Board and recommends the re-election of each director to Shareholders. In line with
the Board’s policy, each Director retires at the Annual General Meeting (AGM) to be held on 1 March
2007. Messrs Shaw, Buchan, Chiappelli, Cran, Prof Marsh and Prof Nimmo, whose biographical details
are shown on page 6, being eligible, offer themselves for re-election.

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CORPORATE GOVERNANCE REPORT

All Directors are entitled to receive appropriate training when required. Directors, in the furtherance of
their duties, may seek independent professional advice at the expense of the Company. No Director took
such advice during the financial year under review.
The Directors’ letters of appointment are available for inspection on request.
RELATIONS WITH SHAREHOLDERS
The Company was formed to, and continues to, invest in a portfolio of small UK quoted companies. The
Board believes that regular contact with shareholders is essential. The Managers endeavour to meet all of
the larger shareholders twice a year and provide them with a detailed report on the progress of the
Company. Directors of the Company are always available for discussion with any shareholder. In
addition, the Managers also publish the Net Asset Value on a weekly basis and a monthly factsheet. The
Directors may be contacted through the Secretaries whose details are shown on page 6 or through the
Chairman’s email address which is [email protected].
All shareholders have the opportunity to attend and vote at the AGM during which the Directors and
Managers are available to discuss key issues affecting the Company. Proxy voting figures are announced
at the AGM and are available via the Managers’ website shortly thereafter.
ACCOUNTABILITY AND INTERNAL CONTROL
The Company reports formally to shareholders twice a year by way of the Annual Report and Accounts
and the Interim Report. As mentioned above, the Managers meet major shareholders regularly to update
them and in addition Company performance and other relevant information is available on the
Managers’ website at www.aberforth.co.uk.
The Company applies the revised guidance published in October 2005 by The Institute of Chartered
Accountants in England and Wales in respect of The Combined Code’s sections on Internal Control
(commonly known as the Turnbull Guidance on Internal Control).
The Board is responsible for the Company’s system of internal control and for reviewing its effectiveness.
Internal control systems are designed to manage, rather than eliminate, the risk of failure to achieve the
business objective and can provide only reasonable and not absolute assurance against material
mis-statement or loss. These controls aim to ensure that the assets of the Company are safeguarded, that
proper accounting records are maintained and that financial information of the Company is reliable. The
Directors have an ongoing process for identifying, evaluating and managing the significant risks faced by
the Company. This was in operation during the year and continues in place up to the date of this report.
At least once a year the Directors formally review the effectiveness of the Company’s system of internal
control. This process principally comprises the Audit Committee receiving and examining reports from
the firms to which services are subcontracted, detailing the internal control objectives and procedures
adopted by each firm. Each report has been reviewed by the respective firm’s auditors. The
Audit Committee then submits a detailed report on its findings to the Board. The Directors have not
identified any significant problems in respect of the Company’s system of internal control.
AUDIT AND MANAGEMENT ENGAGEMENT COMMITTEE
The Directors have appointed an Audit and Management Engagement Committee, chaired by
Mr Chiappelli, who is a Chartered Accountant. There is a range of recent and relevant financial
experience amongst the members of the Committee. This Committee, of which Messrs Buchan and Cran
are also members, specifically considers the accounting policies of, and financial reporting by the
Company, the Company’s key risks, the internal control principles adopted and the relationship with the
Company’s auditors including making recommendations to the Board on the appointment,
reappointment or removal and remuneration of the auditors. In addition, it reviews the scope and
results of the audit, its cost effectiveness and the independence and objectivity of the auditors, with

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CORPORATE GOVERNANCE REPORT

particular regard to non-audit fees. Such fees amounted to £1,000 and related to the provision of taxation
services. The Committee considers that these services are not a threat to objectivity and independence of
the conduct of the audit. Furthermore, non-audit work requires the prior approval of the Committee.
This Committee also formally reviews the terms of the agreements with the Managers and the Secretaries
annually, including the level of service, the basis of fees payable and the length of the notice period.
Details are set out in the Directors’ Report.
The Committee also considers annually whether there is a need for an internal audit function. However,
as the Company has no employees and subcontracts all its business to third parties, it believes that an
internal audit function is not necessary.
The Committee operates within terms of reference which have been agreed with the Board. The
Committee’s findings and recommendations are submitted to the Board for consideration. These terms of
reference are reviewed annually and are available for inspection on request.
SOCIAL, ENVIRONMENTAL AND ETHICAL ISSUES AND VOTING POLICY
The Company is normally a shareholder in over 80 small UK quoted companies. Day to day
management of the Company’s investment portfolio is carried out by its Managers,
Aberforth Partners LLP. The Managers have a consistent and well-defined investment process based
on fundamental analysis of the constituents of their investment universe.
The Managers’ primary objective is to deliver investment returns greater than the return on the
Company’s benchmark index, the HGSC (XIC), over the longer term. The Directors, through the
Company’s Managers, also encourage investee companies to adhere to best practice in the area of
Corporate Governance and Socially Responsible Investment (SRI). The Board and the Managers support
the Statement of Principles of the Institutional Shareholders Committee which set out the responsibilities
of institutional shareholders and agents.
Effective management of risks and opportunities posed by social, environmental and ethical (SEE) issues
is an important component of good corporate governance. Companies that ignore significant corporate
responsibilities risk serious damage to their reputation, brand and shareholder value, as well as litigation
and operational risks.
The Managers believe that sound SEE policies make good business sense and take these issues into
account when investment decisions are taken. However, the Managers do not exclude companies from
their investment universe purely on grounds of SEE concerns. Instead, the Managers adopt a positive
approach whereby such matters are discussed with management with the aim of improving procedures
and attitudes.
The Board has also given discretionary voting powers to the Managers. Aberforth Partners LLP exercises
these voting rights on every resolution which is put to shareholders of the companies in which the
Company is invested. The Managers vote against resolutions that they believe may damage shareholders’
rights or economic interests and under normal circumstances these concerns would have been raised
with directors of the company concerned.
The Board receives from the Managers quarterly reports on governance issues (including voting) arising
from investee companies and reviews, from time to time, the Managers’ voting guidelines and its stance
towards SRI and SEE matters.

31
DIRECTORS’ REMUNERATION REPORT

The Board has prepared this report, in accordance with the requirements of Schedule 7A to the
Companies Act 1985. An ordinary resolution for the approval of this report will be put to members at the
forthcoming Annual General Meeting.
The law requires the Company’s Auditors to audit certain elements of this report. These elements are
described below as ‘‘audited’’. The Auditors’ opinion is included in the report on pages 34 and 35.
REMUNERATION COMMITTEE
The Board is composed wholly of non-executive Directors who together consider and determine all
matters relating to the Directors’ remuneration at the beginning of each financial period. A Remuneration
Committee has not been formed as all of the Directors are non-executive and considered independent.
STATEMENT OF THE COMPANY’S POLICY ON DIRECTORS’ REMUNERATION
The Board’s policy is that the remuneration of the Directors should reflect the experience of the Board, as
a whole, and be comparable to that of similar investment trusts within the AIC’s UK Smaller Companies
sector and other investment trusts that are similar in size and structure. This information is provided by
Aberforth Partners LLP, as Secretaries, who were appointed by the Board. It is intended that this policy
will remain in place for the following financial year and subsequent periods. It is the Company’s policy
to appoint non-executive Directors for an initial period of three years.
Directors’ remuneration is determined within the limits set by the Company’s Articles of Association and
is solely composed of Directors’ fees. Directors are not eligible for bonuses, pension benefits, share
options or any other benefits. There are no performance conditions relating to Directors’ fees. There are
no long-term incentive schemes.
DIRECTORS’ SERVICE CONTRACTS
Directors do not have contracts of service with the Company nor are any such contracts proposed.
However, each Director entered into a letter of appointment with the Company for an initial period of
service. After the initial period, each Director’s term is, upon review, extended for a further year.
Directors are subject to election by Shareholders at the first Annual General Meeting after their
appointment and thereafter at every subsequent Annual General Meeting. A Director may be removed
without notice and no compensation will be due on loss of office.
The following Directors held office during the year:

Date of Date of Date of Letter of Unexpired

Director Appointment Retirement Appointment Term
D R Shaw, Chairman 14 October 1994 — 29 April 2003 1 year
H N Buchan 11 November 2003 — 11 November 2003 1 year
M L A Chiappelli 17 July 2001 — 29 April 2003 1 year
J E G Cran 17 July 2001 — 29 April 2003 1 year
Prof P R Marsh 16 July 2004 — 16 July 2004 1 year
Prof W S Nimmo 16 July 2004 — 16 July 2004 1 year

SHARE PRICE PERFORMANCE

The graph below compares the performance of the Company’s share price against the Hoare Govett
Smaller Companies Index (Excluding Investment Companies), on a total return basis (assuming all
dividends reinvested). This index has been selected for the purposes of comparing the Company’s share
price performance as it has been the Company’s benchmark since inception.

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DIRECTORS’ REMUNERATION REPORT

Total Return Performance over the last 5 Years

DIRECTORS’ FEES (AUDITED)

The emoluments of the Directors who served during the year were as follows:

Fees Fees
2006 2005
£ £
D R Shaw, Chairman (with effect from 23 February 2005) 24,000 22,024
W Y Hughes (Chairman – retired on 23 February 2005) — 3,440
H N Buchan 16,000 15,500
M L A Chiappelli, Chairman of the Audit and Management Engagement Committee 18,500 18,000
J E G Cran 16,000 15,500
Prof P R Marsh 16,000 15,500
Prof W S Nimmo 16,000 15,500
106,500 105,464

No other emoluments or pension contributions were paid by the Company to or on behalf of any other
Director.
APPROVAL
The Directors’ Remuneration Report on pages 32 to 33 was approved by the Board on 22 January 2007
and signed on its behalf by D R Shaw, Chairman.

33
DIRECTORS’ RESPONSIBILITY STATEMENT

The Directors are required by law to prepare financial statements for each financial year, which give a
true and fair view of the state of affairs of the Company as at the end of the financial year and of the net
return for that period. The Directors are also required to prepare a Directors’ Remuneration Report.
The Directors are responsible for keeping proper accounting records, which disclose with reasonable
accuracy at any time the financial position of the Company and to enable them to ensure that the
financial statements comply with the Companies Act 1985. They are also responsible for safeguarding
the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud
and other irregularities.
The financial statements have been prepared on a going concern basis and appropriate accounting
policies have been used and consistently applied. Reasonable and prudent judgements and estimates
have been used in the preparation of the financial statements and applicable UK accounting standards
have been followed.

INDEPENDENT AUDITORS’ REPORT

TO THE MEMBERS OF ABERFORTH SMALLER COMPANIES TRUST PLC

We have audited the financial statements of Aberforth Smaller Companies Trust plc for the year ended
31 December 2006, which comprise the Income Statement, Reconciliation of Movements in
Shareholders’ Funds, Balance Sheet, Cash Flow Statement and the related notes 1 to 18. These
financial statements have been prepared under the accounting policies set out therein. We have also
audited the information in the Directors’ Remuneration Report that is described as having been audited.
This report is made solely to the Company’s members, as a body, in accordance with Section 235 of the
Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s
members those matters we are required to state to them in an auditors’ report and for no other purpose.
To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than
the Company and the Company’s members as a body, for our audit work, for this report, or for the
opinions we have formed.

Respective responsibilities of Directors and Auditors

The Directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and
the financial statements in accordance with applicable United Kingdom law and Accounting Standards
(United Kingdom Generally Accepted Accounting Practice) are set out in the Directors’ Responsibility
Statement.
Our responsibility is to audit the financial statements and the part of the Directors’ Remuneration Report
to be audited in accordance with relevant legal and regulatory requirements and International Standards
on Auditing (UK and Ireland).
We report to you our opinion as to whether the financial statements give a true and fair view and
whether the financial statements and the part of the Directors’ Remuneration Report to be audited have
been properly prepared in accordance with the Companies Act 1985. We also report to you whether the
information given in the Directors’ Report is consistent with the financial statements.
In addition, we report to you if, in our opinion, the Company has not kept proper accounting records, if
we have not received all the information and explanations we required for our audit, or if information
specified by law regarding Directors’ remuneration and other transactions is not disclosed.

34
INDEPENDENT AUDITORS’ REPORT

We review whether the Corporate Governance Statement reflects the Company’s compliance with the
nine provisions of the 2003 FRC Combined Code specified for our review by the Listing Rules of the
Financial Services Authority, and we report if it does not. We are not required to consider whether the
Board’s statements on internal control cover all risks and controls, or form an opinion on the
effectiveness of the Company’s corporate governance procedures or its risk and control procedures.
We read other information contained in the Annual Report and consider whether it is consistent with the
audited financial statements. The other information comprises only the Investment Objective, Ten Year
Investment Record, Company Summary, Year’s Summary, Directors and Corporate Information,
Aberforth Partners – Information, Chairman’s Statement, Managers’ Report, Portfolio Information,
Thirty Largest Investments, List of Investments, Long Term Record, Directors’ Report, Corporate
Governance Report, unaudited part of the Directors’ Remuneration Report, Shareholder Information and
Notice of Annual General Meeting. We consider the implications for our report if we become aware of
any apparent mis-statements or material inconsistencies with the financial statements. Our
responsibilities do not extend to any other information.

Basis of audit opinion

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued
by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to
the amounts and disclosures in the financial statements and the part of the Directors’ Remuneration
Report to be audited. It also includes an assessment of the significant estimates and judgements made by
the Directors in the preparation of the financial statements, and of whether the accounting policies are
appropriate to the Company’s circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we
considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the
financial statements and the part of the Directors’ Remuneration Report to be audited are free from
material mis-statement, whether caused by fraud or other irregularity or error. In forming our opinion we
also evaluated the overall adequacy of the presentation of information in the financial statements and the
part of the Directors’ Remuneration Report to be audited.

Opinion
In our opinion:
à the financial statements give a true and fair view, in accordance with United Kingdom Generally
Accepted Accounting Practice, of the state of the Company’s affairs as at 31 December 2006 and of
its net return for the year then ended;
à the financial statements and the part of the Directors’ Remuneration Report to be audited have been
properly prepared in accordance with the Companies Act 1985; and
à the information given in the Directors’ Report is consistent with the financial statements.

Ernst & Young LLP

Registered Auditor
Edinburgh
22 January 2007
Notes:
1. The maintenance and integrity of the Aberforth Partners LLP web site is the responsibility of the partners of Aberforth Partners LLP;
the work carried out by the Auditors of Aberforth Smaller Companies Trust plc does not involve consideration of these matters
and, accordingly, the Auditors accept no responsibility for any changes that may have occurred to the financial statements since
they were initially presented on the web site.
2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.

35
INCOME STATEMENT
For the year ended 31 December 2006

2006 2005
Revenue Capital Total Revenue Capital Total
Note £’000 £’000 £’000 £’000 £’000 £’000

Gains on investments 9 — 163,032 163,032 — 122,586 122,586

Investment income 2 18,290 2,261 20,551 16,182 4,238 20,420
Other income 2 817 — 817 612 — 612
Investment management fee 3 (2,496) (4,159) (6,655) (2,083) (3,472) (5,555)
Other expenses 4 (402) (3,230) (3,632) (386) (2,542) (2,928)

Net return before finance costs and tax 16,209 157,904 174,113 14,325 120,810 135,135
Finance costs 6 — — — — — —

Return on ordinary activities before tax 16,209 157,904 174,113 14,325 120,810 135,135
Tax on ordinary activities 5 — — — — — —

Return attributable to equity shareholders 16,209 157,904 174,113 14,325 120,810 135,135

Returns per ordinary share 8 16.40p 159.81p 176.21p 14.50p 122.27p 136.77p

The Board declared on 22 January 2007 a proposed final dividend of 9.15p per Ordinary Share (31 December
2005 — 7.85p) and the total payable will be £9,041,000 (31 December 2005 — £7,757,000). The Board also
declared on 20 July 2006 an interim dividend of 4.25p per Ordinary Share (30 June 2005 — 4p) and the total
paid was £4,199,000 (30 June 2005 — £3,952,000).

The total column of this statement is the profit and loss account of the Company. All revenue and capital items in the above
statement derive from continuing operations. No operations were acquired or discontinued in the year. A Statement of Total
Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement.

The accompanying notes form an integral part of this statement.

36
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS
For the year ended 31 December 2006

Capital Capital
Share Special reserve – reserve – Revenue
capital reserve realised unrealised reserve Total
£’000 £’000 £’000 £’000 £’000 £’000

Balance as at 31 December 2005 988 197,305 286,488 162,442 23,951 671,174

Return on ordinary activities after taxation — — 80,724 77,180 16,209 174,113
Equity dividends paid — — — — (11,956) (11,956)

Balance as at 31 December 2006 988 197,305 367,212 239,622 28,204 833,331

For the year ended 31 December 2005

Capital Capital
Share Special reserve ^ reserve ^ Revenue
capital reserve realised unrealised reserve Total
»’000 »’000 »’000 »’000 »’000 »’000

Balance as at 31 December 2004 988 197,305 216,436 111,684 20,742 547,155

Return on ordinary activities after taxation — — 70,052 50,758 14,325 135,135
Equity dividends paid — — — — (11,116) (11,116)

Balance as at 31 December 2005 988 197,305 286,488 162,442 23,951 671,174

The movements in the capital reserve – realised, the capital reserve – unrealised and the revenue reserve represent the profit and
loss of the Company and the equity dividends paid.

37
BALANCE SHEET
As at 31 December 2006

2006 2005
Note £’000 £’000
Fixed assets: investments
Investments at fair value through profit or loss 9 801,470 659,560

Current assets
Debtors 10 1,369 1,408
Cash at bank 30,554 10,267
31,923 11,675

Creditors (amounts falling due within one year) 11 (62) (61)

Net current assets 31,861 11,614
TOTAL NET ASSETS 833,331 671,174

CAPITAL AND RESERVES: EQUITY INTERESTS

Called up share capital:
Ordinary Shares 12 988 988
Reserves:
Special reserve 13 197,305 197,305
Capital reserve–realised 13 367,212 286,488
Capital reserve–unrealised 13 239,622 162,442
Revenue reserve 13 28,204 23,951
TOTAL SHAREHOLDERS’ FUNDS 833,331 671,174

NET ASSET VALUE PER SHARE 14 843.37p 679.26p

Approved and authorised for issue by the Board of Directors on 22 January 2007
and signed on its behalf by D R Shaw, Chairman

The accompanying notes form an integral part of this balance sheet.

38
CASH FLOW STATEMENT
For the year ended 31 December 2006

2006 2005
£’000 £’000
Note
Net cash inflow from operating activities 14,197 15,066
Returns on investments and servicing of finance — —
Capital expenditure and financial investment 15 18,046 (8,061)
32,243 7,005
Equity dividends paid 7 (11,956) (11,116)
20,287 (4,111)
Financing — —
Increase/(decrease) in cash 16 20,287 (4,111)

Reconciliation of net return before finance costs and taxation to net

cash inflow from operating activities
Net return before finance costs and taxation 174,113 135,135
Gains on investments (163,032) (122,586)
Expenses incurred in acquiring or disposing of investments 3,230 2,542
Increase in debtors (115) (35)
Increase in other creditors 1 10
Net cash inflow from operating activities 14,197 15,066

Reconciliation of net cash flow to movement in net funds

Increase/(decrease) in cash in the year 16 20,287 (4,111)
Change in Net Funds 16 20,287 (4,111)
Opening Net Funds 16 10,267 14,378
Closing Net Funds 16 30,554 10,267

The accompanying notes form an integral part of this statement.

39
NOTES TO THE ACCOUNTS

1 ACCOUNTING POLICIES
A summary of the principal accounting policies adopted, all of which have been applied consistently
throughout the year and with the proceeding year, are set out below.

(a) Basis of accounting

The accounts have been prepared in accordance with UK generally accepted accounting practice
(‘‘UKGAAP’’) and the AIC’s Statement of Recommended Practice ‘‘Financial Statements of Investment Trust
Companies’’ issued in 2005.

(b) Investments
The Company’s investments have been categorised as ‘‘financial assets at fair value through profit or loss’’.
Quoted investments are valued at their fair value which is represented by the bid price. Where trading in the
securities of an investee company is suspended, the investment is valued at the Board’s estimate of its net
realisable value.
As investments have been categorised as ‘‘financial assets at fair value through profit or loss’’, gains and losses
arising from changes in fair value are included in the capital return for the period and transaction costs on
acquisition or disposal of a security are expensed to the Capital Reserve-realised.
Purchases and sales of investments are accounted for on trade date.

(c) Income
Dividends receivable on quoted equity shares are brought into account on the ex-dividend date. Dividend
income is shown excluding any related tax credit. Where the Company has elected to receive its dividends in
the form of additional shares rather than in cash, the amount of the cash dividend is recognised as income.
Other income is accounted for on an accruals basis.

(d) Expenses
All expenses are accounted for on an accruals basis. Expenses are charged to revenue except as follows:
. expenses which are incidental to the acquisition and disposal of an investment are charged to capital; and
. expenses are charged to capital reserve-realised where a connection with the maintenance or enhancement
of the value of the investments can be demonstrated. In this respect the investment management fee has
been allocated 62.5% to capital reserve-realised and 37.5% to revenue reserve, in line with the Board’s
expected long-term split of returns, in the form of capital gains and income respectively, from the
investment portfolio of the Company.

(e) Finance costs

Finance costs are accounted for on an accruals basis. Finance costs of debt, insofar as they relate to the
financing of the Company’s investments or to financing activities aimed at maintaining or enhancing the value
of the Company’s investments, are allocated 62.5% to capital reserve-realised and 37.5% to revenue account,
in line with the Board’s expected long-term split of returns, in the form of capital gains and income
respectively, from the investment portfolio of the Company.

40
NOTES TO THE ACCOUNTS

1 ACCOUNTING POLICIES (continued)

(f) Taxation
The tax effect of different items of income/gain and expenditure/loss is allocated between revenue and capital
on the same basis as the particular item to which it relates, under the marginal method, using the Company’s
effective rate of tax for the accounting period. Deferred taxation is recognised in respect of all timing
differences that have originated but not reversed at the balance sheet date where transactions or events that
result in an obligation to pay more or a right to pay less tax in the future have occurred at the balance sheet
date measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax assets
only being recognised if it is considered more likely than not that there will be suitable profits from which the
future reversal of the underlying timing differences can be deducted. Timing differences are differences arising
between the Company’s taxable profits and its results as stated in the accounts which are capable of reversal in
one or more subsequent periods.

(g) Capital reserves

Capital reserve–realised.
The following are accounted for in this reserve:
. gains and losses on the realisation of investments;
. gains on the return of capital by way of investee companies paying special dividends; and
. expenses, together with the related taxation effect, charged to this reserve in accordance with the above
policies.
Capital reserve–unrealised.
The following are accounted for in this reserve:
. increases and decreases in the valuation of investments held at the year-end.

2 INCOME
2006 2005
£’000 £’000
Income from investments (UK listed)
Franked investment income (net) 17,806 16,135
Unfranked investment income — 47
Other investment income 484 —
18,290 16,182
Other income
Deposit interest 797 585
Underwriting commission 20 27
817 612
Total income 19,107 16,794
Total income comprises:
Dividends 18,290 16,135
Interest 797 632
Other income 20 27
19,107 16,794

During the year the Company also received special dividends totalling £2,261,000 (2005 – £4,238,000) which
have been considered as a return of capital by the investee companies and have been credited to Capital
Reserves. Those special dividends paid by investee companies which are considered to be a return on capital
to shareholders, are credited to Revenue.

41
NOTES TO THE ACCOUNTS

3 INVESTMENT MANAGEMENT FEE

2006 2005
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Investment management fee 2,124 3,540 5,664 1,773 2,955 4,728
Irrecoverable VAT thereon 372 619 991 310 517 827
Total 2,496 4,159 6,655 2,083 3,472 5,555

The Company’s investment managers are Aberforth Partners LLP. The contract between the Company and
Aberforth Partners LLP may be terminated by either party at any time by giving six months’ notice of
termination. Aberforth Partners LLP receive a quarterly management fee, payable in advance, equal to 0.2% of
the value of the total assets less all liabilities of the Company. In addition to the investment management fee,
above, the Company also obtains secretarial services from Aberforth Partners LLP. The fee for the secretarial
services is shown with other expenses in Note 4.

4 OTHER EXPENSES
2006 2005
£’000 £’000
The following expenses have been charged to revenue:
Secretarial services 70 68
Directors’ fees (Refer to Directors’ Remuneration Report) 107 105
AIC fees 50 60
Custody and other bank charges 36 21
Directors and Officers liability insurance 11 7
Auditors’ fee–for audit services (recurring) 13 11
–for audit services (non-recurring) — 5
–for non-audit services (recurring) 1 1
Other expenses 114 108
402 386
The following expenses have been charged to capital:
Expenses incurred in acquiring or disposing of investments classified
as fair value through profit or loss 3,230 2,542

42
NOTES TO THE ACCOUNTS

4 OTHER EXPENSES (continued)

Expenses incurred in acquiring or disposing of investments classified as fair value through profit or loss are
analysed below.
2006 2005
£’000 £’000
Analysis of total purchases
Purchase consideration before expenses 242,169 207,941
Commissions 1,101 979
Taxes 1,093 952
Total acquisition expenses 2,194 1,931
Total purchases 244,363 209,872
Analysis of total sales
Sales consideration before expenses 263,291 201,884
Commissions 1,036 611
Total disposal expenses 1,036 611
Total sales net of expenses 262,255 201,273

5 TAXATION
Analysis of tax charged on return on ordinary activities 2006 2005
£’000 £’000
Total current tax charge for the year (see below) — —
Total deferred tax — —
Total tax charge for the year — —

Factors affecting current tax charge for the year

The tax assessed for the period is lower than the standard rate of corporation tax in the UK for a large company
(30%).
The differences are explained below:
Returns on ordinary activities before tax 16,209 14,325
Notional corporation tax at 30% 4,863 4,298
Non-taxable UK dividends (5,342) (4,841)
Tax losses for which no relief has been taken 479 543
Total current tax charge for the year — —

The Company has not recognised an asset for deferred tax on the unutilised management expenses because it
is unlikely that there will be suitable taxable profits from which the future reversal of a deferred tax asset may
be deducted. The Company has unutilised management expenses and loan relationship losses for taxation
purposes of £34,924,000 (2005: £29,167,000).

6 FINANCE COSTS
No interest was payable during the year (2005 — £nil).

43
NOTES TO THE ACCOUNTS

7 DIVIDENDS
2006 2005
£’000 £’000
Amounts recognised as distributions to equity holders in the period:
Final dividend for the year ended 31 December 2005 of 7.85p (2004: 7.25p)
paid on 4 March 2006 7,757 7,164
Interim dividend for the year ended 31 December 2006 of 4.25p (2005: 4.0p)
paid on 2 September 2006 4,199 3,952
11,956 11,116

Proposed final dividend for the year ended 31 December 2006 of 9.15p
(2005: 7.85p) payable on 7 March 2007 9,041 7,757

The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not
been included as a liability in these financial statements.

We also set out below the total dividends payable in respect of the financial year, which is the basis on which
the requirements of Section 842 of the Income and Corporation Taxes Act 1988 are considered.

2006 2005
£’000 £’000
Revenue available for distribution by way of dividends for the year 16,209 14,325

Interim dividend for the year ended 31 December 2006 of 4.25p (2005: 4.0p) 4,199 3,952
Proposed final dividend for the year ended 31 December 2006 of 9.15p
(2005: 7.85p) 9,041 7,757
13,240 11,709

8 RETURNS PER ORDINARY SHARE

The returns per Ordinary Share are based on:
(i) a numerator being the Returns attributable to equity shareholders of:

2006 2005
Total Total
£’000 £’000
Attributable to Ordinary Shareholders 174,113 135,135

and (ii) a denominator being a specific number of shares as follows:

2006 2005
Weighted average number of shares in issue during the year 98,809,788 98,809,788

44
NOTES TO THE ACCOUNTS

9 INVESTMENTS
2006 2005
UK UK
Listed Listed
£’000 £’000
Investments at fair value through profit or loss
Opening book cost 497,118 419,233
Opening unrealised appreciation 162,442 111,684
Opening valuation 659,560 530,917
Movements in the period:
Purchases at cost 242,169 207,941
Sales – proceeds (263,291) (201,884)
– realised gains on sales 85,852 71,828
Movement in unrealised appreciation 77,180 50,758
Closing valuation 801,470 659,560
Closing book cost 561,848 497,118
Closing unrealised appreciation 239,622 162,442
Closing valuation (all investments are in ordinary shares quoted in the UK) 801,470 659,560

Realised net gains on sales 85,852 71,828

Movement in unrealised appreciation 77,180 50,758
Gains on investments 163,032 122,586

10 DEBTORS
2006 2005
£’000 £’000
Amounts due from brokers — 154
Investment income receivable 1,304 1,219
Other debtors 65 35
1,369 1,408

11 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR

2006 2005
£’000 £’000
Other creditors 62 61

45
NOTES TO THE ACCOUNTS

12 SHARE CAPITAL
2006 2005
No. of No. of
Authorised: Shares £’000 Shares £’000
Ordinary Shares of 1p 333,299,254 3,333 333,299,254 3,333
Allotted, issued and fully paid:
Ordinary Shares of 1p 98,809,788 988 98,809,788 988

13 CAPITAL AND RESERVES

Capital Capital
Share capital Special reserve- reserve- Revenue
£’000 reserve realised unrealised reserve TOTAL
£’000 £’000 £’000 £’000 £’000
At 31 December 2004 988 197,305 216,436 111,684 20,742 547,155
Receipt of special dividends taken to capital — — 4,238 — — 4,238
Net gains on sale of investments — — 71,828 — — 71,828
Increase of unrealised appreciation — — — 50,758 — 50,758
Cost of investment transactions — — (2,542) — — (2,542)
Management fees charged to capital — — (3,472) — — (3,472)
Revenue return attributable to equity
shareholders — — — — 14,325 14,325
Equity dividends paid — — — — (11,116) (11,116)
At 31 December 2005 988 197,305 286,488 162,442 23,951 671,174

Receipt of special dividends taken to capital — — 2,261 — — 2,261

Net gains on sale of investments — — 85,852 — — 85,852
Increase of unrealised appreciation — — — 77,180 — 77,180
Cost of investment transactions — — (3,230) — — (3,230)
Management fees charged to capital — — (4,159) — — (4,159)
Revenue return attributable to equity
shareholders — — — — 16,209 16,209
Equity dividends paid — — — — (11,956) (11,956)
At 31 December 2006 988 197,305 367,212 239,622 28,204 833,331

The revenue reserve represents the only reserve from which dividends can be funded.

46
NOTES TO THE ACCOUNTS

14 NET ASSET VALUE PER SHARE

The net asset value per share and the net assets attributable to the Ordinary Shares at the year end are
calculated in accordance with their entitlements in the Articles of Association and were as follows:

Net asset value Net assets

per share attributable attributable
2006 2005 2006 2005
pence pence £’000 £’000
Ordinary Shares 843.37 679.26 833,331 671,174

Net asset value per Ordinary Share is based on net assets of £833,331,000 (2005: £671,174,000), and on
98,809,788 (2005: 98,809,788) Ordinary Shares, being the number of Ordinary Share in issue at the year-end.

15 GROSS CASH FLOWS

2006 2005
£’000 £’000
Capital expenditure and financial investment
Payments to acquire investments (244,363) (209,872)
Receipts from sales of investments 262,409 201,811
18,046 (8,061)

16 ANALYSIS OF CHANGES IN NET FUNDS

Net funds Net funds
at 1 Jan Cash at 31 Dec
2006 flow 2006
£’000 £’000 £’000
Cash at bank 10,267 20,287 30,554

17 FINANCIAL INSTRUMENTS—FRS 25 DISCLOSURES

The Company’s financial instruments comprise its investment portfolio (see note 9 and pages 16 to 19), cash
balances, overdrafts, debtors and creditors that arise directly from its operations such as sales and purchases
awaiting settlement and accrued income. Overdrafts are utilised when the Managers believe it is in the interest
of the Company to financially gear the portfolio. Note 1 sets out the accounting policies, including criteria for
recognition and the basis of measurement applied for significant financial instruments excluding cash at bank
which is carried at fair value. Note 1 also includes the basis on which income and expenses arising from
financial assets and liabilities are recognised and measured.
The main risks that the Company faces arising from its financial instruments are:
(i) cash flow interest rates risk, being the risk that the future cash flows of a financial instrument will fluctuate
because of changes in market interest rates; and
(ii) market prices risk, being the risk that the value of investment holdings will fluctuate as a result of changes
in market prices caused by factors other than interest rate or currency rate movement.
Since the Company invests in UK equities traded on the London Stock Exchange, currency risk, credit risk
and liquidity risk are not significant. Fair value risk is covered under market price risk.

47
NOTES TO THE ACCOUNTS

17 FINANCIAL INSTRUMENTS—FRS 25 DISCLOSURES (continued)

(i) Cash flow interest rates risk

The Company has a bank debt facility of £80,000,000 of which £nil was utilised at 31 December 2006
(2005: total facilities £80,000,000 of which £nil were utilised as at 31 December 2005). The interest rate on
amounts utilised is variable at 0.6% (2005: 0.6%) over base rate with no arrangement or non-utilisation fees
payable. The debt may be repaid by the Company at any time without penalty but the lender cannot withdraw
the facilities without providing at least 364 days’ notice at all times.
When the Company decides to hold cash balances, all balances are held on variable rate bank accounts
yielding rates of interest linked to bank base rate which at 31 December 2006 was 5.00% (2005: 4.50%). The
Company’s policy is to hold cash in variable rate bank accounts and not usually to invest in fixed rate
securities. The Company’s investment portfolio is not directly exposed to interest rate risk.

(ii) Market prices risk

The Company’s investment portfolio is exposed to market price fluctuations which are monitored by the
investment managers in pursuance of the investment objective. Further information on the investment portfolio
is set out in the Managers’ Report on pages 10 to 14, which is not subject to audit. It is not the Managers’
policy to use derivatives to manage portfolio risk.
The Company held the following categories of financial instruments at 31 December 2006:

2006 2005
Book Value Fair Value Book Value Fair Value
£’000 £’000 £’000 £’000
Financial Instruments
Investment Portfolio 801,470 801,470 659,560 659,560
Cash at bank 30,554 30,554 10,267 10,267

The investment portfolio consists of listed investments valued at their bid price, which represents fair value.
Cash, which is held in variable rate bank accounts, can be withdrawn on demand with no penalty. The fair
value disclosures above exclude short-term debtors and creditors. These are carried at their fair value.

18 CONTINGENCIES, GUARANTEES AND FINANCIAL COMMITMENTS

Contingencies, guarantees or financial commitments of the Company as at 31 December 2006, which have
not been accrued, were as follows:

2006 2005
£’000 £’000
Placing and open offer commitments, payable within one month 1,297 —

48
SHAREHOLDER INFORMATION

SHAREHOLDER REGISTER ENQUIRIES

All administrative enquiries relating to Shareholders such as queries concerning holdings, dividend
payments, notification of change of address, loss of certificate or to be placed on a mailing list should be
addressed to the Company’s registrars:
Shareholder Services Department, Capita Registrars, Northern House, Woodsome Park, Fenay Bridge,
Huddersfield HD8 0LA. Tel: 0870 162 3131. Fax: 01484 600 911. Email: shareholder.services@
capitaregistrars.com. Website: www.capitaregistrars.com

PAYMENT OF DIVIDENDS

The best way to ensure that dividends are received as quickly as possible is to instruct the Company’s
registrars, whose address is given above, to pay them directly into a bank account; tax vouchers are then
mailed to Shareholders separately. This method also avoids the risk of dividend cheques being delayed or lost
in the post. The Company also operates a Dividend Re-investment Plan to allow Shareholders to use their cash
dividends to buy shares easily and at a low cost via the Company’s registrars from whom the necessary forms
are available.

SOURCES OF FURTHER INFORMATION

The prices of the Ordinary Shares are quoted daily in the Financial Times, The Herald, The Telegraph and
The Scotsman. The price, together with the Net Asset Values and other financial data, can be found on the
TrustNet website at www.trustnet.com. Other websites containing useful information on the Company are
www.FT.com and www.theaic.co.uk. Company performance and other relevant information is available on
the Managers’ website at www.aberforth.co.uk and are updated monthly.

HOW TO INVEST

The Company’s Ordinary Shares are traded on the London Stock Exchange. They can be bought or sold by
placing an order with a stockbroker, by asking a professional adviser to do so, or through most banks.
The Company’s Managers, Aberforth Partners LLP, do not offer any packaged products such as ISAs, PEPs,
Savings Schemes or Pension Plans.
SEDOL Bloomberg Reuters
Security Codes Ordinary Shares of 1p 0-006-655 ASL LN ASL.L

ELECTRONIC PROXY VOTING

You may register your vote on-line by visiting the Capita Registrars’ website at www.capitaregistrars.com. In
order to register your vote on-line, you will need to enter your name, postal code and investor code which is
given on the form of proxy. If you are a member of CREST, you may register the appointment of a proxy by
using the CREST electronic appointment service. For further details refer to the CREST manual. Completion of a
form of proxy or the appointment of a proxy electronically will not stop you attending the meeting and voting
in person should you so wish.

AIC

The Company is a member of The Association of Investment Companies which produces a detailed Monthly
Information Service on the majority of investment trusts. This can be obtained by contacting The Association of
Investment Companies, 9th Floor, 24 Chiswell Street, London EC1Y 4YY Website: www.theaic.co.uk;
Tel: 020 7282-5555.

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SHAREHOLDER INFORMATION

FINANCIAL CALENDAR

Results For the half year to 30 June announced July

For the full year to 31 December announced January
Ordinary Share Dividends Interim
Ex-dividend July/August
Payable September
Final
Ex-dividend January/February
Payable March
Interim Report Published July
Annual Report and Accounts Published January
Annual General Meeting March
Publication of Net Asset Values Weekly
(via the Managers’ website)
Monthly
(as weekly and also via AIC)
Website Content Update Weekly/Monthly

GLOSSARY OF TECHNICAL TERMS

‘‘Discount’’ is the amount by which the stockmarket price per Ordinary Share is lower than the Net Asset
Value per Ordinary Share. The discount is normally expressed as a percentage of the Net Asset Value per
Ordinary Share.

‘‘Expense Ratio’’ is the total annual operating costs (net of any tax relief), excluding interest costs, divided by
the average Shareholders’ funds (calculated per AIC guidelines).

‘‘Market Capitalisation’’ of a Company is calculated by multiplying the stockmarket price per Ordinary Share
by the total number of Ordinary Shares in issue.

‘‘Net Asset Value’’, also described as Shareholders’ funds, is the value of total assets less liabilities. Liabilities
for this purpose include borrowings as well as current liabilities. The Net Asset Value per Ordinary Share is
calculated by dividing this amount by the total number of Ordinary Shares in issue.

‘‘Net Asset Value Total Return’’ represents the theoretical return on Shareholders’ funds per share assuming
that net dividends (gross dividends prior to 2 July 1997) paid to Shareholders were reinvested in the Net Asset
Value at the time the shares were quoted ex-dividend.

‘‘Premium’’ is the amount by which the stockmarket price per Ordinary Share exceeds the Net Asset Value
per Ordinary Share. The premium is normally expressed as a percentage of the Net Asset Value per
Ordinary Share.

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 NOTICE OF ANNUAL GENERAL MEETING

Notice is hereby given that the Seventeenth Annual General Meeting of Aberforth Smaller Companies Trust plc will
be held at 14 Melville Street, Edinburgh on 1 March 2007 at 6.15 pm for the following purposes:

To consider and, if thought fit, pass the following Ordinary Resolutions:

1. That the Report and Accounts for the year to 31 December 2006 be adopted.
2. That the payment of the final dividend of 9.15p per Ordinary Share be approved.
3. That Mr D R Shaw be re-elected as a Director.
4. That Mr H N Buchan be re-elected as a Director.
5. That Mr M L A Chiappelli be re-elected as a Director.
6. That Mr J E G Cran be re-elected as a Director.
7. That Prof P R Marsh be re-elected as a Director.
8. That Prof W S Nimmo be re-elected as a Director.
9. That the Directors’ Remuneration Report for the year ended 31 December 2006 be approved.
10. That Ernst & Young LLP be re-appointed as Auditors and that the Directors be authorised to determine their
remuneration.

To consider and, if thought fit, pass the following Special Resolution:

11. That pursuant to and in accordance with its Articles of Association, the Company be and it is hereby authorised
in accordance with section 166 of the Companies Act 1985 (the ‘‘Act’’) to make market purchases (within the
meaning of section 163(3) of the Act) of Ordinary Shares of 1p each in the capital of the Company (‘‘Shares’’),
provided that:
(a) the maximum number of Shares hereby authorised to be purchased shall be 14.99% of the issued share
capital of the Company on the date on which this resolution is passed;
(b) the minimum price which may be paid for a Share shall be 1p being the nominal value of a Share;
(c) the maximum price (exclusive of expenses) which may be paid for a Share shall be 5% above the average
of the middle market quotations (as derived from the London Stock Exchange Daily Official List) for the
Shares for the five business days immediately preceding the date of purchase; and
(d) unless previously varied, revoked or renewed, the authority hereby conferred shall expire on 31 July 2008
or, if earlier, at the Annual General Meeting of the Company to be held in 2008, save that the Company
may, prior to such expiry, enter into a contract to purchase Shares under such authority which will or
might be executed wholly or partly after the expiry of such authority and may make a purchase of Shares
pursuant to any such contract.

By Order of the Board

Aberforth Partners LLP, Secretaries

14 Melville Street, Edinburgh EH3 7NS
22 January 2007
greenaways E168195

The final dividend, if approved, will be paid on 7 March 2007 to Shareholders on the Register at 9 February 2007.
A member who is entitled to attend and vote at this meeting is entitled to appoint one or more proxies to attend and,
on a poll, vote on his/her behalf. Such a proxy need not also be a member of the Company.
A Form of Proxy for use by Shareholders is enclosed. Completion of the Form of Proxy will not prevent a Shareholder
from attending the meeting and voting in person. To register your vote electronically, log on to the registrar’s web site
at www.capitaregistrars.com and follow the instructions on screen. You will require your investor code. CREST users
should note they can lodge their proxy votes for the meeting through the CREST proxy voting system. For further
instructions users should refer to the CREST User Manual. Any CREST sponsored members should contact their
CREST sponsor.
No Director has a contract of service with the Company. The Directors’ letter of appointment will be available for
inspection for 15 minutes prior to the Annual General Meeting and during the meeting.

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