Portfolio Update

Merrill Lynch Br. SmallerCo Tst PLC
18 August 2006


MERRILL LYNCH BRITISH SMALLER COMPANIES TRUST plc

All information is at 31 July 2006 and unaudited.

Performance at month end is calculated on a capital only basis

                                            One          Three              One           Three            Five
                                         Month         Months              Year           Years           Years

Net asset value                          -1.2%           -7.5%            21.6%           85.3%           50.3%
Share price                              -0.4%           -9.1%            25.7%           96.4%           65.9%
FTSE SmallCap Index (ex IC's)            -0.5%           -6.2%            10.3%           43.3%           20.8%

Sources:  Merrill Lynch Investment Managers and Datastream.

From 30 December 2005 underlying investments are valued on a bid price basis, in
accordance with AITC guidelines.

At month end
Net asset value:                                 352.81p
Share price:                                     299.50p
Discount to NAV:                                   15.1%
Net yield:                                          1.5%
Total assets:                                    £193.2m
Gearing:                                            8.3%
Ordinary shares in issue:                        50,563,523


Ten Largest Sector
Weightings                                                                                             % of Total Assets
Support Services                                                                                                    17.0
Real Estate                                                                                                          8.5
Industrial Engineering                                                                                               8.1
Software & Computer Services                                                                                         7.5
Oil & Gas Producers                                                                                                  6.6
Electronic & Electrical Equipment                                                                                    6.0
Media                                                                                                                5.3
General Financial                                                                                                    5.3
Mining                                                                                                               4.9
Construction & Materials                                                                                             4.5
                                                                                                                    ----
Total                                                                                                               73.7
                                                                                                                    ----




Ten Largest Equity Investments
Company
Aveva Group
Brewin Dolphin
BSS Group
Chaucer Holdings
Dechra Pharmaceuticals
Headlam Group
Mouchel Parkman
Rathbone Brothers
Spirax-Sarco Engineering
WSP Group




Commenting on the markets, Mike Prentis, representing the Investment Manager
noted:



July was a difficult month. The Company's NAV fell by 1.2% on a capital only
basis to 352.81p. This was behind the benchmark index which fell by only 0.5%.



The main contributors to underperformance in July were the holding in Xaar and
the Company's exposure to the online and telephone betting sector. Xaar, a
leading manufacturer of specialist printheads, has been a core holding for some
time and until recently a very strong performer. Its mid July trading update
pointed to sales to Far Eastern customers falling below plan which would cause
first half profit to fall below market expectations. It has subsequently emerged
that the Chinese customs authorities are investigating several of Xaar's
customers, collectively accounting for 15% of Xaar's sales, over alleged non
payment of import duty. This investigation could prove to be protracted. Whilst
this is unfortunate, we believe it does not reflect on Xaar, and we regard Xaar
management highly. We have decided to retain the holding pending further
information.



Our exposure to the online and telephone betting sector is modest but share
price falls in the sector were sharp as the US authorities showed renewed
determination to curb this form of betting.



Good performers during the month included Hyder Consulting, Kier Group, BSS,
Avocet Mining and Topps Tiles. Hyder's July trading statement was positive and
re-affirmed strong trading across its markets. Earnings were upgraded and the
shares, which have traded at a discount to it's peers, responded. Kier also
produced a strong trading statement and management were on confident form on a
visit to operations in Scotland. BSS shares performed well, ahead of its trading
statement which lived up to expectations. Avocet shares had fallen sharply in
previous months and rallied on good results and a firm gold price. Topps Tiles
announced they would hand cash back to shareholders.



New holdings during the month were Wolfson Microelectronics, YouGov and Arden
Partners, each 0.5% of total assets or less. All purchases were made after good
meetings with management and have performed well since purchase. Wolfson designs
and supplies semiconductors. These are used to improve audio quality
particularly in MP3 players, such as the iPod, and mobile phones. YouGov is a
market research organisation which operates through the use of extensive
research panels accessed online. Arden is a stockbroker specialising in UK small
and mid cap shares - we know many of their executives very well. We also added
to a number of core holdings.



Disposals included our holdings in Enterprise, Brammer, Metal Bulletin and
Mears. The Enterprise holding was sold as we were surprised by the company
incurring a large exceptional item mainly in relation to existing contracts.
Brammer shares performed soundly in July, and although we believe the company is
trading well, we decided to take profit and re-invest elsewhere. Metal Bulletin
shares were sold after a strong rise and the announcement of a probable bid from
Euromoney. The holding in Mears was sold as we became concerned that competitive
pressures were growing in the social housing area, and that Mears' relatively
high share rating might suffer.



We believe the Company continues to be well placed going into the late August/
September reporting season. The portfolio is built around core holdings which
are trading well. Large holdings such as discretionary fund managers Rathbones
and Brewin Dolphin will perform better in strong markets, and conversely are
likely to remain lacklustre if markets remain weak. Our view is that interest
rates are nearing a peak in the UK and US, and that markets should respond
positively once it is clear that the peak in the interest rate cycle has passed.









Latest information is available by typing www.mlim.co.uk/its on the internet,
'MLIMINDEX' on Reuters, 'MLIM' on Bloomberg or '8800' on Topic 3 (ICV terminal).



18 August 2006


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