Aberforth UK Small Companies Fund

Annual Report and Accounts 31 December 2007 INVESTMENT OBJECTIVE ‘‘The objective of Aberforth UK Small Companies Fund (the Fund) is to achieve a total return (with income 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.’’

INVESTMENT RECORD

The Fund* –10.8% Benchmark IndexÀ –8.3%

31.12.07 01.01.07 % Change Issue Price 10,115p 11,333p –10.7% Cancellation Price 9,848p 11,041p –10.8% Total Net Assets £610.0m £846.8m Initial Charge NIL NIL Dealing Spread (based on mid price) 2.7% 2.6%

31.12.07 31.12.06 Total Expense Ratio 0.825% 0.813%

TEN YEAR INVESTMENT RECORD

Absolute Performance Relative Performance (ﬁgures are total returns and have been rebased to 100 at 31 Dec 1997) (ﬁgures are total returns and have been rebased to 100 at 31 Dec 1997) INVESTMENT RECORD

HISTORIC TOTAL RETURNS

Discrete Annual Returns (%) Period The Fund* IndexÀ 1 year to 31 December 2007 –10.8 –8.3 1 year to 31 December 2006 26.6 28.0 1 year to 31 December 2005 26.5 27.8 1 year to 31 December 2004 29.8 20.7 1 year to 31 December 2003 38.7 43.0 1 year to 31 December 2002 –10.3 –23.3 1 year to 31 December 2001 9.0 –13.0 1 year to 31 December 2000 18.7 1.2 1 year to 31 December 1999 45.1 56.2 1 year to 31 December 1998 –8.9 –5.7 1 year to 31 December 1997 5.6 9.2 1 year to 31 December 1996 20.6 18.7 1 year to 31 December 1995 23.3 16.1 1 year to 31 December 1994 –1.4 –3.1 1 year to 31 December 1993 52.7 41.6 1 year to 31 December 1992 3.5 6.4 Compound Cumulative Annual Returns (%) Returns (%) Periods to 31 December 2007 The Fund* IndexÀ The Fund* IndexÀ 2 years from 31 December 2005 6.3 8.3 12.9 17.4 3 years from 31 December 2004 12.6 14.5 42.8 50.0 4 years from 31 December 2003 16.7 16.0 85.3 81.0 5 years from 31 December 2002 20.8 21.0 157.0 158.8 6 years from 31 December 2001 14.9 12.1 130.6 98.6 7 years from 31 December 2000 14.1 8.1 151.2 72.7 8 years from 31 December 1999 14.6 7.2 198.2 74.8 9 years from 31 December 1998 17.7 11.8 332.9 172.9 10 years from 31 December 1997 14.7 9.9 294.4 157.2 11 years from 31 December 1996 13.8 9.8 316.5 180.9 12 years from 31 December 1995 14.4 10.6 402.2 233.5 13 years from 31 December 1994 15.1 11.0 519.0 287.3 14 years from 31 December 1993 13.8 9.9 510.1 275.3 15 years from 31 December 1992 16.0 11.8 831.6 431.4 16 years from 31 December 1991 15.2 11.4 864.0 465.4 16.8 years from inception on 15.0 10.7 940.6 453.4 20 March 1991

^ STANDARDISED PAST PERFORMANCE

31 December 2002- 31 December 2003- 31 December 2004- 31 December 2005- 31 December 2006- 31 December 2003 31 December 2004 31 December 2005 31 December 2006 31 December 2007 % Growth % Growth % Growth % Growth % Growth 38.7 29.8 26.5 26.6 –10.8

* Represents cancellation price to cancellation price since 2 July 1997, prior to which tax credits were reinvested. À 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). This index comprises the bottom 10% of all UK quoted companies by market value which at 1 January 2008 included some 509 companies, the largest market capitalisation of which was £1.1 billion and the aggregate market capitalisation of which was £142 billion. ^ Represents cancellation price to cancellation price. This table is in accordance with the Financial Services Authority’s Regulations. Past performance is not a guide to future performance. Stockmarket movements may cause the capital value of an investment and the income derived from it to go down as well as up and investors may get back less than they originally invested.

1 MANAGER’S REPORT

STATUS Aberforth UK Small Companies Fund (the Fund) was constituted by a Trust Deed dated 17 December 1990 and is an authorised unit trust scheme under the Financial Services & Markets Act 2000 (the Act). The Fund is a UCITS scheme as deﬁned by the Collective Investment Schemes Sourcebook.

CHANGES TO PROSPECTUS On 8 January 2007, the Fund converted to the Financial Services Authority’s (FSA) new Rules for authorised investment funds set out in the Collective Investment Schemes Sourcebook, known as COLL. All UK authorised funds had to comply with the new Rules by February 2007. The Fund’s Prospectus now includes the power for the Manager to defer redemptions from one valuation point to the next (which will normally be the following business day) if requests to redeem 10% or more of the total value of the Fund are received on a particular day. This is a useful tool with which to protect the interests of continuing unitholders in exceptional circumstances as it allows the sale of assets to be matched to the level of redemptions more effectively. In addition to the conversion to COLL, a change was made to the investment policy of the Fund to allow investment in securities quoted on the Alternative Investment Market (AIM), in addition to small UK companies ofﬁcially listed on the London Stock Exchange, regardless of where such companies are incorporated. This change took effect from 31 March 2007. However, it is not currently envisaged that investment in AIM quoted companies will form a material part of the Fund’s portfolio. From 1 January 2008, income units are available in the Fund in addition to the original accumulation units. Distributions for these units will be paid on 31 August and 28 February each year in respect of the distribution periods ending 30 June and 31 December respectively. The ﬁrst distribution will be payable on 31 August 2008.

INCOME The Fund accumulates or distributes income on a twice yearly basis and for the six months to 31 December 2007 the income available for accumulation was 77.7708p per unit. Tax vouchers in respect of the ﬁnal distribution will be issued as at 28 February 2008.

PERFORMANCE Following very good gains in each of the previous four years, small UK quoted companies decreased in value in 2007: the total return of the Fund’s investment benchmark, the Hoare Govett Smaller Companies Index (Excluding Investment Companies) (HGSC (XIC)), was –8.3%. Large companies proved more resilient, with the FTSE All-Share Index achieving a rise of 5.3%. The Fund’s net asset value total return of –10.8% was below that of its benchmark. The reasons for this under-performance are set out in the ‘Investment Performance’ section below. The 13.6 percentage point gap between the performance of large and small companies makes 2007 the worst relative year for the Fund’s asset class since 1998. In common with that year, 2007 witnessed remarkable turmoil in the financial markets. Back then, financial crises in emerging markets culminated in the failure of LTCM, the hedge-fund. Within the last 12 months, we have witnessed credit and liquidity crunches that have taken place not on the periphery of the financial system but at the heart of the Western economies. While small UK quoted companies have considerably less direct exposure than the bank-dominated large caps to fall-out from the sub-prime fiasco, their share prices have certainly been affected by a rising tide of risk aversion.

INVESTMENT BACKGROUND The credit crunch of 2007 cannot be dismissed as solely a phenomenon of the ﬁnancial markets. Its roots are tangled in the travails of the US housing market, which for several years had been buoyed by cheap money and the loose lending standards of sub-prime mortgages. Indications of strain were evident at this time last year, when housing construction activity had already started to slow markedly. However, it was only in 2007 that losses from sub-prime lending started to be felt in the credit markets.

2 MANAGER’S REPORT

The impact of these losses was exacerbated both by the layers of leverage inherent in the system and by a break-down in trust along the chain of financial institutions involved in the dissemination of sub-prime risks. Trends such as securitisation meant that credit risks were not confined to the balance sheets of banks, though this is certainly not to say that the banks escaped unscathed. Aggravating the problem was the proliferation of derivative structures – such as collateralised debt obligations and structured investment vehicles – that were designed to spread risk but that have ultimately complicated the identification of where liability really does lie. Adding more uncertainty is the phasing of disclosure by the holders of the various debt instruments: the process of marking their prices to a prevailing market rate has been tortuously slow, owing partly to the difficulty of establishing a market price in the absence of willing buyers. This uncertainty meant that pain was not confined to the riskiest tranches of sub-prime risk. The consequent contagion ensured that prices fell and yields moved up across the spectrum of mortgage related credit risk. Indeed, spreads expanded in other classes of debt, with the corporate bond and leveraged loan market also affected. Compounding the Autumn’s de facto monetary tightening was a breakdown in trust between the banks themselves, evident in a sharp rise in interbank (LIBOR) rates, which also form the basis for much corporate lending. With much of the US economy – specifically the consumer and corporate sectors – facing a higher market-imposed cost of borrowing, there has been a clear risk that the turmoil in the financial markets spills back into the real economy. This potential reflexivity was evident in movements in government bond yields: 10 year US treasury yields dropped from 5% at the end of June to end the year at 4%, as expectations for real economic growth were revised downwards and the appetite for low risk assets rose. The means of transmission from the financial sphere back into the real economy would appear to be the housing market, which had itself been inflated by the dubious lending practices that fostered the sub-prime bubble. The Case-Shiller national index shows US house prices to have fallen by 4.5% year on year in the third quarter. Statistics abound to suggest that the US housing market has not experienced such tough conditions for 20 years. With consumer confidence thus challenged, there has been speculation about a US recession some time in 2008. On the other hand, inflation has not proved sufficiently alarming to get in the way of 100 basis points of cuts in interest rates. The US economy also has dollar weakness working in its favour. The dollar slid by a further 10% against the euro in 2007 to bring its effective devaluation since late 2000 to 43%. This movement represents a substantial boost to the competitiveness of US businesses, which has now started to be reflected in a declining current account deficit as exports grow. And, to the extent that a weaker consumer sector in 2008 puts pressure on imports, the current account may see further ‘improvement’. Thus, one of the pieces would appear to be in place for a rebalancing of the global economy, which has been so reliant on the US as the ‘consumer of last resort’ in recent years. But this solution to the global imbalances puts pressure on other economies, in particular the Euro-block, which has had to shoulder further euro strength. The UK sits somewhere in the middle, with a further appreciation against the dollar in 2007 offset by a fall of 9% against the euro. The UK shares several of the challenges that are presently confronting the US economy, but lacks, as yet, the stimulus of a meaningful devaluation. The British banking sector has seen its balance sheets weakened by US sub-prime losses and has also had perhaps the highest profile casualty of the credit market turmoil in Northern Rock. While Northern Rock had limited exposure to sub-prime debt, its reliance on wholesale funding rendered it vulnerable to the credit crunch, as the credit contagion reduced the availability of funding and pushed up its cost. As one of the more aggressive mortgage lenders in recent years, Northern Rock may also serve to highlight the vulnerability of the UK economy to the housing market. According to the HBOS survey, UK house prices declined for three consecutive months from September to November, to bring the annual rate of growth down from 11% mid year to 5% in December. The vulnerability to further falls is brought out by the historical context: over the last 10 years, UK house prices have risen by a cumulative 189% against 116% in the US. Additional pressure is likely to be forthcoming in 2008, with mortgage applications down sharply and many fixed rate mortgages due to reset closer to market rates. Talk therefore abounds of a slowdown similar to that of the early 1990s. The Bank of England has responded with a 25 basis point cut in base rates, but at 5.5% rates are still 50 basis points higher than at the start of 2007. The scope to act has been constrained by inflationary pressures. While the rate of increase in the CPI has fallen back from the April levels that prompted a letter from Mervyn King to the Chancellor, it ended the year on the wrong side of the target 2% rate. Oil, whose price rose by 50% over the year, has been joined

3 MANAGER’S REPORT by food price rises as an underlying inflationary threat. Nevertheless, the futures market, which in the mid year had been discounting interest rates of over 6.25% by June 2008, is looking for a cut of at least 25 basis points. This may, however, prove inadequate to offset mounting pressures on the economy. Moreover, transmission of monetary stimulus to the consumer and corporate sectors might be inhibited by the banks’ imperative to rebuild their balance sheets. So, as things stand today, a repetition of 2005’s solitary and quickly reversed cut in interest rates looks unlikely. Rather a series of cuts seems more probable, though with the precise phasing influenced by the path of inflation.

INVESTMENT PERFORMANCE Given the stresses in the credit markets and the impact on banks’ balance sheets of sub-prime losses, it is perhaps surprising that the FTSE All-Share, with its 15% weighting in the Bank sector, should have out-performed the HGSC (XIC), which had no exposure to that sector. However, offsetting this, large companies boast relatively big weightings in Oil & Gas Producers, which proved resilient in 2007, and Mining, which was spectacular as momentum built on the back of takeover speculation and Far Eastern demand for commodities. These two sectors account for 27% of the FTSE All-Share against 4% of the HGSC (XIC). In rationalising the weakness of the HGSC (XIC), divergent sector weightings can therefore prove helpful. The other important influence must be the classic perception of smaller companies as higher risk than their larger peers, even though the experience of Northern Rock might reasonably be thought to undermine this argument. Nevertheless, events of 1998 suggest that small companies tend to perform relatively poorly in times of financial stress and heightened uncertainty: over the four months to the end of September 1998, the HGSC (XIC) fell by 26.5% but the FTSE All-Share was down by 15.5%. The Manager would usually expect the Fund to fare relatively well in such circumstances of absolute declines in its benchmark index. However, while the Fund started the year well and was ahead of the HGSC (XIC) at the interim stage, the second half proved more challenging. The following paragraphs explain the Fund’s 2.5 percentage point under-performance over 2007. . Size can be an important issue even within the confines of the HGSC (XIC). It was a negative influence in 2007 for the Fund. With a total return of 65%, the strongest part of the UK stockmarket since the end of 2004 has been the FTSE 250. The corresponding figures for the FTSE All-Share and the FTSE SmallCap are 50% and 20%. The HGSC (XIC), which includes all of the FTSE SmallCap and 141 members of the FTSE 250, has thus seen a valuation gap open up between its mid cap and its small cap constituents. For the Manager, with its value investment philosophy, this disparity represented an opportunity to recycle capital from the relatively expensive mid caps in the HGSC (XIC) to its smaller denizens: at the end of the year, mid caps represented 37% of the Fund’s portfolio against 67% of the HGSC (XIC). However, given the continued strong performance of the FTSE 250, this positioning has so far proved inappropriate and hindered relative returns in 2007. Stripping out this size effect offers some reassurance about underlying stock picking. Analysis of last year’s performance shows that the Fund’s mid cap holdings out-performed the mid cap component of the benchmark and that the small cap holdings out-performed the small cap component. . Consistent adherence to the value investment discipline has served the Fund and its unitholders well over the long term. However, the stockmarket’s appetite for value waxes and wanes. Indeed, analysis conducted by Citigroup on its universe of small and mid cap companies suggests that 2007 witnessed a return to favour of growth stocks. This may be rationalised by rising expectations of tougher trading conditions in 2008: whereas the buoyant economy of recent years has benefited all companies, growth may be in shorter supply going forward and it can be argued that genuine growth should merit a re-rating. The Manager would certainly not disagree with the notion of paying up for sustainable growth. However, consistent with its commitment to value investing, it believes that few growth companies actually live up to the expectations implicit in their often heady valuations and is as a consequence reluctant to expose the Fund’s portfolio to such situations. . In a reverse of 2006, the Fund enjoyed a positive contribution from sector selection (i.e. either a higher exposure than the benchmark’s to those sectors that performed well or a lower exposure to those that performed poorly). The main feature of sector selection was the portfolio’s positioning in Real Estate, which was 5.1 percentage points lower than that of the benchmark at the start of the year. This proved advantageous since Real Estate fell by 43% over 2007. This was in marked contrast to 2006, when excitement about

4 MANAGER’S REPORT

REITs legislation in the UK and cheap debt combined to push valuations of quoted property companies to extravagant and unsustainable levels. Thus, while the Manager’s fundamental concerns about Real Estate were unhelpful in 2006, they have been fully vindicated in 2007 – timing the stockmarket’s mood swings is not easy. . Out-weighing the positive impact from sector selection was a weak contribution from stock selection (i.e. the effect of the relative performance of the portfolio’s investments in a sector against that sector’s benchmark return). At work here were two issues. The first concerns stocks that the Manager chose to own. Within a portfolio of 100 stocks over any twelve month period, there will inevitably be several stocks that encounter trading difficulties and as a consequence experience share price falls. Last year was no exception. Two of the larger impacts came from companies that felt the indirect effects of the credit crunch. Weaker than expected profits took these companies into breach of their banking covenants. A year earlier, the banks and therefore the stockmarket may have been more forgiving but, given the pressure on the banks’ own balance sheets, a more severe reaction was experienced. However, the portfolio as a whole retains the bias, noted in the interim report, to companies with strong balance sheets, positioning that the Manager believes will prove assistive in the coming year. The second issue affecting stock selection were the stocks that were not held. Last year the HGSC (XIC) was buoyed by strong performances from an unusually narrow band of stocks. The twenty companies that made the largest positive contributions to the benchmark’s performance enjoyed a remarkable average total return of 60%. Without these companies, the HGSC (XIC) would have been down by 14% rather than the actual 8.3%. However, only five of these companies had valuations that were consistent with the Manager’s value investment style. The rest were companies that in many cases had strong underlying businesses but whose share prices had, in general, acquired a momentum of their own. Indeed, of the five companies held, two were sold during the year as they were re-rated to levels that the Manager considered unsustainable. . Despite the travails of the credit market, de-equitisation, a term that describes the trend of recent years to replace equity financing with debt financing, remained a feature of the UK stockmarket in 2007. Within the large company world, de-equitisation had been dominated by the share buy-backs of giants such as BP, but in 2007 large companies also experienced an increase in M&A activity. Most notably, private equity felt sufficiently confident to acquire Alliance Boots, although the transaction was completed before the Autumn’s deterioration in the credit markets. However, given the sclerosis in the debt markets, this deal probably marked the high-point of private equity’s ambition at least for the time being. That said, deals within the small cap universe should be more digestible by private equity. Trade buyers, with the promise of synergies to offset higher borrowing costs, remained active through the year. In total, 38 companies within the HGSC (XIC) were acquired in 2007, down from 52 in the previous year, but this should be viewed in the context of a considerably more uncertain period for financial markets. The Fund itself benefited from the completion of five deals within its portfolio. On top of these, three other holdings at the end of the year had received bids and a further holding had been sold after the announcement but before the completion of the bid process. The Manager takes comfort from the continuing levels of corporate activity – over the years corporate transactions have proved a fruitful means of value realisation for the Fund’s portfolio, especially when the stockmarket’s appetite for small companies wanes. Last year was again good for dividends, a somewhat less exciting form of de-equitisation, though nevertheless important for equity returns over the longer term. Of the Fund’s 100 holdings at the year end, it was the policy of 21 not to pay a dividend, while another six had only started paying a dividend in 2007, rendering year on year comparisons meaningless. Of the remaining 73, three cut their dividends, a further eight held them unchanged and 62 reported increases. The median company within the 73 raised its dividend payment by 10%. This rate of growth is considerably ahead of that achieved by UK equities over the longer term and hints at the confidence with which management teams view their business prospects in 2008, notwithstanding the likelihood of greater macro economic challenges. It should be noted that the median figure does not necessarily reflect the Fund’s actual receipts, since the portfolio is actively managed and a specific rate of dividend growth is not targeted.

5 MANAGER’S REPORT

INVESTMENT OUTLOOK Investors in small UK quoted companies are confronted by a conundrum. Company results reported in 2007 were in general good and management teams – to judge by their outlook statements, their purchases of shares and dividend increases – tend towards optimism about the year ahead. On the other hand, the unresolved turmoil of the credit markets combines with deteriorating fundamentals in the wider economy to cast doubt on this rosy outcome. Given the pressures on the housing market, a so far minor currency stimulus compared with that of the US, and the relatively recent monetary response by the Bank of England that will take some months to filter through to the economy, it would seem prudent to anticipate a slowdown. This, though, need not mean outright recession, with a period of subnormal economic growth perhaps more likely. Such a scenario would clearly pose difficulties for the many retailers and building companies within the HGSC (XIC) that are reliant on the fortunes of the domestic economy. Large companies, however, face their own challenges, with tremendous uncertainty still hanging over the banking sector. On the basis of historic PE ratios, small companies have moved to a 3% discount to their larger peers, having begun the year at a 29% premium. Adjustment for the divergent sector exposures noted earlier would imply a larger discount. An element of this erosion was due to the under-performance of small companies. However, also at work was a superior rate of earnings growth from small companies, one of the core attractions of the asset class. They are presently expected to generate a superior rate of growth again in 2008. This is plausible, though the outcome will inevitably be influenced by the fortunes of the banks.

31 December 2007 31 December 2006 Characteristics The Fund Benchmark The Fund Benchmark Number of Companies 100 509 113 505 Weighted Average Market Capitalisation £435m £577m £449m £570m Price Earnings Ratio (Historic) 13.1x 11.7x 18.9x 18.5x Net Dividend Yield (Historic) 2.6% 2.9% 2.2% 2.0% Dividend Cover (Historic) 2.9x 2.9x 2.4x 2.4x

The table above shows that, on the basis of historic PE ratios, the Fund’s portfolio was valued on a premium to the benchmark at the year end. This is not without precedent, having occurred at four previous year ends over the Fund’s lifetime. At work is the Manager’s caution about a probable deterioration in trading conditions during 2008. This affects the aggregate PE of the portfolio in two ways. First, the portfolio has been biased towards companies with strong balance sheets, often with net cash: 38 of the 100 companies in the portfolio at the year end had net cash on their balance sheets. Given the comparatively low return available from cash, this strategy inflates the stated average PE ratio of the portfolio. Second, the Manager has chosen to avoid businesses in several sectors whose profitability is particularly exposed to the economic cycle. The stockmarket tends to value such companies on low multiples of historic earnings, in anticipation of a drop in future earnings. The price falls experienced by the asset class in the final quarter of 2007 were frequently severe and indiscriminate. They left many benchmark constituents, particularly towards the smaller end of the spectrum, on extremely low valuations that have not been evident for some years. It would thus seem that, if we are experiencing a cyclical de-rating of small companies, a significant portion of that process may already have taken place for a large number of companies within the benchmark. While some of these companies will inevitably feel the effects of a more difficult economic environment, should it indeed be forthcoming, the Manager considers that, consistent with previous cycles, some represent excellent opportunities. Indeed, the Manager is optimistic that these opportunities will provide the basis for a recovery in the Fund’s relative performance as and when the stockmarket’s flirtation with growth and momentum ends. As always, the precise timing is difficult to call, but in the meantime the task is to ensure that the Fund’s resources are appropriately directed to those companies about which the Manager, through its value investment disciplines, has conviction. A J Whyte, Director E R Macdonald, Director Aberforth Unit Trust Managers Limited 24 January 2008

6 INFORMATION ON ABERFORTH UNIT TRUST MANAGERS LIMITED

The Manager is wholly owned by Aberforth Partners LLP (the ‘‘firm’’). The predecessor business of the firm, 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 £1.9 billion (as at 31 December 2007). The firm is wholly owned by seven partners – five founding partners and two additional partners, all of whom are investment managers. The seven investment managers work as a team managing the Fund’s portfolio on a collegiate basis. The founding partners have been managing the portfolio since the Fund’s launch in March 1991. The biographical details of the seven investment managers are as follows: Andrew P Bamford (41) 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; Food Producers; 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 (50) 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; Chemicals; 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 (37) 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 (48) 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; 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 (58) 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 Trust Companies.

David Warnock (50) BCom (Hons), CDipAF – David was a founding partner in May 1990 and is responsible for investment research and stock selection in the following areas – 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 (44) – 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; 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 PERFORMANCE RECORD

TRUST SIZE

Balance sheet Net Asset Net Asset Value per No. of Value Unit Units Date £’000 (p) in Issue 31 December 2005 734,368 8,823 8,323,510.330 31 December 2006 846,801 11,094 7,632,918.720 31 December 2007 610,039 9,896 6,164,675.529

UNIT PRICE RANGE

Accumulation Units Highest Lowest Issue Cancellation Period (p) (p) 1 January 2003 to 31 December 2003 5,502 3,578 1 January 2004 to 31 December 2004 7,116 5,393 1 January 2005 to 31 December 2005 8,971 6,915 1 January 2006 to 31 December 2006 11,333 8,733 1 January 2007 to 31 December 2007 12,382 9,375

NET ACCUMULATION

Accumulation Units Pence Per £1,000 per Invested at Period Unit 1.1.03 (£) Year to 31 December 2003 122.4630 30.43 Year to 31 December 2004 138.5010 34.42 Year to 31 December 2005 150.2460 37.34 Year to 31 December 2006 174.6180 43.39 Year to 31 December 2007 176.0364 43.75

Notes (i) At 31 December 2007 the cancellation and issue prices were 9,848p and 10,115p respectively. (ii) The Fund was launched on 20 March 1991 with an initial issue price of 1,000p. (iii) The annual income accumulation and distribution date is 28 February in each year. The interim income accumulation and distribution date is 31 August relating to the period to 30 June. Past performance is not a guide to future performance.

8 STATEMENT OF TOTAL RETURN For the year ended 31 December 2007

2007 2006 Notes £’000 £’000 £’000 £’000 Net (losses)/gains on investments during the year 2 (88,043) 172,806 Income 3 18,860 20,969 Expenses 4 (6,549) (6,473) Finance costs: interest 6 (1) —

Net income before taxation 12,310 14,496 Taxation 5 — —

Net income after taxation 12,310 14,496

Total return before distributions (75,733) 187,302 Finance costs: distributions 6 (12,310) (14,496)

Change in net assets attributable to Unitholders (88,043) 172,806

STATEMENT OF CHANGE IN UNITHOLDERS’ NET ASSETS For the year ended 31 December 2007

2007 2006 £’000 £’000 £’000 £’000 Net assets at the start of the year 846,801 728,648 Movement due to sales and repurchases of units: Amounts received for creation of units 4,530 30,353 Less: amounts paid on cancellation of units (164,934) (98,943)

(160,404) (68,590) Stamp duty reserve tax (21) (56) Change in net assets attributable to Unitholders (see statement of total return above) (88,043) 172,806 Retained distribution on accumulation units 11,706 13,993

Net assets at the end of the year 610,039 846,801

9 PORTFOLIO STATEMENT As at 31 December 2007

31 December 2007 31 December 2006 %of %of %of %of Total HGSC Total HGSC Value Net (XIC) Net (XIC) Holding Security £’000 Assets Index Assets Index

Oil & Gas Producers 9,279 1.5 2.3 0.9 3.0 382,700 Melrose Resources 999 0.2 634,500 Premier Oil 8,280 1.3 Oil Equipment & Services 0 0 2.0 1.5 1.8 Chemicals 12,077 2.0 1.7 2.7 1.8 7,406,881 Delta 8,222 1.4 5,073,200 Elementis 3,855 0.6 Industrial Metals 0 0 0.9 0.0 0.0 Mining 0 0 2.0 0.0 1.8 Construction & Materials 18,297 3.0 3.3 3.4 3.2 1,702,584 Clarke (T.) 2,894 0.5 4,736,900 Galliford Try 4,761 0.8 4,537,000 Heywood Williams Group 2,042 0.3 7,226,900 Low & Bonar 8,600 1.4 Aerospace & Defence 44,407 7.3 1.4 3.4 1.7 7,920,768 Hampson Industries 12,198 2.0 907,700 Ultra Electronics Holdings 12,436 2.0 1,498,311 UMECO 9,394 1.6 1,505,300 VT Group 10,379 1.7 General Industrials 12,792 2.1 0.9 2.4 0.8 1,437,900 British Polythene Industries 3,638 0.6 4,338,400 RPC Group 9,154 1.5 Electronic & Electrical Equipment 38,379 6.3 4.3 6.7 4.5 2,585,300 Abacus Group 1,603 0.3 2,071,750 Dialight 2,615 0.4 3,270,500 Domino Printing Sciences 9,640 1.6 3,334,200 e2v technologies 8,452 1.4 923,848 Oxford Instruments 1,811 0.3 2,569,542 Raymarine 7,188 1.2 1,047,400 Spectris 7,070 1.1 Industrial Engineering 36,993 6.1 4.3 4.7 4.5 2,342,171 Castings 6,980 1.1 1,864,358 Foseco 5,276 0.9 1,760,200 Renold 1,602 0.3 8,565,860 Senior 10,001 1.6 967,954 Spirax-Sarco Engineering 8,498 1.4 792,469 Vitec Group (The) 4,636 0.8 Industrial Transportation 8,699 1.4 3.1 1.0 2.8 2,351,000 Wincanton 8,699 1.4 Support Services 67,743 11.1 12.6 12.2 14.3 1,758,500 4imprint Group 3,605 0.6 1,518,524 Acal 2,308 0.4 3,065,800 BSS Group 11,888 1.9 8,958,800 Communisis 6,406 1.0 2,808,800 Interserve 13,250 2.2 4,857,800 MITIE Group 13,735 2.3 2,275,959 ofﬁce2ofﬁce 2,674 0.4 6,099,700 Shanks Group 13,877 2.3 Automobiles & Parts 0 0 0.1 0.0 0.2 Beverages 7,040 1.2 0.7 0.5 0.6 2,046,600 Britvic 7,040 1.2

10 PORTFOLIO STATEMENT As at 31 December 2007

31 December 2007 31 December 2006 %of %of %of %of Total HGSC Total HGSC Value Net (XIC) Net (XIC) Holding Security £’000 Assets Index Assets Index

Food Producers 15,121 2.5 2.5 1.5 2.5 127,800 Cranswick 1,086 0.2 513,174 New Britain Palm Oil 1,924 0.3 2,222,100 Robert Wiseman Dairies 12,111 2.0

Household Goods 9,740 1.6 2.3 3.3 1.6 1,419,376 Headlam Group 6,132 1.0 3,310,118 McBride 3,608 0.6

Leisure Goods 0 0 0.4 0.0 0.7 Personal Goods 0 0 1.6 0.0 1.2 Health Care Equipment & Services 7,587 1.2 2.5 2.7 2.2 2,119,450 Biocompatibles International 2,607 0.4 4,543,150 Clinphone 2,181 0.3 6,787,607 Nestor Healthcare Group 2,308 0.4 256,100 Whatman 491 0.1

Pharmaceuticals & Biotechnology 19,632 3.2 2.5 2.7 2.4 2,134,900 Acambis 2,525 0.4 1,947,136 Alizyme 1,120 0.2 8,264,726 Ark Therapeutics Group 7,686 1.3 3,852,576 Asterand 202 – 1,636,634 Axis-Shield 3,928 0.6 12,218,300 Medical Solutions 855 0.1 5,290,401 Vectura Group 2,844 0.5 7,615,170 Vernalis 472 0.1

Food & Drug Retailers 19,659 3.2 0.4 2.6 0.4 418,278 Greggs 19,659 3.2 General Retailers 32,747 5.4 7.1 6.4 7.9 2,016,382 Blacks Leisure Group 3,650 0.6 2,955,733 Brown (N.) Group 6,998 1.2 2,629,700 Halfords Group 7,935 1.3 1,842,191 John David Group (The) 6,392 1.0 2,682,200 Lookers 3,024 0.5 1,879,638 Nord Anglia Education 4,004 0.7 800,601 ScS Upholstery 744 0.1

Media 32,904 5.4 4.6 7.3 3.7 4,527,100 Centaur Media 4,210 0.7 7,668,700 Chime Communications 2,761 0.4 10,843,000 Future 3,416 0.6 14,262,345 Huntsworth 12,765 2.1 4,688,700 Wilmington Group 9,752 1.6

Travel & Leisure 29,293 4.8 4.6 5.1 4.2 1,657,800 Holidaybreak 11,273 1.8 820,772 Luminar Group Holdings 3,529 0.6 1,976,200 Regent Inns 400 0.1 2,163,863 Sportech 2,153 0.3 4,233,250 Thomas Cook Group 11,938 2.0

Fixed Line Telecommunications 5,691 0.9 1.3 0.6 1.4 10,587,352 KCOM Group 5,691 0.9 Utilities 0 0 0.0 0.0 0.1 Banks 0 0 0.2 0.0 0.0

11 PORTFOLIO STATEMENT As at 31 December 2007

31 December 2007 31 December 2006 %of %of %of %of Total HGSC Total HGSC Value Net (XIC) Net (XIC) Holding Security £’000 Assets Index Assets Index

Nonlife Insurance 27,042 4.4 4.4 4.8 4.4 5,906,000 Beazley Group 9,612 1.6 7,977,800 Highway Insurance Holdings 5,744 0.9 4,096,800 Hiscox 11,686 1.9

Life Insurance 5,160 0.8 0.4 0.2 0.4 1,799,600 Hansard Global 5,160 0.8

Real Estate 15,725 2.6 7.7 5.1 10.5 2,014,646 Grainger 6,996 1.2 1,440,800 Minerva 1,912 0.3 1,967,300 Unite Group 6,817 1.1

General Financial 33,809 5.5 10.4 2.8 6.9 4,172,400 Brewin Dolphin Holdings 6,885 1.1 606,890 Charles Stanley Group 1,620 0.3 4,910,600 Collins Stewart 8,495 1.4 6,708,523 Evolution Group 8,117 1.3 2,031,750 Helphire Group 7,259 1.2 1,069,200 Paragon Group of Companies 1,433 0.2

Software & Computer Services 55,877 9.2 5.5 7.9 6.5 17,816,473 Anite 9,398 1.6 4,204,056 Dicom Group 7,336 1.2 3,582,000 Intec Telecom Systems 1,585 0.3 1,872,043 Macro 4 2,677 0.4 6,169,351 Microgen 2,776 0.5 6,766,609 Northgate Information Solutions 6,242 1.0 26,221,200 NSB Retail Systems 9,768 1.6 3,649,925 Parity Group 1,935 0.3 2,327,198 Phoenix IT Group 7,214 1.2 3,215,876 RM 6,946 1.1

Technology Hardware & Equipment 21,157 3.5 2.0 3.5 2.0 1,474,500 CSR 8,802 1.4 3,427,246 Filtronic 6,015 1.0 5,444,700 Trafﬁcmaster 2,137 0.4 8,848,080 Zetex 4,203 0.7

Investments as shown in the Balance Sheet 586,850 96.2 100.00 95.9 100.0 Net Current Assets 23,189 3.8 0.0 4.1 0.0 Total Net Assets 610,039 100.00 100.00 100.0 100.0

All investments are in ordinary shares and have a full listing on the London Stock Exchange. No investments are listed on AIM.

12 BALANCE SHEET As at 31 December 2007

2007 2006 Notes £’000 £’000 £’000 £’000 ASSETS Portfolio of investments 586,850 811,920

Debtors 7 1,349 1,455 Cash and bank balances 26,723 34,028

Total other assets 28,072 35,483

Total assets 614,922 847,403

LIABILITIES Creditors 8 (4,883) (602)

Total liabilities (4,883) (602)

Net assets attributable to unitholders 610,039 846,801

Net asset value per unit 9 9,896p 11,094p

A J Whyte, Director E R Macdonald, Director Aberforth Unit Trust Managers Limited 24 January 2008

SUMMARY OF MATERIAL PORTFOLIO CHANGES For the year ended 31 December 2007

Cost Proceeds Purchases £’000 Sales £’000 MyTravel Group 16,730 ITE Group 20,967 Collins Stewart 13,859 Abbot Group 20,465 VT Group 10,367 Croda International 15,247 Helphire Group 9,809 Spirent Communications 13,935 CSR 9,118 Carillion 12,426 Abbot Group 8,891 Restaurant Group 12,319 Hampson Industries 8,626 Laird Group 11,493 Galliford Try 8,388 Catlin Group 10,340 Premier Oil 7,400 Game Group 9,946 Wincanton 6,457 Foseco 9,693 Hiscox 6,167 Mapeley 9,626 Paragon Group of Companies 5,890 Domestic & General Group 8,901 Lookers 5,523 Headlam Group 8,816 Future 5,114 Alpha Airports Group 8,629 Elementis 4,863 Holidaybreak 7,673 Raymarine 4,548 Huntleigh Technology 7,562 Heywood Williams Group 4,507 Premier Oil 7,380 Hansard Global 4,080 Johnson Service Group 7,263 Robert Wiseman Dairies 4,008 Sondex 6,474 Unite Group 3,934 Computacenter 6,404 Other purchases 90,587 Other sales 159,525

Total for the year 238,866 Total for the year 375,084

13 NOTES TO THE ACCOUNTS

1 ACCOUNTING POLICIES (a) The accounts have been prepared on the historical cost basis, as modified by the revaluation of investments and in accordance with the Statement of Recommended Practice for Authorised Funds (SORP) issued by the Investment Management Association in December 2005. (b) Dividends on equities are recognised when the security is quoted ex-dividend. Dividend income is shown excluding any related tax credit. Interest receivable and underwriting commission are accounted for on an accruals basis. (c) The ordinary element of scrip dividends is treated as income and forms part of the distribution. (d) Special dividends or share buy-backs are treated as income or capital depending on the facts of each particular case. (e) Management expenses are charged against the income of the Fund. (f) In accordance with the SORP the investments of the Fund have been valued at a fair value which is represented by the bid price as at close of business on 31 December 2007. Suspended securities are initially valued at the suspension price but are subject to constant review. (g) Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events have occurred at that date that will result in an obligation to pay less or receive more tax. Deferred tax assets are recognised only to the extent that the manager considers that it is more likely than not that there will be taxable profits from which the underlying timing differences can be deducted. (h) The Fund is not more than 60% invested in qualifying investments (as defined by section 468L of the Income and Corporation Taxes Act 1988) and will pay a dividend distribution.

2 NET GAINS/(LOSSES) ON INVESTMENTS 2007 2006 £’000 £’000 The net (losses)/gains on investments during the year comprise: Non-derivative securities (88,043) 172,806

3 INCOME 2007 2006 £’000 £’000 UK dividends 17,460 19,479 Other investment income 698 532 Bank interest 689 932 Underwriting commission 13 26 Total income 18,860 20,969

14 NOTES TO THE ACCOUNTS

4 EXPENSES 2007 2006 £’000 £’000 Payable to the Manager or associate of the Manager: Manager’s periodic charge 6,417 6,331 Payable to the Trustee or associate of the Trustee: Trustee’s fees 82 82 Other expenses: FSA fee — 1 Audit fee 8 6 Safe custody fees 37 39 Registration fees 5 14 50 60 Total expenses 6,549 6,473

The Manager’s periodic charge is 0.8% per annum of the valuation of the Fund’s property which accrues and is paid monthly in arrears out of income. Further details of the management charges, Trustee’s fees and other expenses of the Fund are available in the Fund’s Prospectus.

5 TAXATION 2007 2006 (a) Analysis of charge in period: £’000 £’000 Total current tax (note 5(b)) — — Total deferred tax — — — —

(b) Factors affecting current tax charge for the period: The tax assessed for the period is lower than the standard rate of corporation tax in the UK for an authorised unit trust (20%). The differences are explained below: Net income before taxation 12,310 14,496 Corporation tax at 20% 2,462 2,899 Effects of: Non taxable UK dividends (3,492) (3,896) Tax losses for which no relief has been taken 1,030 997 (2,462) (2,899) Current tax charge for the period (Note 5(a)) — —

At the balance sheet date, the Fund had excess management expenses of £26,818,000 (2006: £21,667,000). It is unlikely that the Fund will generate sufﬁcient taxable proﬁts in the future to utilise these expenses and therefore, no deferred tax asset has been recognised. The deferred tax amount, being 20% of the excess management expenses, equates to £5,363,600 (2006: £4,333,400).

15 NOTES TO THE ACCOUNTS

6 FINANCE COSTS Distributions and interest The distributions take account of income received on the creation of units and income deducted on the cancellation of units, and comprise:

2007 2006 £’000 £’000 Interim 6,912 7,781 Final 4,794 6,212 11,706 13,993 Add: Income deducted on cancellation of units 617 550 Less: Income received on creation of units (13) (47) Finance costs: distributions 12,310 14,496 Finance costs: interest 1 — Total ﬁnance costs 12,311 14,496

Details of the distribution per unit are set out in the table on page 18.

7 DEBTORS 2007 2006 £’000 £’000 Amounts receivable for creation of units — 106 Accrued income 1,349 1,349 Total debtors 1,349 1,455

8 CREDITORS 2007 2006 £’000 £’000 Amounts payable for cancellation of units 4,275 13 Purchases awaiting settlement 156 — Accrued management fee 429 555 Other accrued expenses 22 25 Stamp duty reserve tax 1 9 Total creditors 4,883 602

9 NET ASSET VALUE PER UNIT Net asset value per unit is based on net assets of £610,039,000 (2006: £846,801,000) and on 6,164,675.529 accumulation units (2006: 7,632,918.720), being the units in issue at the year end.

10 CONTINGENT LIABILITIES 2007 2006 £’000 £’000 Placing and underwriting commitments due in one month — 1,234

16 NOTES TO THE ACCOUNTS

11 FINANCIAL INSTRUMENTS In pursuing its investment objectives, set out on the inside front cover, the Fund holds a number of financial instruments. These comprise: . Equity shares which are held in accordance with the Fund’s investment objectives and policies; . Cash, liquid resources and short-term debtors and creditors that arise directly from its operations; and . Unitholders’ funds which represent investors’ monies which are invested on their behalf. Under current tax legislation, authorised unit trusts are not permitted to trade in financial instruments. Accordingly it is, and has been throughout the year under review, the Fund’s policy that no trading in financial instruments shall be undertaken. The main risks arising from the Fund’s financial instruments are market price, liquidity and credit risks. The Manager reviews policies for managing each of these risks and they are summarised below. These policies have remained unchanged since the beginning of the year to which these financial statements relate.

MARKET PRICE RISK Market risk arises mainly from uncertainty about future prices of ﬁnancial instruments held. It represents the potential loss the Fund might suffer through holding market positions in the face of price movements.

LIQUIDITY RISK The Fund’s assets comprise mainly securities which can be readily sold. The main liability of the Fund is the redemption of any units that investors wish to sell.

CREDIT RISK Certain transactions in securities that the Fund enters into expose it to the risk that the counter-party will not deliver the investment (purchase) or cash (sale) after the Fund has fulﬁlled its responsibilities. The Fund only buys and sells investments through brokers which have been approved by the Manager as an acceptable counter-party. These are reviewed on an ongoing basis.

Interest rate risk profile of financial assets and financial liabilities The interest rate profile of the Fund’s financial assets and liabilities at 31 December 2007 was:

2007 2006 £’000 £’000 Financial Assets Floating rate ﬁnancial assets 26,723 34,028 Financial assets on which no interest is paid 588,199 813,375 614,922 847,403

Financial Liabilities Financial liabilities on which no interest is paid 614,922 847,403 614,922 847,403

The floating rate financial assets comprise bank deposits that bear interest linked to bank base rate which, at 31 December 2007, was 5.5% (2006: 5.0%). Financial assets on which no interest is paid comprise equity shares which have no maturity date and short-term debtors. Financial liabilities on which no interest is paid comprise the Fund’s liability to redeem all units plus short-term creditors. Maturity of financial liabilities The financial liabilities of the Fund, as at 31 December 2007, are payable either within one year or on demand.

Fair values of ﬁnancial assets and liabilities There is no material difference between the carrying value and the fair values of the ﬁnancial assets and liabilities disclosed in the balance sheet.

17 NOTES TO THE ACCOUNTS

12 RELATED PARTY TRANSACTIONS Management fees paid to Aberforth Unit Trust Managers Limited are shown in note 4 and details of units created and cancelled are shown in the Statement of Movements in Unitholders’ Funds. The balance due to Aberforth Unit Trust Managers Limited at the year end in respect of these transactions was £4,704,000 (31 December 2006: £462,000). Trustee fees paid are shown in note 4. The balance due to The Royal Bank of Scotland plc at the year end in respect of these fees was £6,000 (31 December 2006: £7,000).

13 PORTFOLIO TRANSACTION COSTS 31 December 31 December 2007 2006 £’000 £’000 Analysis of total purchase costs Purchases in period before transaction costs 236,740 263,453 Commissions 1,078 1,176 Taxes 1,048 1,181 Total purchase costs 2,126 2,357 Gross purchases total 238,866 265,810

Analysis of total sale costs Gross sales in year before transaction costs 376,676 350,803 Commissions (1,592) (1,233) Total sale costs (1,592) (1,233) Total sales net of transaction costs 375,084 349,570

DISTRIBUTION TABLE For the period 1 July 2007 to 31 December 2007

Group 1: Units purchased prior to 1 July 2007 Group 2: Units purchased on or after 1 July 2007 Net Distribution Distribution Income EqualisationÀ Accumulated Accumulated 2007 2007 2007 2006 Accumulation units Group 1 77.77080p — 77.77080p 81.37800p Group 2 32.40649p 45.36431p 77.77080p 81.37800p

À Equalisation applies only to units purchased during the distribution period (Group 2 units). It is the average amount of income included in the purchase of all Group 2 units and is refunded to holders of these units as a return of capital. Being capital, it is not liable to income tax but must be deducted from the cost of units for capital gains tax purposes.

18 RESPONSIBILITY STATEMENTS

STATEMENT OF THE MANAGER’S RESPONSIBILITIES IN RELATION TO THE REPORT AND ACCOUNTS OF THE SCHEME The Financial Services Authority’s Collective Investment Schemes Sourcebook as amended (the Regulations) require the Manager to prepare accounts for each annual accounting period which give a true and fair view of the ﬁnancial affairs of the scheme and of its income/expenditure for the period. In preparing the accounts the Manager is required to: . select suitable accounting policies and then apply them consistently; . comply with the disclosure requirements of the Statement of Recommended Practice relating to Authorised Funds; . follow United Kingdom accounting standards; and . keep proper accounting records which enable it to demonstrate that the accounts as prepared comply with the above requirements. The Manager is responsible for the management of the scheme in accordance with its trust deed, prospectus and the Regulations.

STATEMENT OF THE TRUSTEE’S RESPONSIBILITIES AND REPORT OF THE TRUSTEE TO THE UNITHOLDERS OF ABERFORTH UK SMALL COMPANIES FUND FOR THE YEAR ENDED 31 DECEMBER 2007 The trustee is responsible for the safekeeping of all the property of the scheme (other than tangible moveable property) which is entrusted to it and for the collection of income that arises from that property. It is the duty of the trustee to take reasonable care to ensure that the scheme is managed in accordance with the Financial Services Authority’s Collective Investment Scheme Sourcebook (COLL), as amended, the scheme’s trust deed and prospectus, in relation to the pricing of, and dealings in, units in the scheme; the application of income of the scheme; and the investment and borrowing powers of the scheme. Having carried out such procedures as we considered necessary to discharge our responsibilities as trustee of the scheme, it is our opinion, based on the information available to us and the explanations provided that, in all material respects, the manager: (i) has carried out the issue, sale, redemption and cancellation, and calculation of the price of the scheme’s units and the application of the scheme’s income in accordance with COLL, the trust deed and prospectus, and (ii) has observed the investment and borrowing powers and restrictions applicable to the scheme.

The Royal Bank of Scotland plc Trustee & Depositary Services The Broadstone 50 South Gyle Crescent Edinburgh EH12 9UZ 24 January 2008

19 INDEPENDENT AUDITORS’ REPORT

TO THE UNITHOLDERS OF ABERFORTH UK SMALL COMPANIES FUND We have audited the fund’s financial statements for the year ended 31 December 2007 which comprise the Statement of Total Return, Statement of Change in Unitholders’ Net Assets, Portfolio Statement, Balance Sheet, Summary of Material Portfolio Changes, the Notes To The Accounts 1 to 13 and the Distribution Table. These financial statements have been prepared under the accounting policies set out therein. This report is made solely to the unitholders of the fund, as a body, pursuant to Paragraph 4.5.12 of the rules of the Collective Investment Schemes Sourcebook of the Financial Services Authority. Our audit work has been undertaken so that we might state to the unitholders 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 fund and the unitholders as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Manager, Trustee and Auditors The manager’s responsibilities for preparing the Annual Report and the financial statements in accordance with the rules of the Collective Investment Schemes Sourcebook of the Financial Services Authority, the Trust Deed, and Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of Managers Responsibilities in relation to the financial statements The trustee is required to take reasonable care to ensure compliance by manager with all relevant requirements. Our responsibility is to audit the financial statements in accordance with UK 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 are properly prepared in accordance with the Statement of Recommended Practice relating to Authorised Funds, the rules of the Collective Investment Schemes Sourcebook of the Financial Services Authority, and the Trust Deed. We also report to you whether, in our opinion, the Report of the Manager is consistent with the financial statements, whether the manager has not kept proper accounting records for the fund or whether the financial statements are not in agreement with those records, and whether we have received all the information and explanations which, to the best of our knowledge and belief, we require for our audit. We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. This other information comprises only the Investment Objective, Investment Record, Manager’s Report, Performance Record and the Trustee’s Report. We consider the implications for our report if we become aware of any apparent misstatements 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. It also includes an assessment of the significant estimates and judgements made by the manager 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 are free from material misstatement, 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. Opinion In our opinion: . the financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the financial position of the fund as at 31 December 2007 and of the net income and the net losses on the scheme property of the fund for the year then ended; . the financial statements have been properly prepared in accordance with the Statement of Recommended Practice relating to Authorised Funds, the rules of the Collective Investment Schemes Sourcebook of the Financial Services Authority and the Trust Deed; . the Manager’s Report is consistent with the financial statements; . there is nothing to indicate that proper accounting records have not been kept or that the financial statements are not in agreement with those records; and . we have received all the information and explanations which, to the best of our knowledge and belief, we require for our audit.

Ernst & Young LLP Registered Auditor Edinburgh 24 January 2008 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 UK Small Companies Fund 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.

20 MANAGEMENT AND ADMINISTRATION

MANAGER Aberforth Unit Trust Managers Limited 14 Melville Street Edinburgh EH3 7NS Telephone – Dealing: 0845 6080940 Enquiries: 0131 220 0733 Email: [email protected] Website: www.aberforth.co.uk