Artemis UK Smaller Companies Fund

Artemis UK Smaller Companies Fund Manager s Report and Financial Statements For the year ended 31 December 2009 Fig.1 the tracks of the PROFIT BIRD

Information about the Artemis UK Smaller Companies Fund Company profile Artemis Investment Management Limited was established by Mark Tyndall, John Dodd, Derek Stuart and Lindsay Whitelaw in 1997 as a dedicated active investment management house, specialising in growing the money of retail investors. They wanted to create a company that offered investors superior returns and service, as well as being a progressive and vibrant place to work for its employees. Since the launch of the first funds in 1998, the company s success has meant it now manages an asset base of some 9.9bn* and has become one of the leading fund management groups in the UK. Clients investments are spread across a range of unit trusts, an investment trust, hedge fund products, a venture capital trust, an international SICAV as well as segregated and pooled institutional portfolios. The founding partners have been joined by thirteen other dedicated fund managers who share the same flair and enthusiasm for fund management. The Artemis philosophy requires our fund managers to invest in Artemis funds. This means that our managers interests are directly aligned with those of our investors. Fund status Artemis UK Smaller Companies Fund was constituted by a Trust Deed dated 17 March 1998 and is an authorised unit trust scheme under the Financial Services and Markets Act 2000. The fund belongs to the category of UCITS schemes as defined in the Collective Investment Schemes Sourcebook of the Financial Services Authority. * Source: Internal as at 31 January 2010. Artemis UK Smaller Companies Fund 3

Information about the Artemis UK Smaller Companies Fund (continued) Investment objective The objective of the fund is to achieve long term capital growth. The emphasis of the fund will be investment in smaller companies listed, quoted and/or traded in the UK and in smaller companies which are headquartered or have a significant part of their activities in the UK which are quoted on a regulated market outside the UK. Investment policy The manager actively manages the portfolio in order to achieve the objective and will not be restricted in respect of investments by industrial sectors. The securities of companies listed, quoted and/or traded in the UK but domiciled elsewhere and the securities of companies traded on PLUS may be included in the portfolio. The fund may also invest in other transferable securities, units of collective investment schemes, money market instruments, warrants, cash and near cash, derivatives and forward transactions and other investments to the extent that each is permitted by the regulations. Buying and selling Units may be bought and sold by contacting the manager by telephone at the address on page 5 or via the website. Valuation of the fund takes place each business day at 12 noon on a forward pricing basis. Investors are reminded that past performance is not a guarantee of performance in the future and that the price of the units and the revenue from them can fall as well as rise. Prospectus Copies of the most recent Prospectus are available free of charge from the manager at the address on page 5. 4 Artemis UK Smaller Companies Fund

General information Manager Artemis Fund Managers Limited* Cassini House 57 St James s Street London SW1A 1LD Dealing information Unit Trust Department Artemis Fund Managers Limited PO Box 9688 Chelmsford CM99 2AE Telephone: 0800 092 2051 Website: www.artemisonline.co.uk Trustee The Royal Bank of Scotland plc* Trustee & Depositary Services The Broadstone 50 South Gyle Crescent Edinburgh EH12 9UZ Registrar International Financial Data Services (UK) Limited* IFDS House St Nicholas Lane Basildon Essex SS15 5FS Auditors Ernst & Young LLP Ten George Street Edinburgh EH2 2DZ Investment adviser Artemis Investment Management Limited* 42 Melville Street Edinburgh EH3 7HA *Authorised and regulated by the Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS. Artemis UK Smaller Companies Fund 5

Statement of the trustee s responsibilities The trustee is responsible for the safekeeping of all the property of the fund (other than tangible moveable property) which is entrusted to it and for the collection of revenue that arises from that property. It is the duty of the trustee to take reasonable care to ensure that the fund is managed in accordance with the Financial Services Authority s Collective Investment Schemes Sourcebook ( COLL ), as amended, the fund s Trust Deed and Prospectus in relation to the pricing of, and dealings in, units in the fund; the application of revenue of the fund; and the investment and borrowing powers of the fund. Report of the trustee Having carried out such procedures as we considered necessary to discharge our responsibilities as trustee of the fund, 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 fund s units and the application of the fund s revenue in accordance with COLL, the Trust Deed and Prospectus; and (ii) Has observed the investment and borrowing powers and restrictions applicable to the fund. The Royal Bank of Scotland plc Edinburgh Trustee & Depositary Services 26 February 2010 6 Artemis UK Smaller Companies Fund

Statement of the manager s responsibilities The Collective Investment Schemes Sourcebook ( COLL ) of the Financial Services Authority requires the manager to prepare financial statements for each annual accounting period which give a true and fair view of the financial affairs of the fund and of its revenue and expenditure for the year. In preparing the financial statements the manager is required to: (i) (ii) Select suitable accounting policies and then apply them consistently; Comply with the disclosure requirements of the Statement of Recommended Practice ( SORP ) for Authorised Funds issued by the Investment Management Association in November 2008; (iii) Follow applicable accounting standards; (iv) Keep proper accounting records which enable it to demonstrate that the financial statements as prepared comply with the above requirements; (v) Make judgements and estimates that are reasonable and prudent; and (vi) Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the fund will continue in operation. The manager is responsible for the management of the fund in accordance with its Trust Deed, Prospectus and COLL requirements. The manager is also responsible for taking reasonable steps for the prevention and detection of fraud and other irregularities. Report of the manager This report has been prepared in accordance with the requirements of the Collective Investment Schemes Sourcebook as issued and amended by the Financial Services Authority. R J Turpin Director 26 February 2010 Artemis UK Smaller Companies Fund 7

Independent auditors report to the unitholders of the Artemis UK Smaller Companies Fund We have audited the fund s financial statements for the year ended 31 December 2009 which comprise the statement of total return, statement of change in net assets attributable to unitholders, balance sheet, the related notes 1 to 16 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 the 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 the manager s responsibilities in relation to the financial statements. The Trustee is required to take reasonable care to ensure compliance by the 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 information about the Artemis UK Smaller Companies Fund, general information, the statement of the trustee s responsibilities, the report of the trustee, the report of the manager, the investment review, the five largest purchases and sales, the portfolio 8 Artemis UK Smaller Companies Fund

Independent auditors report to the unitholders of the Artemis UK Smaller Companies Fund (continued) statement and the comparative tables. 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 fund 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 2009 and of the net revenue and the net gains 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 report of the manager 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 Edinburgh Registered auditor 26 February 2010 Artemis UK Smaller Companies Fund 9

Investment review Performance Up, but behind The fund returned 42.7%* in the year under review. After reporting on a modest, if index-lagging, recovery at the interim stage, the fund s return improved in the second half of the year. Although we ended the year with a return behind that of our benchmark s 60.7%*, 2009 turned out to be the best year in the last 30 for the performance of the Hoare Govett Smaller Companies (ex IT) Index - and beaten only by four years since that index began 55 years ago. But it was also a year in which few managers were able to exceed their benchmark: the sector s average return was 50.1%*. Against a rapidly rising market in 2009, there was a significant drag on our overall fund - amounting to around 10% - from our four unquoted investments being held at fixed values for most of the year. Of these unquoteds, Vostok Energy (Russian gas) and Hurricane Exploration (West of Shetlands oil) are the two major ones. We kept the Vostok price unchanged over the year (although there was a 10% fall in the translation of its US dollar value back into sterling), but we re-valued our Hurricane holding upwards after its announcement of a major oil discovery in its West of Shetlands licences. Review Resources reduced, and new growth stocks With confidence returning, some of our resource company share prices improved substantially during the year following the beating they took in the second half of 2008. We used this opportunity to reduce our exposure. Our major sales were Premier Oil, Kenmare Resources, Salamander Energy and Aricom (which was bid for by its previous parent). We ended the year with around 20% of the fund invested in resources stocks, as compared to 33% at the previous yearend. We would expect to see this proportion fall further as we are in active discussions about reducing our unquoted exposure. Other good performers included Alterian, a marketing services company, whose share price bounced following a torrid previous period. Booker, a cash-and-carry company, did well on the back of a well-executed turnaround plan by new management. Abcam, one of our largest holdings, continued to produce profits ahead of expectations, as did H&T (pawn-brokers). The main sales during the year, apart from the resources cutbacks already mentioned, were carried out to take profits into share price strength in some of our large holdings, such as Abcam, Booker and Shaftesbury. The main outright sale was that of our holding, in Connaught, a social housing repairs business. Although the company announced good profits growth, it was not backed by the conversion into the strong cash generation we like to see from our investments. So, rather reluctantly, we sold out. The main purchases were additions to our existing holdings of Axis Shield, Group NBT and Homeserve. Axis Shield, a leader in vitro diagnostic testing, has developed a new blood test machine for doctors surgeries that can give patients immediate results for diabetes monitoring, viral or bacterial infections as well as, in the near future, cholesterol testing. These governmentreimbursed tests provide a rapidly growing and highly valuable annuity profit-stream for the * Source: Lipper Limited, bid to bid basis with net income reinvested. 10 Artemis UK Smaller Companies Fund

Investment review (continued) company, while giving doctors much improved information. This reduces the need for expensive hospital treatments. In a similar vein, Group NBT produces a recurring revenue stream from its annual charges to corporate clients for maintaining their internet domain names around the world. With more trade occurring on-line each year, we think that the protection of domain name intellectual property will become ever more important. Homeserve also benefits from repeat earnings; this time from the thousands of plumbing and electrical insurance policies they sell via an affinity marketing program with regional water and electricity companies. The company is rolling out this proven formula from the UK to various international markets. This gives the group great long-term growth prospects. Outlook Sound stocks for the future After turning bullish about prospects a year ago, we did not expect such a strong rally in 2009. We thought a rebound in value might well be spread over the following few years to match a slow, hard climb out of recession. Despite this rally, smaller company shares remain at a reasonable discount to both their long term average and to their larger company counterparts. The trailing p/e ratio on the smaller companies index is now around 11 times, as compared to its 25-year average of 14 times and the current ratio for larger companies of around 13 times. But it must be acknowledged that the domestic economic outlook is worse than in recent years, given the UK s huge fiscal deficit. As we perhaps move closer to a period when interest rates start to climb after being held artificially low by the government s quantitative easing, and investors start to worry about the possibility of inflation returning, we feel our portfolio of shares with strong cash generation giving a high free cash-flow yield should be much sought after by investors and corporate acquirers alike. We believe that our portfolio of well capitalised, quality business franchises - many with large overseas earnings - is very strongly positioned for the years ahead. John Dodd and Mark Niznik Fund managers Five largest purchases and sales For the year ended 31 December 2009 Cost Proceeds Purchases 000 Sales 000 Homeserve 8,299 Mears Group 7,816 Xchanging 7,280 Babcock International Group 7,218 Chemring Group 6,966 Premier Oil 11,182 Abcam 9,479 Shaftesbury 7,872 Booker Group 7,825 Connaught 7,164 Artemis UK Smaller Companies Fund 11

Portfolio statement As at 31 December 2009 Valuation % of Investment Holding 000 net assets United Kingdom - 95.70% (88.19%) Basic Materials - 0.25% (4.37%) Central Asia Metals + 1,844,000 774 0.25 Consumer Goods - 8.15% (3.17%) Cranswick 1,300,000 10,010 3.22 Hilton Food Group 664,288 1,329 0.43 R.E.A. Holdings 1,919,400 7,870 2.53 R.E.A. Holdings 9% (cumulative preference) 140,756 149 0.05 SSL International 450,000 3,445 1.11 Vitec 648,729 2,506 0.81 25,309 8.15 Consumer Services - 11.34% (9.48%) Asos # 1,000,000 4,865 1.57 Booker Group 16,544,815 7,695 2.48 CVS Group # 2,556,823 4,526 1.46 Dignity 1,200,000 7,320 2.36 Greggs 500,000 2,174 0.70 Handmade # 6,250,000 562 0.18 Stanley Gibbons Group # 2,500,000 3,325 1.07 Tarsus Group 4,500,000 4,725 1.52 35,192 11.34 Financials - 10.80% (11.59%) Chaucer Holdings 4,692,764 2,112 0.68 Hansteen Holdings 10,250,000 8,302 2.68 Hardy Underwriting Bermuda 1,200,000 3,360 1.08 H&T Group # 2,942,804 8,828 2.85 IP Group 5,230,505 2,929 0.94 Millfield 6,935,739 - - mform 10% 2009 (loan note) + 12,500 - - mform 10% 2009 (loan note) + 100,000 - - mform + 185 - - mform (preference) + 4 - - Rathbone Brothers 280,981 2,196 0.71 Record 3,744,084 2,883 0.93 Shaftesbury 750,000 2,896 0.93 Third Advance Value Realisation + 158,927 - - 33,506 10.80 12 Artemis UK Smaller Companies Fund

Portfolio statement (continued) Valuation % of Investment Holding 000 net assets Health Care - 6.84% (4.79%) Abcam # 1,200,000 11,280 3.64 Axis-Shield 1,900,000 7,429 2.39 Dechra Pharmaceuticals 525,242 2,508 0.81 21,217 6.84 Industrials - 28.52% (19.76%) 4Imprint Group 1,500,000 1,800 0.58 Babcock International Group 1,400,000 8,302 2.68 Brammer 3,000,000 3,600 1.16 BSS Group 1,000,000 2,380 0.77 Chemring Group 150,000 4,402 1.42 Chloride Group 1,016,241 1,822 0.59 Domino Printing Sciences 2,000,000 6,550 2.11 Hamworthy # 638,581 1,692 0.55 Hargreaves Services # 953,272 6,597 2.13 Homeserve 544,936 9,248 2.98 Mears Group 3,085,050 8,515 2.74 Mitie Group 1,700,000 3,891 1.25 Norcros 41,639,695 2,811 0.91 Norcros (deferred shares) 41,639,695 - - Rotork 750,000 8,970 2.89 RWS Holdings # 1,163,665 3,607 1.16 Scott Wilson Group 1,320,375 1,235 0.40 Spirax-Sarco Engineering 200,000 2,470 0.80 WSP Group 1,039,589 2,864 0.92 Xchanging 3,700,000 7,696 2.48 88,452 28.52 Oil & Gas - 15.65% (25.83%) Energy Equity Resources (Norway) + 14,000 - - Hurricane Exploration + 1,666,667 10,000 3.22 Leed Petroleum # 9,776,400 562 0.18 Ophir Energy + 2,020,000 3,515 1.13 Premier Oil 200,000 2,214 0.71 Salamander Energy 2,500,000 7,387 2.38 Timan Oil & Gas + 1,431,667 - - Vostok Energy + 13,211,967 24,902 8.03 48,580 15.65 Technology - 14.15% (9.20%) Alterian 4,357,623 8,083 2.61 Artemis UK Smaller Companies Fund 13

Portfolio statement (continued) Valuation % of Investment Holding 000 net assets Craneware # 442,500 1,460 0.47 Fidessa Group 476,430 5,589 1.80 Group NBT # 1,839,736 5,795 1.87 NCC Group 465,000 1,790 0.58 Phoenix IT 2,800,000 7,140 2.30 SDL 2,078,199 8,536 2.75 Spirent Communications 2,500,000 2,550 0.82 Statpro Group # 1,518,725 1,519 0.49 System C Healthcare # 2,883,334 1,442 0.46 43,904 14.15 Overseas - 2.96% (6.24%) Canada - 0.15% (1.67%) Neulion 587,350 228 0.07 New Gold (2012 warrants) 6,250,000 92 0.03 Rusoro Mining (2011 warrants) + 833,334 - - Rusoro Mining (2012 warrants) + 639,706 - - Thistle Mining 2,376,532 166 0.05 486 0.15 Bermuda - 1.87% (0.00%) Energy XXI (Bermuda) # 4,999,998 5,788 1.87 Guernsey - 0.08% (0.14%) Brookwell (A preference) # 415,255 256 0.08 Ireland - 0.66% (1.93%) Kenmare Resources 10,000,000 2,050 0.66 United States - 0.20% (2.02%) Cyberview Technology # 26,866 - - ROK Entertainment Group + 410,914 - - Somero Enterprise # 4,719,830 614 0.20 614 0.20 Portfolio of investments 306,128 98.66 Net other assets 4,147 1.34 Net assets 310,275 100.00 All holdings are ordinary shares unless otherwise stated. The figures in brackets represent percentages as at 31 December 2008. At this date the portfolio included an exposure to Australia (0.32%) and the Netherlands (0.16%). # Denotes holdings that are traded on the Alternative Investment Market and represent 20.23% of the total value of the fund at 31 December 2009 (2008: 29.04%). + Denotes holdings that are unquoted and represent 12.63% of the total value of the fund at 31 December 2009 (2008: 15.83%). 14 Artemis UK Smaller Companies Fund

Statement of total return For the year ended 31 December 2009 31 December 2009 31 December 2008 Note 000 000 000 000 Income Net capital gains/(losses) 4 99,597 (286,154) Revenue 6 5,631 7,458 Expenses 7 (4,679) (7,615) Finance costs: interest 9 (1) (479) Net revenue before taxation 951 (636) Taxation 8 - (18) Net revenue after taxation 951 (654) Total return before distributions 100,548 (286,808) Finance costs: distribution 9 (950) - Change in net assets attributable to unitholders 99,598 (286,808) Statement of change in net assets attributable to unitholders For the year ended 31 December 2009 31 December 2009 31 December 2008 000 000 000 000 Opening net assets attributable to unitholders 256,475 600,128 Amounts receivable on issue of units 263 3,576 Amounts payable on cancellation of units (46,850) (60,310) (46,587) (56,734) Stamp duty reserve tax (59) (111) Change in net assets attributable to unitholders 99,598 (286,808) Retained distribution on accumulation units 848 - Closing net assets attributable to unitholders 310,275 256,475 Artemis UK Smaller Companies Fund 15

Balance sheet As at 31 December 2009 31 December 2009 31 December 2008 Note 000 000 000 000 Assets Investments 306,128 242,179 Debtors 10 744 788 Cash and bank balances 11 4,505 14,436 Total other assets 5,249 15,224 Total assets 311,377 257,403 Liabilities Creditors 12 1,102 928 Total liabilities 1,102 928 Net assets attributable to unitholders 310,275 256,475 16 Artemis UK Smaller Companies Fund

Notes to the financial statements 1. Accounting policies (a) Basis of accounting. The financial statements have been prepared under the historical cost basis, as modified by the revaluation of investments, and in accordance with the Statement of Recommended Practice ( SORP ) for Authorised Funds issued by the Investment Management Association in November 2008. During the year, the fund adopted this SORP having previously applied the SORP issued in 2005. This has resulted in other currency losses of 7,000 (2008: gains of 19,000) being included in capital gains/losses. No changes to the Net Asset Value of the fund have arisen from the adoption of the SORP. (b) Valuation of investments. All investments have been valued at 12 noon on 31 December 2009. Listed investments are valued at fair value which is deemed to be the bid or SETS price. Unquoted investments are valued at fair value which is determined by the investment manager, with reference to the valuation guidelines issued by the International Private Equity and Venture Capital Valuation Guidelines Board. (c) Foreign exchange rates. Assets and liabilities denominated in foreign currencies are translated into sterling at the exchange rates prevailing at 12 noon on the last working day of the accounting period. Revenue and expenditure transactions are translated at the rates of exchange ruling on the dates of the transactions. Exchange differences on such transactions follow the same treatment as the principal amounts. (d) Derivatives. Where appropriate, certain permitted transactions such as derivatives or forward foreign currency transactions are used for efficient portfolio management and investment purposes. Gains and losses on derivative instruments are recognised as either revenue or capital depending on the nature and circumstances of each particular case. Any positions on such transactions open at the year end are reflected in the balance sheet at their marked to market value. (e) Revenue. Dividends receivable from equity and non equity shares, including UK Real Estate Investment Trusts ( REITs ), are credited to revenue, net of attributable tax credits, when the security is quoted ex-dividend. Dividends received as shares (scrip/stock dividends), to the extent that the value of such dividends is equal to the cash dividends, are treated as revenue. Dividends on unquoted stocks are credited to revenue when the dividend is declared. Special dividends are reviewed on a case by case basis when determining if the dividend is to be treated as revenue or capital. It is likely that where a special dividend results in a significant reduction in the capital value of a holding, then the dividend will generally be treated as capital, otherwise this will be recognised as revenue. Bank interest is recognised on an accruals basis. Artemis UK Smaller Companies Fund 17

Notes to the financial statements (continued) (f) Expenses. All expenses (other than those relating to the purchase and sale of investments) are charged against revenue on an accruals basis. (g) Taxation. The charge for taxation is based on the results for the year. In general, the tax accounting treatment follows that of the principal amount. Deferred tax is provided for all timing differences that have originated but not reversed at the balance sheet date other than those recorded as permanent differences. Deferred tax is provided for at the average rate of tax expected to apply. Deferred tax assets and liabilities are not discounted to reflect the time value of money. 2. Distribution policy The distribution policy of the fund is to accumulate all available revenue, after deduction of expenses properly chargeable against revenue, subject to any expense which may currently be transferred to capital for the purpose of calculating the distribution. Gains and losses on non-derivative investments and currencies, whether realised or unrealised, if taken to capital are not available for distribution. The fund currently pays dividend distributions. 3. Risk management policies The fund's financial instruments comprise equities, cash balances and liquid resources which include debtors and creditors. The fund holds such financial assets in accordance with its investment objective and policy which is provided on page 4. The fund is exposed to a number of risks that are associated with the financial instruments and markets in which it invests. The most significant risks which the fund is exposed to are market risk, credit risk and liquidity risk. (a) Market risk. Market risk, which includes interest rate risk, currency risk and other price risk, arises mainly from uncertainty about future values of financial instruments in the fund's investment portfolio. The fund, in order to meet its investment objective and policy, invests predominantly in equities and maintains an appropriate spread of investments in accordance with the Collective Investment Schemes Sourcebook, the Trust Deed and the Prospectus. The manager's investment strategy is to select investments for their fundamental value. Stock selection is therefore based on disciplined accounting, market and sector analysis, with the emphasis on long-term investments. There is no material difference between the carrying values and the fair values of the financial assets and liabilities of the fund disclosed in the balance sheet. (i) Interest rate risk. As the majority of the fund's financial assets are non-interest 18 Artemis UK Smaller Companies Fund

Notes to the financial statements (continued) (ii) Currency risk. A portion of the net assets of the fund is denominated in currencies other than sterling, and therefore the balance sheet and total return can be affected by currency movements (see note 15). Therefore, the manager may decide that a proportion of the investments that are not priced in sterling, may be covered by forward currency hedges, so that the fund's exposure to currency risk is reduced. There were no open foreign currency hedges as at 31 December 2009 or 31 December 2008. Revenue received in foreign currencies is converted into sterling on or near the date of receipt. No hedging is undertaken with regard to managing the currency movement risk on accrued revenue. (iii) Other price risk. Other price risk is the risk that the value of an instrument will fluctuate as a result of changes in market prices (other than those relating to interest rate risk, currency risk and credit risk), whether caused by factors specific to an investment or wider issues affecting the market generally. The value of equities is dependent on a number of factors, arising from the performance of the company itself and matters arising in the wider market (for example the state of the underlying economy and current government policy). The portfolio is invested in securities domiciled in a number of countries as detailed in the portfolio statement and will be exposed to market movements in the relevant country arising from changes in the local economy and government decisions. As part of the ongoing review of the portfolio, the manager monitors and reviews these factors. (b) Credit risk. Credit risk is the risk that a party to a financial instrument will fail to discharge an obligation or commitment it has entered into with the fund, resulting in a financial loss. The manager has a pre-approved list of counterparties it uses for investment transactions, which is reviewed on a regular basis.the largest counterparty risk is with HSBC, the fund s custodian and banker, who holds the fund s investments and maintains the bank accounts. Bankruptcy or insolvency of HSBC may cause the fund s rights with respect to securities and cash held by the custodian to be delayed or limited. The trustee receives and reviews an annual report on the internal controls in place at HSBC. The fund is also exposed to counterparty risk through holding specific financial instruments. There were no significant concentrations of credit risk to counterparties other than to the custodian at 31 December 2009 or 31 December 2008. (c) Liquidity risk. Some of the fund s financial instruments may include securities that are traded on AIM or are not listed on a recognised stock exchange and which may not always be readily realisable. As a result, the fund may not be able to realise these investments quickly at their fair value to meet any further liquidity requirements, or to Artemis UK Smaller Companies Fund 19

Notes to the financial statements (continued) respond to specific events such as deterioration in the creditworthiness of any particular issuer. These holdings are disclosed in the portfolio statement on pages 12 to 14. In order to manage liquidity requirements, the fund seeks to maintain sufficient cash to pay creditors. The fund s overall liquidity risk is managed by the manager in accordance with the requirements stipulated in the Collective Investment Schemes Sourcebook and the Prospectus. (d) Derivatives. The manager is currently empowered to enter into derivative transactions on behalf of the fund. Transactions will normally only be entered into when conventional stock selection is not the best way to either limit investment risk or maximise investment opportunities. There were no open derivative positions at 31 December 2009 or 31 December 2008. 4. Net capital gains/(losses) 31 December 2009 31 December 2008 000 000 Net gains/(losses) on non-derivative securities 99,604 (286,173) Currency (losses)/gains (7) 19 Net capital gains/(losses) 99,597 (286,154) 5. Portfolio transaction costs Analysis of total purchases costs Purchases in year before transaction costs 126,332 149,219 Commissions 372 446 Taxes 487 569 Total purchases costs 859 1,015 Gross purchases total 127,191 150,234 Analysis of total sales costs Gross sales in year before transaction costs 163,364 234,268 Commissions (510) (618) Total sales costs (510) (618) Total sales net of transaction costs 162,854 233,650 20 Artemis UK Smaller Companies Fund

Notes to the financial statements (continued) 6. Revenue 31 December 2009 31 December 2008 000 000 UK dividends 4,988 5,859 Overseas dividends 330 1,291 Income from UK REITs 236 184 Bank interest 63 121 Underwriting commission 21 - Currency (losses)/gains on overseas recoverable withholding tax (7) 3 Total revenue 5,631 7,458 7. Expenses Payable to the Manager, associates of the Manager and agents of either of them: Annual management charge 4,334 7,200 Administration fees paid to an associate of the manager 76 129 4,410 7,329 Payable to the Trustee, associates of the Trustee and agents of either of them: Trustee fee 45 68 Other expenses: Registration fees 170 204 Administration fees 40 88 Safe custody fees 5 13 Audit fee 9 8 Postage fee - 1 VAT on registration fees * - (96) 224 218 Total expenses 4,679 7,615 Irrecoverable VAT is included in the above expenses where relevant. * Following the issuance of Business Brief 07/06 on 27 June 2006, a portion of VAT on registration fees previously incurred by the fund has been reclaimed from HM Revenue & Customs. This amount has been excluded from the calculation of the Total Expense Ratio for the fund. Artemis UK Smaller Companies Fund 21

Notes to the financial statements (continued) 8. Taxation 31 December 2009 31 December 2008 000 000 a) Analysis of the tax charge for the year Irrecoverable overseas tax - 18 Total taxation - 18 b) Factors affecting the tax charge for the year Net revenue before taxation 951 (636) Corporation tax at 20% (2008: 20%) 190 (127) Effects of: UK dividends (998) (1,172) Non taxable overseas dividends (27) - Irrecoverable overseas tax - 18 Unutilised management expenses 835 1,299 Total taxation (note 5a) - 18 c) Provision for deferred taxation No provision for deferred tax has been made in the current or prior accounting year. d) Factors that may affect future tax charges The fund has unutilised management expenses of 10,650,000 (2008: 9,815,000). The fund does not expect to be able to utilise this in the foreseeable future. Following the abolition of taxation on overseas dividends effective from 1 July 2009, the deferred tax asset in relation to eligible unrelieved foreign tax has been reduced to nil (2008: 45,000). 22 Artemis UK Smaller Companies Fund

Notes to the financial statements (continued) 9. Finance costs: distributions and interest The table below sets out the finance costs which comprise the distributions and overdraft interest. The distributions take account of amounts received on the issue of units and amounts deducted on the cancellation of units. Final dividend distribution 848 - Add: amounts deducted on cancellation of units 103 - Deduct: amounts received on issue of units (1) - Finance costs: distribution 950 - Finance costs: interest 1 479 Total finance costs 951 479 The distribution per unit is set out on the distribution table on page 25. 10. Debtors 31 December 2009 31 December 2008 000 000 Accrued revenue 391 357 Sales awaiting settlement 353 294 Overseas withholding tax recoverable - 11 Amounts receivable for issue of units - 126 Total debtors 744 788 11. Cash and bank balances Cash and bank balances 1,299 14,436 Amounts held in HSBC Sterling Liquidity Fund 3,206 - Total cash and bank balances 4,505 14,436 12. Creditors Amounts payable for cancellation of units 592 469 Accrued annual management charge 406 329 Accrued other expenses 93 127 Purchases awaiting settlement 7 - Accrued trustee fee 4 3 Total creditors 1,102 928 13. Contingent liabilities and commitments There were no contingent liabilities and commitments at the current or prior year end. Artemis UK Smaller Companies Fund 23

Notes to the financial statements (continued) 14. Related party transactions The manager and trustee are deemed to be related parties. All transactions and balances associated with the manager and trustee are disclosed within the statement of total return, statement of change in net assets attributable to unitholders and the balance sheet on pages 15 and 16 and notes 7, 10 and 11 on pages 21 and 23 including all issues and cancellations where the manager acted as principal. The balance due to the manager as at 31 December 2009 in respect of these transactions was 998,000 (2008: 672,000). The balance due to the trustee as at 31 December 2009 in respect of these transactions was 4,000 (2008: 3,000). 15. Risk disclosures - currency risk Net foreign currency assets Net foreign currency assets 31 December 2009 31 December 2008 Investments Net assets Total Investments Net assets Total Currency 000 000 000 000 000 000 US Dollar 31,556 6 31,562 36,474-36,474 Canadian Dollar 228-228 3,633-3,633 Euro - - - 2,119-2,119 Australian Dollar - - - 829-829 16. Post balance sheet event As at 25 February 2010, the Net Asset Value per unit, on a bid basis, was 530.04p. This represents a increase of 2.4% since 31 December 2009 when the Net Asset Value per unit was 517.54p. 24 Artemis UK Smaller Companies Fund

Distribution table Final dividend distribution for the year ended 31 December 2009 (in pence per unit) Net Distribution Distribution revenue Equalisation 26 February 2010 27 February 2009 Group 1 1.4145-1.4145 - Group 2 0.4614 0.9531 1.4145 - Group 1 units have been purchased prior to a distribution period, and group 2 units have been purchased during a distribution period. Equalisation applies only to units purchased during the distribution period (group 2 units). It is the average amount of revenue included in the purchase price of group 2 units and is refunded to the 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. Corporate unitholders should note that: 1 91.00% of the revenue distribution together with the tax credit is received as franked investment income. 2. 9.00% of the revenue distribution is received as an annual payment received after deduction of income tax at the lower rate and is liable to corporation tax. It is not franked investment income. Artemis UK Smaller Companies Fund 25

Comparative tables Fund sizes & Net Asset Values Net Asset Value Net Asset Value Unit Units in Date of fund ( ) per unit (p) type issue 31 December 2007 600,128,188 750.50 Accumulation 79,964,017 31 December 2008 256,474,990 362.76 Accumulation 70,701,967 31 December 2009 310,274,642 517.54 Accumulation 59,952,000 Net revenue distributions & unit price range Net revenue Highest offer Lowest bid Year per unit (p) price (p) price (p) 2005-668.41 503.81 2006-806.94 619.83 2007-932.57 712.07 2008-844.91 344.90 2009 1.4145 569.30 347.00 Net revenue includes all amounts paid and payable in each calendar year. Total Expense Ratio Expense 31 December 2009 31 December 2008 Annual management charge 1.50% 1.50% Other expenses 0.13% 0.11% Total Expense Ratio 1.63% 1.61% The Total Expense Ratio shows the fund s annual operating expenses as a percentage of its average net assets for the preceding twelve months. Portfolio Turnover Rate 31 December 2009 31 December 2008 Artemis UK Smaller Companies Fund 85% 68% The Portfolio Turnover Ratio is equal to the total of purchases and sales of securities netted against the value of the issue and cancellation of units, as a percentage of the average net assets of the fund for the preceding twelve months. 6295/01/10KJ 26 Artemis UK Smaller Companies Fund

Fig. 2 A typical PROFIT