ABERDEEN ASIAN SMALLER COMPANIES INVESTMENT TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 JULY 2008

1.  CHAIRMAN'S STATEMENT

Results and Dividend

During the year to 31 July 2008, the Company's share price and diluted net asset value fell 16.7% and 13.2% respectively, which compares with declines of 24.1% and 11.6% in the MSCI AC Asia Pacific ex Japan Small Cap index and the MSCI Asia Pacific ex Japan index respectively. Although the smaller companies index significantly under-performed the large companies index during the review period, your Company significantly outperformed the smaller cap index, a reflection of the quality and strength of the companies in which it invests. Since our year end until the end of September the share price and net asset value have fallen further, by 11.1% and 6.8%, but have done much better than the indices which were down 17.8% and 13.0%.

When I reported to you in October 2007 I cautioned that the future level of any special dividend payable by the Company would depend upon the receipt of special dividends from the companies in the portfolio. During the year we have seen a marked reduction in special dividend receipts although this has been tempered by a general increase in the ordinary dividends received. As a result, the Company has today declared a first and final dividend of 4.0p together with a special dividend of 1.0p, representing an increase in the level of the final dividend of 15.9%. The 18.7% reduction in the total dividend paid reflects the sharp reduction in special dividends received in the year. If approved by shareholders at the Annual General Meeting of the Company, the dividends will be paid on 28 November 2008 to shareholders on the register on 17 October 2008.

Overview

It was clearly a very difficult year for your Company. During Autumn last year, it appeared that Asian markets would be spared the effects of the mortgage-led credit implosion that had begun towards the end of July. However, reality soon caught up and from November onwards, regional markets tumbled. Rapidly rising commodity prices, particularly that of oil, lead to inflation fears, since many Asian economies are importers of resources, and were thus seeing significant deteriorations in their terms of trade. Political uncertainties, notably in Malaysia and Thailand, where incumbent governments were besieged with no-confidence votes, also weighed on sentiment. 

Your Manager Hugh Young and his team at Aberdeen Asset Management Asia in Singapore, however, steered the Company well during the past year's uncertainties. This was due to their well-entrenched philosophy of investing in companies that offer margins of safety, good long-term growth prospects, and have sound management teams and strong balance sheets. 

Your portfolio trades on an average price-to-earnings multiple of 12x based on 2008 earnings, very reasonable in the context of Asia's excellent long-term growth prospects and the strength of the balance sheets of the companies.

Your Manager continues to be cautious about Chinese companies, preferring to gain exposure to the growth of the Chinese economy through Hong Kong companies, where transparency and accounting standards are more stringent than those of the stock exchanges in Shanghai and Shenzhen and, even more importantly, where managements have long experience of managing publicly listed companies through economic cycles. 

The Company has no presence in Australian companies as your Manager believes Australian smaller companies to be vulnerable to earnings disappointments given their balance sheets, which are generally more leveraged than elsewhere in Asia. The Company is also absent Taiwan having found no companies of sufficient quality.

Benchmark

I advised shareholders in the Half Yearly Report that the Board, in conjunction with the Manager, was reviewing a new index, the MSCI Asia Pac Free ex. Japan Small Cap Index (currency adjusted) (the "Small Cap Index"), with a view to deciding whether to adopt it as a Benchmark. Following this review, the Board and Manager remain of the opinion that there is no suitable index to use as a Benchmark for the Company. However, the performance of the new Small Cap Index will be included for information only in future Annual Reports and will also be used for Board reporting along with the MSCI AC Asia Pacific Free ex Japan Index (currency adjusted) which is a general regional index. Shareholders should remember that, due to the management style, it is likely that there will be periods when the Company's performance will be quite unlike that of either index.

Share Capital and Gearing

During the year, your Company purchased in the market for treasury 1,022,011 Ordinary shares. We also took the opportunity to purchase for cancellation 282,000 Warrants in order to reduce future dilution.  

The Company has continued to use gearing during the year and was approximately 2.6% geared at the year end (on a net basis) compared with 1.2% at the start of the year. During the year the Company repaid its facility with AIB and drew down the equivalent of £4.2 million under a new multi currency committed facility with Barclays Bank. Subsequent to the year end a further £5.4 million was drawn down under the facility. The Board will continue to monitor the Company's gearing on a regular basis under advice from the Manager. 

Annual General Meeting

The Annual General Meeting is scheduled to be held on 26 November 2008 at 12.00 noon. In addition to the usual ordinary business, as special business the Board is seeking to renew its existing authority to issue new shares for cash without pre-emption rules applying and to renew its authority to buy back shares and either hold them in treasury for future resale (at asset value or above) or cancel them. The Directors are also proposing to adopt new articles of association which will take account of further changes as a result of the implementation of the Companies Act 2006. Amongst other things, these changes will enable the Board to approve at its discretion potential conflicts that may arise between the Directors and the Company on a case by case basis. 

Outlook

The outlook for the next twelve months is very uncertain. Asian stock markets have fallen sharply and economic growth forecasts have been trimmed, albeit Asia will remain the world's fastest growing region.

At the time of writing, the US financial industry bailout package had just been passed although it was far from clear that this would prevent further contagion. 

That said, the recent falls in the oil price and those of other commodities have taken the pressure off many Asian central banks, at least in the short term, to tighten monetary conditions. Balance sheets at both a company and country level are strong, providing a stable backdrop for good economic growth in the next 3-5 years.

As for your portfolio, where balance sheets are especially strong your Manager believes that the current downturn will provide the companies in which your Company invests with opportunities to strengthen their competitive positions. The long term Asian growth story remains fundamentally very much in place.

Nigel Cayzer

Chairman

8 October 2008

2.  MANAGER'S REVIEW

The year under review proved a very challenging one for Asian stock markets, as the financial crisis that began in the US spread to all parts of the world. Although the problems in the mortgage-backed securities markets surfaced in late July, it took a further three months for Asian markets to be impacted. Hopes that Asian economies could 'decouple' from their Western counterparts had underpinned markets but as the year progressed, it became increasingly clear that regional markets and economies were still sensitive to events in the West. Concerns over weakening global economic prospects heightened investors' nervousness which, combined with fears of a resurgence of inflation, led to a widespread sell-off. Interventions by US and European central banks staved off a total loss of confidence in credit markets, allowing many major global financial institutions to raise much-needed capital. In Asia, China and India lead the falls in equity markets, these having been the ones which had run up the most in 2006 and 2007.

Few Asian companies, small or otherwise, had exposure to collateralised debt obligations, having invested in the safer sovereign bond markets. But this did not stop the turmoil from causing a sharp sell off in Asian equities, particularly the less liquid counters. Consequently, smaller companies, which had out-performed their larger peers in the latter stages of the bull market, under-performed significantly during the review period. The MSCI AC Asia Pacific ex Japan Small Cap Index lost almost 22% in sterling terms, compared to the MSCI AC Asia Pacific ex Japan Index's decline of around 9%. 

Economic growth held up well for the most part, with most Asian economies expanding steadily. But momentum has eased considerably in recent months as rising input costs squeezed profit margins, while higher food and fuel costs dampened private consumption. Export-reliant economies, such as China, Hong Kong, Singapore and Taiwan have downgraded their 2008 economic forecasts. More domestically driven economies such as India, Korea and the Philippines followed suit, signalling a deeper slowdown in the region. 

Decelerating economic growth, coupled with the return of inflation, has complicated fiscal and monetary policy, especially in Asia, where food and fuel account for a higher proportion of spending. So far, policy responses have been mixed. Some countries chose to maintain expensive subsidies; others, such as India and the Philippines tightened monetary conditions; while Singapore allowed its currency to appreciate to counter price increases. But real interest rates across Asia remain negative in aggregate.

Portfolio review

Historically, your Company has used the MSCI AC Asia Pacific ex Japan index for performance comparison. During the review period, on a total return basis the Company lagged this index by 4% in sterling terms. But measured against the MSCI AC Asia Pacific ex Japan Small Cap Index, the Company outperformed by more than 9% (total return basis). The underperformance compared with the AC Asia Pacific ex Japan index was due to negative contributions from stock selection and currency, which nullified a positive gain from asset allocation.  

At the stock level, the main disappointments were from the Company's holdings in Indonesia, Thailand and Korea. In Indonesia, consumer-related companies Dynaplast and Mustika Ratu, and Bank NISP were the main laggards, with each declining over 25%. Dynaplast (-28.1%) was dragged down by its weak first-half earnings despite signs of recovery in the second quarter. Higher material costs squeezed margins, as the higher oil price had driven up the price of plastics, the main input for the company's packaging products. Doubts about Mustika Ratu's expansion plans through mergers and acquisitions undermined the stock (-25.8%) during the review period, while a weakening domestic banking environment pushed Bank NISP's share price down 26.3%. The bank's management has adopted a more conservative tone and is likely to moderate its pace of expansion. 

In Thailand, transhipment operator Regional Container Lines slumped 58.1%. We have trimmed the position in the stock, given the general weakness in shipping stocks and profits that were affected by higher bunker charges and softer freight rates. Tisco Bank (-43.7%) fell despite reporting decent second quarter results, as fears that the company's bid for loss-making, thinly-capitalised Bank Thai would succeed weighed on the stock. Although Tisco subsequently withdrew from the bid, worries remain over narrowing loan margins. Aeon Thana Sinsap (-38.5%), a holding which we introduced during the second-half of the reporting period, faced concerns over rising bad loans and thinner margins amid lacklustre economic growth. We had initiated a position in the consumer finance company to leverage our good understanding of Aeon Group companies (Hong Kong's Aeon Credit Service operates similarly to the Thai business) and attractive growth opportunities, particularly outside the capital Bangkok. 

In Korea, the Company's bank holdings, Jeonbuk (-33.6%) and Daegu (-32.7%), faced an increasingly challenging operating environment, but their first-half results were in line with expectations. Jeonbuk benefited from one-off gains, while Daegu was boosted by an improvement in loan growth. 

The underperformance of the holdings in India was largely attributable to Aventis Pharma (-40.0%) and Jammu and Kashmir Bank (-27.3%). Aventis was affected by weak export demand and some minor production issues, while poor sentiment relating to slowing economic growth and higher interest rates affected Jammu and Kashmir Bank.

On the positive side, strong performances from the Company's holdings in Singapore and Hong Kong contributed to relative returns. Retail group Robinson & Company, and Straits Trading, an investment holding company with operations in property, hospitality and mining, surged 73.5% and 64.3% respectively, on the back of bids for the companies. We sold Robinson & Co after the Al-Futtain Group improved its offer, and completed the sale of Straits Trading after accepting the tender offer from the families of the late Tan Chin Nam.

Aeon Credit (+26.3%), Aeon Stores (+15.6%) and Hong Kong Economic Times (+10.8%), all of which we topped up during the review period, were among the Company's best performers in Hong Kong. Aeon Credit's business remains solid; Aeon Stores is benefiting from its successful expansion into China; while Hong Kong Economic Times continues to grow its market share and improve circulation numbers by introducing niche products, despite operating in a saturated market. 

Other holdings that did well included Chevron Lubricants (+52.8%), the market leader in Sri Lanka which saw sustained strength in its business; brewer Multi Bintang Indonesia (+41.9%), a defensive stock that provides an attractive yield of 7.5%; Malaysian plantation company United Malacca (+40.1%), a beneficiary of strong crude oil prices; Holcim Indonesia (+19.4%), which performed well owing to robust cement sales; and LPI Capital (+17.4%), which gained from healthy results and a strong balance sheet.

On the asset allocation front, the Company's relative performance was helped by the overweight in Indonesia and the underweight in Korea. Indonesia was the only market that bucked the regional downtrend, with shares there benefiting from the spike in commodity prices. Korean equities struggled, due in part to renewed credit market woes and economic uncertainty, but also to the political protests sparked by President Lee Myung-Bak's decision to resume US beef imports. 

The overweight positions in Hong Kong and Singapore also boosted relative returns. Hong Kong stocks, which had had a feverish run-up at the start of the reporting period when China announced moves to widen mainland investment into the territory, were subsequently pulled lower by the sharp falls in Chinese shares. In Singapore, easing demand for exports and the impact of the turmoil in the financial and real estate sectors undermined market sentiment. We have, however, maintained overweight positions for some time now, as the two markets offer high-quality, well-run companies with superior earnings track records and standards of corporate governance.

The Company's lack of exposure to weak markets such as Australia and China had a positive impact on relative performance, but the strength of the Australian dollar and renminbi ate into relative gains.

In portfolio activity, the more significant transactions for the review period included the introduction of Holcim Indonesia, YNH Property and Shangri-La Hotels Malaysia. Holcim Indonesia, a subsidiary of Swiss cement-producer Holcim, offers exposure to domestic infrastructure spending; Malaysian-listed property developer YNH Property, which evolved from a plantation company, has successfully expanded into Ipoh and Kuala Lumpur and continues to benefit from cheap land acquisitions; and hotel chain Shangri-La, which continues to see improvements in its business prospects. We also reinitiated a position in Hong Kong satellite service provider Asia Satellite, which has a strong balance sheet and offers steady earnings growth.

In addition to the purchases mentioned above, we also added to holdings in India's Godrej Consumer Products and Philippine fast-food operator Jollibee Foods, both of which have successfully created niche positions and solid brand names in their respective domestic markets, despite facing intense competition from international companies. We also increased our exposure to Hong Kong-based apparel retailer Giordano International, having seen an improvement in its operations in several key markets. Other less prominent transactions included top-slicing Eastern Water Resources, given the change in its business model, as well as the trimming of positions in Indonesian plantation company MP Evans and conglomerate Distilleries Company of Sri Lanka after their strong runs.

Outlook

General market volatility is expected for some time, as the fallout from the credit crisis and deteriorating economic conditions continues to weigh on sentiment. With signs of slowing global growth spreading across Asia, the region's pace of expansion will likely ease, while inflation will remain elevated despite the recent fall in commodity prices. Political risks have risen too, as the strain of increasing living costs feed a growing discontent.

With markets broadly at levels seen a year ago, consolidation, which had been anticipated for some time, is underway. Although we expect corporate earnings to deteriorate further this year and next owing to declining demand and margin pressure, the Company's holdings should weather these difficulties, given their strong balance sheets and competitive positions. 

As ever, we remain committed to investing in companies with robust business models, sound finances, and management teams that have a high regard for minority shareholders. We are confident that our predisposition towards such companies will continue to deliver steady results over the long term. 

Note: All figures mentioned above are based on one-year total return in sterling terms.

Aberdeen Asset Management Asia Limited

8 October 2008

  3.  RESULTS

Performance (total return)

Dividends

  4.  BUSINESS REVIEW

Status

The Company is registered as a public limited company, is an investment company as defined by Section 833 of the Companies Act 2006, and is a member of the Association of Investment Companies.

The Company has been approved by HM Revenue & Customs as an investment trust for the purposes of Section 842 of the Income and Corporation Taxes Act 1988 for the year ended 31 July 2007. The Directors are of the opinion that the Company has conducted its affairs for the year ended 31 July 2008 so as to be able to continue to obtain approval as an investment trust under Section 842 of the Income and Corporation Taxes Act 1988 for that year, although approval for that year would be subject to review were there to be an enquiry under the Corporate Tax Self Assessment regime.

The Company intends to manage its affairs so as to be a qualifying investment for inclusion in the stocks and shares component of an Individual Savings Account ("ISA") and it is the Directors' intention that the Company should continue to be a qualifying trust.

A review of the Company's activities is given below and in the Chairman's Statement and the Manager's Review. This includes a review of the business of the Company and its principal activities, likely future developments of the business, recommended dividends and details of the issue of new shares during the year by the Company. The major risks associated with the Company are detailed below and in Note 19 to the Financial Statements. Further details of the risk management objectives and policies are provided in the Annual Report. The Key Performance Indicators for the Company, including NAV performance and share price performance, are detailed under Results above.

The current Directors, Messrs N K Cayzer, A S Kemp, M J Gilbert (alternate H Young), C S Maude and Miss H Fukuda were the only Directors who served during the year.  

The Company does not make political donations and has not made any donations for charitable purposes during the year and in common with most investment trusts, the Company has no employees. Directors' & Officers' liability insurance cover has been maintained throughout the year at the expense of the Company.

Investment Objective

The investment objective of the Company is to maximise total return to Shareholders over the long term from a portfolio of smaller quoted companies (with a market capitalisation of up to approximately US$750m at the time of investment) in the economies of Asia and Australasia, excluding Japan.  

Investment Policy

The Company's assets are invested in a diversified portfolio of securities in quoted smaller companies spread across a range of industries and economies in the investment region including Australia, Bangladesh, China, Hong Kong, India, Indonesia, Korea, Malaysia, New Zealand, Pakistan, The Philippines, Singapore, Sri Lanka, Taiwan and Thailand together with such other countries in Asia as the Directors may from time to time determine, (collectively, the "Investment Region").

The Company's portfolio comprises securities (substantially in the form of equities or equity related securities such as convertible securities and warrants) of companies with market capitalisations of up to approximately US$750 million at the time that the investment is made.

Investments may also be made through collective investment schemes and in companies traded on stock markets outside the Investment Region provided that over 75 per cent. of their consolidated revenue is earned from trading in the Investment Region or they hold more than 75 per cent. of their consolidated net assets in the Investment Region.

Achieving the Investment Policy

The Directors are responsible for determining the investment policy and the investment objective of the Company. Day to day management of the Company's assets has been delegated to AAM Asia. The Manager invests in a diversified range of companies throughout the Investment Region in accordance with the investment policy. The Manager follows a bottom-up investment process based on a disciplined evaluation of companies through direct visits by its fund managers. Stock selection is the major source of added value. No stock is bought without the fund managers having first met management. The Manager estimates a company's worth in two stages, quality then price. Quality is defined by reference to management, business focus, the balance sheet and corporate governance. Price is calculated by reference to key financial ratios, the market, the peer group and business prospects. Top-down investment factors are secondary in the Manager's portfolio construction, with diversification rather than formal controls guiding stock and sector weights. Except for the maximum market capitalisation limit little regard is paid to market capitalisation. The Manager is authorised to invest up to 10% of the Company's gross assets in any single stock although circumstances may occasionally arise when it may be in shareholders' interests to make an investment that exceeds this level.

A detailed description of the investment process and risk controls employed by the Manager is disclosed in the Annual Report. At the year end the Company's portfolio consisted of 65 holdings.

The Board is responsible for determining the gearing strategy for the Company. Gearing is used selectively to leverage the Company's portfolio in order to enhance returns where and to the extent this is considered appropriate to do so. At the year end there was gearing of 2.6% which compares with a maximum limit of 25% although in the last 10 years gearing has been within the approximate range of 0% to 16%. Borrowings are short term and particular care is taken to ensure that any bank covenants permit maximum flexibility of investment policy.

In addition, it is the investment policy of the Company to invest no more than 15% of its gross assets in other listed investment companies (including listed investment trusts). The Company currently does not have any investments in other investment companies.

Benchmark

There is no meaningful smaller companies index against which to compare the performance of the Company. Accordingly, the Manager utilises two general regional indices, the MSCI AC Asia Pacific ex Japan (currency adjusted) and the MSCI AC Asia Pacific Small Cap ex Japan (currency adjusted), as well as peer group comparisons for Board reporting. It is likely that performance will diverge, possibly quite dramatically in either direction, from these or any other indices.

The Manager undertakes substantial due diligence before initiating any investment, including company visits, to assure the quality of any prospective investment. The Manager seeks to minimise risk by using in depth research and does not see divergence from a benchmark as risk.

Capital Structure

At 31 July 2008 the Company had a capital structure comprising 32,651,144 Ordinary shares (of which 31,629,133 Ordinary shares are in issue and 1,022,011 Ordinary shares are held in treasury) and 4,495,356 Warrants to subscribe for Ordinary shares at 100p. The Company also had bank borrowings in US Dollars amounting to the equivalent of £4.2 million which rank for repayment ahead of any capital repayment to Shareholders.

Total Assets and Net Asset Value

The Company had total assets of £114.0 million and a basic net asset value of 347.24p per share at 31 July 2008.

Duration

The Company does not have a fixed life.

Principal Risk Factors

Investment in Far East equities or those of companies that derive significant revenue or profit from the Far East involves a greater degree of risk than that usually associated with investment in the securities in major securities markets. The securities that the Company owns may be considered speculative because of this higher degree of risk. Further details of the risks attaching to the Company's shares are provided in note 19 to the financial statements. These risks include:

Ordinary Shares

The market price and the realisable value of the Ordinary shares, as well as being affected by their underlying net asset value, also take into account supply and demand, market conditions and general investor sentiment. As such, the market value and the realisable value of the Ordinary shares may fluctuate and vary considerably from their net asset value and investors may not be able to realise the full value of their original investment. 

Dividends

The Company will only pay dividends on the Ordinary shares to the extent that it has profits available for that purpose. The ability of the Company to pay any dividends in respect of the Ordinary shares will depend primarily on the level of income received from its investments. Accordingly, the amount of the dividends paid to Shareholders may fluctuate.

Borrowings

Whilst the use of borrowings should enhance the total return on the Ordinary shares where the return on the Company's underlying assets is rising and exceeds the cost of borrowing, it will have the opposite effect where the underlying return is less than the cost of borrowing, further reducing the total return on the Ordinary shares. The Company currently utilises gearing in the form of bank borrowings (see 'Capital Structure' above and note 11).

Market Risks

The Company's investments are subject to normal market fluctuations and the risks inherent in the purchase, holding or selling of securities, and there can be no assurance that appreciation in the value of those investments will occur. Investment in emerging securities markets in the Asia Pacific region involves a greater degree of risk than that usually associated with investment in more developed securities markets; including the risk of social, economic and political instability which may have an adverse effect on economic reforms or restrict investment opportunities.

Foreign Exchange Risks

The Company accounts for its activities and reports its results in sterling while investments are made and realised in other currencies. It is not the Company's present intention to engage in currency hedging, although it reserves the right to do so. Accordingly, the movement of exchange rates between sterling and the other currencies in which the Company's investments are denominated or its borrowings are drawn down may have a material effect, unfavourable as well as favourable, on the returns otherwise experienced on the investments made by the Company.

Taxation and Exchange Controls

Any change in the Company's tax status or in taxation legislation (including the tax treatment of dividends or other investment income received by the Company) or failure to satisfy the conditions of section 842 of the Income and Corporation Taxes Act 1988 could affect the value of the investments held by the Company, affect the Company's ability to provide returns to Shareholders or alter the post-tax returns to Shareholders.

The Company may purchase investments that may be subject to exchange controls or withholding taxes in various jurisdictions. In the event that exchange controls or withholding taxes are imposed with respect to any of the Company's investments, the effect will generally be to reduce the income received by the Company on its investments and the capital value of the affected investments.

Management Agreement

The Company has an agreement with AAM Asia for the provision of management services, details of which are shown in note 3 to the financial statements.

The Directors review the terms of the investment management agreement on a regular basis and have confirmed that, due to the long-term relative performance, investment skills, experience and commitment of the investment management team, in their opinion the continuing appointment of AAM Asia is in the interests of Shareholders as a whole.

5.  STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and Accounts and the financial statements, in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with UK Accounting Standards.

The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 1985 and Companies Act 2006, where applicable. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Statement of Corporate Governance that comply with that law and those regulations.

The financial statements are published on www.asian-smaller.co.uk which is a website maintained by the Company's Manager. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

For Aberdeen Asian Smaller Companies Investment Trust PLC

Nigel Cayzer

Chairman

8 October 2008

  6.   INVESTMENT PORTFOLIO

Ten Largest Investments

As at 31 July 2008