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Edinburgh Inv. Trust (EDIN)

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Wednesday 29 May, 2013

Edinburgh Inv. Trust

Annual Financial Report


                      The Edinburgh Investment Trust plc                       

                     Annual Financial Report Announcement                      

                       for the Year Ended 31 March 2013                        

FINANCIAL INFORMATION AND PERFORMANCE STATISTICS

Performance Statistics

(1) Source: Thomson Reuters Datastream

FOR THE YEAR TO 31 MARCH                          2013         2012
                                                                   
                                                     %            %
                                                                   
                                                CHANGE       CHANGE
                                                                   
Total Return (capital growth with income                           
reinvested)                                                        
                                                                   
Net asset value (NAV) total return:                                
                                                                   
  - debt at par                                  +21.1        +15.2
                                                                   
  - debt at market value                         +22.4        +15.8
                                                                   
FTSE All-Share Index total return(1)             +16.8         +1.4
                                                                   
Share price total return(1)                      +20.1        +17.6


                                                    AT           AT            
                                                                               
                                              31 March     31 March           %
                                                                               
                                                  2013         2012      CHANGE
                                                                               
Capital Return                                                                 
                                                                               
NAV:                                                                           
                                                                               
  - debt at par                                581.89p      502.03p       +15.9
                                                                               
  - debt at market value                       559.01p      478.30p       +16.9
                                                                               
FTSE All-Share Index(1)                        3380.64      3002.78       +12.6
                                                                               
Share price(1)                                  572.0p       497.6p       +15.0
                                                                               
Discount/(premium):                                                            
                                                                               
  - debt at par                                   1.7%         0.9%            
                                                                               
  - debt at market value                        (2.3)%       (4.0)%            
                                                                               
Gearing (at par):                                                              
                                                                               
  - gross gearing                                17.6%        20.4%            
                                                                               
  - net gearing                                  17.6%        20.3%            


                                                                             %
                                                                              
FOR THE YEAR TO 31 MARCH                         2013        2012       CHANGE
                                                                              
Revenue Return                                                                
                                                                              
Revenue return per share                        22.0p       22.1p         -0.5
                                                                              
Dividends:                                                                    
                                                                              
  - first interim                                5.0p        5.0p             
                                                                              
  - second interim                               5.0p        5.0p             
                                                                              
  - third interim                                5.0p        5.0p             
                                                                              
  - final proposed                               7.8p        7.0p             
                                                                              
  - total dividends                             22.8p       22.0p         +3.6
                                                                              
Retail Price Index(1)                            3.3%        3.6%             


FOR THE YEAR TO 31 MARCH                         2013          2012
                                                                   
                                                    %             %
                                                                   
                                               CHANGE        CHANGE
                                                                   
Ongoing Charges Ratio:                                             
                                                                   
  Excluding performance fee                      0.71          0.72
                                                                   
  Performance fee(2)                             1.21          0.41

(2) The ongoing charges ratio (OC ratio) is calculated in accordance with
recent guidance issued by the AIC of: total ongoing expenses ÷ average NAV
(debt at market value). Note that since the Company's performance fee is based
on average NAV (debt at par) of up to 1% of period end net assets, the OC ratio
can result in a figure that is higher or lower than 1% of period end net assets
which is the basis used in these accounts.

.

CHAIRMAN'S STATEMENT

Dear Shareholder,

Notwithstanding the cautious tone of my last letter to shareholders, the last
year has seen a major recovery in global equity markets, although against a
backdrop of continuing uncertainty around economic recovery in many western
economies and ongoing challenges around public debt levels, particularly in
Europe.

At the same time there has been no change in the investment strategy which has
been in place since the appointment of Invesco as Manager in September 2008,
and which has delivered strong investment out-performance against benchmark in
the 12 month period to 31 March 2013. More detail on performance is given
below.

The income generation of the portfolio remains good and the Board is proposing
a final dividend of 7.8 pence per share for the three months to 31 March 2013
which would result in a full year dividend of 22.8 pence per share, an increase
of 3.6% year-on-year.

UK Equity Market

Since June 2012 the UK equity market has performed very strongly, in part due
to continuing monetary stimuli, but also as a consequence of a low interest
rate environment reducing the attractiveness of many other investment assets.
Some fundamental challenges remain in place for financial markets in general,
including concerns over austerity measures and the lack of economic growth
stimuli in many western economies, oil price worries around political
instability in the Middle East, and the ongoing Eurozone debt and banking
crisis.

A more detailed discussion on the UK equity market and the Company's portfolio
is contained in the Manager's Report.

Investment Strategy

Since the 2008 financial crisis, the Board and the Manager have been consistent
in their view that the recovery of the global economy was likely to be slower
than the markets had anticipated, with a longer period of lower growth rates in
the developed world being a distinct possibility.

The central theme behind the construction of the Company's investment portfolio
is the selection of individual stocks based upon fundamental value. This
approach is designed to be resilient in the continuing difficult economic
environment, whilst at the same time providing opportunity to participate in
long term growth by offering fundamental value through earnings and dividend
growth. This investment approach has remained in place for nearly five years,
including the current year.

Performance for the Year

The Company's produced an NAV total return for the year to 31 March 2013 of
21.1% (debt at par) and of 22.4% (debt at market value), which compares with a
total return of 16.8% for the FTSE All-Share Index (`the Index'), the Company's
benchmark. The portfolio is concentrated in a relatively small number of
sectors and its overweight position in the pharmaceutical sector and the
underweight position in the mining sector have been material drivers of the
Company's investment out-performance in the year.

The Company produced a share price total return (share price with dividends
reinvested) of 20.1%, which compares to the Index's total return of 16.8%. The
discount of the share price to NAV (debt at par) increased from 0.9% at 31
March 2012 to 1.7% at 31 March 2013; valuing debt at market, the shares traded
at a premium of 2.3%, a decrease from 4.0% at 31 March 2012.

Performance Fee

A performance fee is payable in respect of each three year rolling period in
which the Company outperforms its benchmark index plus a hurdle of 1.25% pa.
This fee is capped at 1% of the period end net assets, before deduction of any
performance fee.

As a result of the Company's very strong performance over three years producing
a total return of 56.7% against the Index total return of 28.7%, a capped
performance fee of £11.5 million is due.

Gearing

The Company continues to have long-term debt amounting to £200 million in the
form of two £100 million debentures. This debt is fully deployed for investment
purposes. As a result of the appreciation in NAV over the year, at 31 March
2013 the gross gearing level was 17.6% compared to 20.4% at 31 March 2012.

One of the debentures, the 11.5% £100m debenture, matures in June 2014. The
Board continues to keep this position under review, both in terms of whether
and how best to replace the financing represented by that debenture.

Dividend

Income from the portfolio during the year was £52.9m (2012 £52.9m).

The Board is recommending a final dividend of 7.8 pence per share which, if
approved at the AGM, will be paid on 31 July 2013 to shareholders on the
Company's register on 14 June 2013. This would result in a total dividend for
the year to 31 March 2013 of 22.8 pence compared to 22.0 pence in the prior
year, an increase of 3.6% compared to a rise in the Retail Prices Index of
3.3%, and demonstrates the Company's commitment to its long term objective of
providing income growth which exceeds the rate of inflation.

Retail Distribution Review (RDR)

RDR came into effect on 31 December 2012 and has significant implications for
the way financial advice is provided, retail fund platforms operate and
financial products are distributed. It remains too early to draw final
conclusions about how RDR will play out for Investment Trusts. Many
commentators continue to suggest that the abolition of commission under RDR
should result in more demand by individual investors for Investment Trusts,
with the likely beneficiaries of this demand being the larger Investment Trusts
- such as The Edinburgh Investment Trust - which have good levels of liquidity
in their own shares and can demonstrate a strong investment track record, a
clear investment strategy and a compelling brand.

The Board is continuing to monitor external developments in the market for
financial investments as they evolve to ensure that the Company is positioned
appropriately to benefit in the new environment.

Board

Following Will Samuel's retirement from the Board in December 2012 and Nicola
Ralston's forthcoming retirement after the AGM in July, I am pleased to be able
to announce two new appointments to the Board; Vicky Hastings and Glen Suarez.

Vicky has nearly 25 years' experience in the investment management industry and
is a non-executive director of Henderson Global Trust plc and Impax
Environmental Markets plc. Her roles have included investment director at JO
Hambro Capital Management; chief investment officer, private clients at Merrill
Lynch Investment Managers (London); a fund manager in the Merrill Lynch
European Equity team; and non-executive director of Charter European Trust.

Glen is Deputy CEO of Knight Vinke Asset Management. Prior to joining Knight
Vinke, he was a Partner in Soditic Limited and before that he was Head of
European Utilities at Morgan Stanley. He is a specialist in the banking and
energy sectors and is a Fellow of the Institute of Chartered Accountants in
England and Wales and a Fellow of the Royal Society of Arts.

I should like to take this opportunity of thanking Will and Nicola for their
very valuable contribution to the Board over many years. We wish them well for
the future.

Outlook

With markets having risen against a cautious backdrop, there is always the
potential for a disconnect between the equity markets and economic
fundamentals. Against this background, the Board and the Manager see no reason
to change the Company's current investment approach of focussing on stock
selection based on fundamental value. As has been the case in recent years, the
relatively concentrated nature of the portfolio may from time to time result in
material short term performance deviations from benchmark. However, the Board
and the Manager continue to believe that in the present market environment our
current investment approach should give some resilience whilst still providing
the opportunity for creating growth in shareholder value over the longer term.

Jim Pettigrew

Chairman

28 May 2013

.

MANAGER'S REPORT

Market Review

After a nervous start to the period, UK equities shrugged off concerns over the
outlook for global economic growth and the on-going Eurozone crisis. The
statement last June by Mario Draghi, President of the European Central Bank,
that he would do "whatever it takes" to save the euro marked the turning point
as, fuelled by ever increasing amounts of monetary stimulus, both the FTSE 100
and FTSE All-Share indices delivered positive returns for 10 straight months -
the first time this had been witnessed in over 50 years. This occurred despite
some very mixed news from the global economy, further bail outs of Eurozone
banking systems, profit downgrades from companies and further reductions in
forecasts for UK economic growth.

Portfolio Strategy and Review

The Company produced a net asset value total return (with debt at market value)
of 22.4% during the year, compared to total return from the FTSE All-Share
Index of 16.8%.

A strong performance was delivered by the pharmaceutical sector, where over a
quarter of the Company's assets are invested. The holding in Roche again
delivered exceptional returns, as the company confirmed its ability to lead the
industry in terms of drug discovery and innovation. The holding in AstraZeneca,
which had delivered a relatively disappointing performance the previous year,
also contributed strongly as the appointment of a new chief executive, Pascal
Soriot, and his subsequent outline of a strategy to return the company to
growth, has been very well received. The Manager remains convinced that, over
the longer term, a significant exposure to this sector will continue to prove
rewarding.

There were positive performances from a range of the Company's other major
holdings. Shares in BAE Systems had performed strongly in the months before the
company confirmed that it was in early stage talks with EADS regarding a
merger. The deal did not look particularly beneficial to shareholders and the
two companies subsequently confirmed that merger negotiations had been
terminated. Waning concerns over the possible impact of US defence spending
cuts saw BAE Systems shares continue to outperform through to the end of the
period.

Reckitt Benckiser pleased the stock market with a very good operational
performance and news that it had trumped Bayer to the purchase of Schiff
Nutrition, a deal which gives it access to the $30 billion vitamins and
nutrition supplements market. Reckitt Benckiser has an excellent track record
of creating value through acquisitions and this is a highly fragmented but well
regulated market, with scope for growth in both emerging and developed markets.

BT continued to deliver very strong share price performance. Results from the
company underlined why the Manager expects this stock to continue to deliver
good profit and dividend growth. While headline profits came in just slightly
ahead of expectations, the stock market warmed to the prospect of further
cost-savings. The current management team has very effectively reduced the
cost-base in recent years and the announcement of a new group-wide
restructuring in February opens a path for the next wave of efficiencies.

The Company's zero weighting in the mining sector provided another positive
impact on performance. This is a sector which has tended to do well in previous
market rallies, but the Manager is increasingly seeing evidence that the
"risk-on" crowd is slowly falling out of love with it. News from Rio Tinto
highlighted the scale of the value destroyed by the sector's acquisition spree
of recent years. Rio announced a further write down of assets - since acquiring
Alcan for $38 billion in 2007, the company is estimated to have written down
$25 billion of the price paid.

Imperial Tobacco fell during the year following confirmation of tough trading
conditions in southern Europe and growing concerns that the UK may follow
Australia in introducing plain packaging for cigarettes. The Manager believes
the low valuation of the shares of Imperial Tobacco compared with its peers
more than discounts these concerns and that the tobacco sector as a whole
continues to offer attractive and dependable growth opportunities.

BG saw its shares fall sharply on the news last October that it had reduced
production growth forecasts. The Manager had reduced the position earlier in
the year at higher share price levels but the remaining holding weighed on
performance over the year. There was also disappointing news from Chemring.
Carlyle called off its discussions about a possible takeover of the company
while Chemring also issued a significant profit warning and a decline in its
order book. With a new management team now in place, the Manager is confident
that long-term value can be realised from the high quality businesses within
the company.

There was disappointing news from Vodafone as the company reduced its forecasts
for revenue growth on the back of on-going weakness in its core southern
European markets and announced a share buy-back rather than the hoped for
special dividend with its dividend from Verizon. The Manager has reservations
about the company's ability to generate profits from data services while the
cash flow cover of the dividend has fallen to what he views as uncomfortably
low levels, and hence has disposed of the Company's holdings in the shares.

In terms of portfolio activity, as outlined above the holding in Vodafone was
sold and the holding in BG was reduced. The holding in International Power was
sold following a bid for the company while the holdings in Hibu (formerly Yell)
and Tate & Lyle were also disposed of. The holdings in Capita, Centrica,
Rentokil, Serco and Smith & Nephew were added to while new investments were
made in Elan, G4S, Lancashire Holdings, Revolymer and Smiths.

Outlook

The UK stock market's rise of the past year, fuelled by monetary stimulus and
central bank policy initiatives, has occurred despite cuts in forecasts to
economic growth and associated reductions in the forecasts of company earnings
- most notably in the mining sector but also across the a range of companies
most exposed to the economic cycle. Equity valuations on the whole, therefore,
are no longer as compellingly cheap as they were a year ago.

At a time when the UK market appears more relaxed about the risks facing the
world economy and financial markets, the Manager has become a bit more
cautious. The environment is still very challenging in a real sense, but
financial markets have been propped up by symptomatic treatment rather than by
a cure of the world's economic problems

However, while the Manager has concerns over the economic environment and
believes the stock market may be vulnerable to some near term volatility, he
has very strong levels of conviction in the attractiveness of the businesses in
which the Company is invested. The overall market is no longer as cheap as it
was, but some high quality, dependable growth companies remain significantly
undervalued. The Manager remains convinced by their potential to deliver
attractive positive returns over the medium/long term, regardless of the
economic headwinds we expect to prevail.

Neil Woodford

Investment Manager

28 May 2013

.

INVESTMENTS IN ORDER OF VALUATION

at 31 MARCH 2013

UK listed and ordinary shares unless stated otherwise

AIM Investments quoted on AIM (formerly Alternative Investment Market)

                                                            MARKET             
                                                                               
                                                             VALUE         % OF
                                                                               
INVESTMENT                    SECTOR                         £'000    PORTFOLIO
                                                                               
AstraZeneca                   Pharmaceuticals &            123,603          9.2
                              Biotechnology                                    
                                                                               
GlaxoSmithKline               Pharmaceuticals &            121,637          9.1
                              Biotechnology                                    
                                                                               
British American Tobacco      Tobacco                       93,412          7.0
                                                                               
BT                            Fixed Line                    87,923          6.6
                              Telecommunications                               
                                                                               
Roche - Swiss Common Stock    Pharmaceuticals &             79,615          5.9
                              Biotechnology                                    
                                                                               
Reckitt Benckiser             Household Goods & Home        66,211          4.9
                              Construction                                     
                                                                               
Imperial Tobacco              Tobacco                       64,083          4.8
                                                                               
BAE Systems                   Aerospace & Defence           63,444          4.7
                                                                               
Reynolds American - US Common Tobacco                       60,024          4.5
Stock                                                                          
                                                                               
Rolls-Royce                   Aerospace & Defence           54,332          4.1
                                                                               
Ten Largest Holdings                                       814,284         60.8
                                                                               
Capita                        Support Services              51,262          3.8
                                                                               
Centrica                      Gas, Water &                  47,559          3.6
                              Multiutilities                                   
                                                                               
Novartis - Swiss Common Stock Pharmaceuticals &             42,708          3.2
                              Biotechnology                                    
                                                                               
Altria - US Common Stock      Tobacco                       40,862          3.1
                                                                               
BG                            Oil & Gas Producers           28,097          2.1
                                                                               
Drax                          Electricity                   27,442          2.0
                                                                               
SSE                           Electricity                   26,947          2.0
                                                                               
Sanofi - French Common Stock  Pharmaceuticals &             25,532          1.9
                              Biotechnology                                    
                                                                               
Smith & Nephew                Health Care Equipment &       24,233          1.8
                              Services                                         
                                                                               
G4S                           Support Services              22,807          1.7
                                                                               
Twenty Largest Holdings                                  1,151,733         86.0
                                                                               
Provident Financial           Financial Services            20,920          1.6
                                                                               
Wm Morrison Supermarkets      Food & Drug Retailers         19,247          1.4
                                                                               
Raven Russia - Preference     Real Estate Investment &       8,573             
                              Services                                         
                                                                               
Raven Russia - Ordinary                                      6,961             
                                                                               
                                                            15,534          1.1
                                                                               
Serco                         Support Services              15,142          1.1
                                                                               
Hiscox                        Non-life Insurance            13,925          1.0
                                                                               
Amlin                         Non-life Insurance            13,603          1.0
                                                                               
Rentokil Initial              Support Services              13,562          1.0
                                                                               
BTG                           Pharmaceuticals &             12,819          1.0
                              Biotechnology                                    
                                                                               
Catlin                        Non-life Insurance            10,391          0.8
                                                                               
PayPoint                      Support Services               7,727          0.6
                                                                               
Thirty Largest Holdings                                  1,294,603         96.6
                                                                               
IP Group                      Financial Services             7,416          0.6
                                                                               
Elan ADR                      Pharmaceuticals &              7,049          0.5
                              Biotechnology                                    
                                                                               
HomeServe                     Support Services               6,789          0.5
                                                                               
Chemring                      Aerospace & Defence            4,300          0.3
                                                                               
Burford CapitalAIM            Equity Investment              4,247          0.3
                              Instruments                                      
                                                                               
Barclays Bank - Nuclear Power Electricity                    3,851          0.3
Notes 28 Feb 2019(1)                                                           
                                                                               
Stobart                       Industrial Transportation      3,810          0.3
                                                                               
Lancashire                    Non-life Insurance             2,985          0.2
                                                                               
Smiths                        General Industrials            2,503          0.2
                                                                               
Oxford PharmascienceAIM       Pharmaceuticals &              1,481          0.1
                              Biotechnology                                    
                                                                               
Forty Largest Holdings                                   1,339,034         99.9
                                                                               
Proximagen - Rights -         Pharmaceuticals &                815          0.1
Unquoted                      Biotechnology                                    
                                                                               
RevolymerAIM                  Chemicals                        414            -
                                                                               
Helphire                      Financial Services               349            -
                                                                               
Eurovestech - Unquoted        Financial Services               241            -
                                                                               
Prothena - US Common Stock    Pharmaceuticals &                 95            -
                              Biotechnology                                    
                                                                               
Total Holdings (45)                                      1,340,948        100.0

(1) Contingent Value Rights (CVRs) referred to as Nuclear Power Notes (NPNs)
were offered by EDF as a partial alternative to cash in its bid for British
Energy (BE). The NPNs were issued by Barclays Bank. The CVRs participate in
BE's existing business.

.

Report of the Directors

Principal Risks and Uncertainties

The Company's key long-term investment objectives are an increase in the
capital net asset value per share by more than the growth in the FTSE All-Share
Index (the `benchmark' or `index') and an increase in dividends by more than
the growth of RPI. The principal risks and uncertainties facing the Company are
an integral consideration when assessing the operations in place to monitor
these objectives, including the performance of the portfolio, share price and
dividends. The Board is ultimately responsible for the risk control systems but
the day-to-day operation and monitoring is delegated to the Manager.

Market Risk

The uncertainty over future equity market price movements is an inherent part
of the rationale for the Company's existence. The Company's assets principally
consist of quoted securities. The prices of these securities and the income
derived from them are influenced by many factors such as general economic
conditions, interest rates, inflation, political events, and government
policies as well as by supply and demand reflecting investor sentiment. In
addition, there continues to be a risk that European policy makers fail to
implement an effective and lasting solution to the Eurozone crisis. Such
factors are outside the control of the Board and Manager and may give rise to
high levels of volatility in the prices of investments held by the Company. The
asset value and price of the Company's shares and its earnings and dividends
may consequently also experience volatility and may decline.

Investment Performance Risk

The Board sets performance objectives and delegates the investment management
process to the Manager. The achievement of the Company's performance objectives
relative to the market requires active management of the portfolio of assets
and securities. The Manager's approach is to construct a portfolio which is
compatible with the Manager's view of future trends in the UK and global
economies. The Manager is a long term investor, prepared to take substantial
positions in securities and sectors which may well be out of fashion, but which
the Manager believes will have potential for material increases in earnings
and, in due course, dividends and share prices. Strategy, asset allocation and
stock selection decisions by the Manager can lead to underperformance of the
benchmark index and/or income targets. The Manager's style may result in a
concentrated portfolio with significant overweight or underweight positions in
individual stocks or sectors compared to the index and consequently the
Company's performance may deviate significantly, possibly for extended periods,
from that of the benchmark index. In a similar way, the Manager manages other
portfolios holding many of the same stocks as the Company which reflects the
Manager's high conviction style of investment management. This could
significantly increase the liquidity and price risk of certain stocks under
certain scenarios and market conditions. However the Board and Manager believe
that the investment process and policy outlined above should, over the long
term, meet the Company's objectives of capital growth in excess of the
benchmark index and real dividend growth.

Investment selection is delegated to the Manager. The Board does not specify
asset allocations. Information on the Company's performance against the
benchmark and peer group is provided to the Board on a quarterly basis. The
Board uses this to review the performance of the Company, taking into account
how performance relates to the Company's objectives. The Manager is responsible
for monitoring the portfolio selected and seeks to ensure that individual
stocks meet an acceptable risk-reward profile.

Gearing Risk

The Company has the ability to invest up to £200 million from its debenture
stocks in the equity market. The principal gearing risk is that the level of
gearing may have an adverse impact on performance. Secondary risks relate to
whether the cost of gearing is too high and whether the term of gearing is
appropriate. The Company also has a new secondary risk concerning its ability
to replace, if it so chooses, the £100 million debenture stock which matures in
June 2014 with a form of gearing that is acceptable, both in type and cost, to
the Company and the Manager. The Company's performance could be adversely
affected if the debenture stock were not replaced.

The Manager has full discretion over the amount of cash from the Company's
Debenture Stocks to be invested in the equity market whilst the issuance,
repurchase or restructuring of debt are for the Board to decide. Information
related to gearing is provided to the Directors as part of the Board papers.
The Board regularly reviews the level of gearing. Additionally, the Board keeps
under review the cost of buying back debt.

Income/Dividend Risk

The Company is subject to the risk that income generation from its investments
fails to reach the level of income required to meet its objectives.

The Board monitors this risk through the review of detailed income forecasts
and comparison against budget. These are contained within the Board papers. The
Board considers the level of income at each meeting.

Share Price Risk

There is a risk that the Company's prospects and NAV may not be fully reflected
in the share price from time to time.

The share price is monitored on a daily basis. The Board is empowered to
repurchase shares within agreed parameters. The discount at which the shares
trade to NAV can be influenced by share repurchases. The Company has not
repurchased shares in the last year.

Control Systems Risk

The Board delegates a number of specific risk control activities to the Manager
including:

• best practice standards in fund management operations;

• financial controls;

• meeting regulatory requirements;

• the management of the relationship with the Custodian in respect of the
custody and security of the Company's assets; and

• the management of the relationship with the Registrar.

Consequently in respect of these activities the Company is dependent on the
Manager's control systems and those of its Custodian and Registrars, both of
which are monitored by the Manager in the context of safeguarding the Company's
assets and interests. There is a risk that the Manager fails to ensure that
these controls are operated in a satisfactory manner. In addition, the Company
relies on the soundness and efficiency of the Custodian for good title and
timeliness of receipt and delivery of securities.

A risk-based programme of internal audits is carried out by the Manager
regularly to test the controls environment. An internal controls report
providing an assessment of these risks is prepared by the Manager and
considered by the Audit Committee, and is formally reported to and considered
by the Board.

Reliance on Third Party Providers

The Company has no employees and the Directors are all appointed on a
non-executive basis. The Company is reliant upon the performance of third party
providers for its executive function. The Company's most significant contract
is with the Manager, to whom responsibility both for the Company's portfolio
and for the provision of company secretarial and administrative services are
delegated. The Company has other contractual arrangements with third parties to
act as Auditor, Registrar, Custodian and Broker. Failure by any service
provider to carry out its obligations to the Company in accordance with the
terms of its appointment could have a materially detrimental impact on the
operation of the Company and could affect the ability of the Company to pursue
successfully its investment policy and expose the Company to risk of loss or to
reputational risk.

In particular, the Manager performs services which are integral to the
operation of the Company. The Manager may be exposed to the risk that
litigation, misconduct, operational failures, negative publicity and press
speculation, whether or not it is valid, will harm its reputation. Any damage
to the reputation of the Manager could result in counterparties and third
parties being unwilling to deal with the Manager and by extension the Company.
This could have an adverse impact on the ability of the Company to pursue its
investment policy.

The Board seeks to manage these risks in a number of ways:

• The Manager monitors the performance of all third party providers in relation
to agreed service standards on a regular basis, and any issues and concerns are
dealt with promptly and reported to the Board. The Manager formally reviews the
performance of all third party providers and reports to the Board on an annual
basis.

• The Board reviews the performance of the Manager at every board meeting and
otherwise as appropriate. The Board has the power to replace the Manager and
reviews the management contract formally once a year.

• The day-to-day management of the portfolio is the responsibility of Neil
Woodford, Head of Investment at Invesco Perpetual, who has worked in equity
markets since 1981 and has been the portfolio manager of the Company since
Invesco's appointment in September 2008. The Board has adopted guidelines
within which the portfolio manager is permitted wide discretion. Any proposed
variation outside these guidelines is referred to the Board and the guidelines
themselves are reviewed at every board meeting.

• The risk that the portfolio manager might be incapacitated or otherwise
unavailable is mitigated by the fact that he works within, and is supported by,
the wider Invesco Perpetual UK Equity team.

Other Risks

The Company may be exposed to other business and strategic risks in the future,
including fiscal, legal or regulatory changes, and the perceived impact of the
designated Investment Manager ceasing to be involved with the Company.

The instruments in which the Company's cash positions are invested are reviewed
by the Board to ensure liquidity and concentration risks are adequately
managed. Where an Invesco Group vehicle is utilised, it is assessed for
suitability against other similar investment options.

The Company is subject to laws and regulations by virtue of its status as an
investment trust and is required to comply with certain regulatory requirements
that are applicable to listed closed-ended investment companies. The Company is
subject to the continuing obligations imposed by the UK Listing Authority on
all companies whose shares are listed on the Official List. A breach of the
conditions for approval as an investment trust could lead to the Company being
subject to capital gains tax on the sale of the investments in the Company's
portfolio. A serious breach of other regulatory rules may lead to suspension
from listing on the Stock Exchange or a qualified Audit Report.

The Alternative Investment Fund Managers Directive will impose obligations on
the Company and the Manager which may have significant consequences for the
Company and may increase its compliance and regulatory costs. Failure to meet
these obligations may impair the Manager's ability to manage the investments of
the Company, which may materially adversely affect the Company's ability to
implement its investment strategy and achieve its investment objective.

The Manager reviews compliance with investment trust tax conditions and other
financial and regulatory requirements on a daily basis.

There is an ongoing process for the Board to consider these other risks. In
addition, the composition of the Board is regularly reviewed to ensure the
membership offers sufficient knowledge and experience to assess and anticipate
these risks, as far as possible.

.

DIRECTORS' RESPONSIBILITY STATEMENT

in respect of the preparation of the annual financial report

The Directors are responsible for preparing the annual financial report in
accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each
financial year. Under the law the Directors have elected to prepare financial
statements in accordance with applicable law and UK Accounting Standards
(United Kingdom Generally Accepted Accounting Practice). Under company law, the
Directors must not approve the accounts unless they are satisfied that they
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.

In preparing these financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable and prudent;

• state whether applicable UK Accounting Standards have been followed, subject
to any material departures disclosed and explained in the financial statements;
and

• prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the company will continue in business.

The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and which
enable them to ensure that the financial statements comply with the Companies
Act 2006. 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, a Directors' Remuneration Report and a Corporate
Governance Statement that comply with that law and those regulations.

In so far as each of the Directors is aware:

• there is no relevant audit information of which the Company's auditors are
unaware; and

• the Directors have taken all steps that they ought to have taken to make
themselves aware of any relevant audit information and to establish that the
auditors are aware of that information.

The Directors of the Company each confirm to the best of their knowledge, that:

• the financial statements, prepared in accordance with the applicable set of
accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit of the Company; and

• this annual financial report includes a fair review of the development and
performance of the business and the position of the Company together with a
description of the principal risks and uncertainties that it faces.

Jim Pettigrew

Chairman

Signed on behalf of the Board of Directors

28 May 2013

Electronic Publication

The annual financial report is published on www.invescoperpetual.co.uk/
investmenttrusts which is the Manager's website maintained by the Company's
Manager. The work carried out by the Auditors does not involve consideration of
the maintenance and integrity of this website and accordingly, the Auditors
accept no responsibility for any changes that have occurred to the financial
statements since they were initially presented on the website. Visitors to the
website need to be aware that legislation in the United Kingdom governing the
preparation and dissemination of the financial statements may differ from
legislation in other jurisdictions.

.

INCOME STATEMENT

FOR THE YEAR ENDED 31 MARCH

                                 2013                      2012           
                                                                          
                       REVENUE  CAPITAL    TOTAL REVENUE  CAPITAL    TOTAL
                                                                          
                         £'000    £'000    £'000   £'000    £'000    £'000
                                                                          
Gains on investments         -  185,241  185,241       -  109,922  109,922
                                                                          
Foreign exchange             -    (377)    (377)       -        6        6
(losses)/profits                                                          
                                                                          
Income - note 2         52,887        -   52,887  52,857      398   53,255
                                                                          
Investment management  (1,804) (15,699) (17,503) (1,662)  (7,461)  (9,123)
fee                                                                       
                                                                          
- note 3                                                                  
                                                                          
Other expenses           (722)      (2)    (724)   (776)      (1)    (777)
                                                                          
Net return before       50,361  169,163  219,524  50,419  102,864  153,283
finance costs and                                                         
taxation                                                                  
                                                                          
Finance costs          (5,850) (13,651) (19,501) (5,850) (13,653) (19,503)
                                                                          
Return on ordinary      44,511  155,512  200,023  44,569   89,211  133,780
activities before tax                                                     
                                                                          
Tax on ordinary        (1,565)        -  (1,565) (1,490)        -  (1,490)
activities                                                                
                                                                          
Return on ordinary      42,946  155,512  198,458  43,079   89,211  132,290
activities after tax                                                      
for the financial year                                                    
                                                                          
Return per ordinary                                                       
share                                                                     
                                                                          
Basic - note 4           22.0p    79.7p   101.7p   22.1p    45.7p    67.8p

The total column of this statement represents the Company's profit and loss
account, prepared in accordance with UK Accounting Standards. The supplementary
revenue and capital columns are presented for information purposes in
accordance with the Statement of Recommended Practice issued by the Association
of Investment Companies. All items in the above statement derive from
continuing operations and the Company has no other gains or losses therefore no
statement of recognised gains or losses is presented. No operations were
acquired or discontinued in the year.

.

reconciliation of movements in shareholders' funds

FOR THE YEAR ENDED 31 MARCH

                                          Capital                              
                                                                               
                       Share     SHARE redemption   CAPITAL   REVENUE          
                                                                               
                     Capital   PREMIUM    RESERVE   RESERVE   RESERVE     TOTAL
                                                                               
                       £'000     £'000      £'000     £'000     £'000     £'000
                                                                               
Balance at 31         48,779     6,639     24,676   752,448    61,364   893,906
March 2011                                                                     
                                                                               
Dividends paid -           -         -          -         -  (44,018)  (44,018)
note 5                                                                         
                                                                               
Net return on              -         -          -    89,211    43,079   132,290
ordinary                                                                       
activities                                                                     
                                                                               
Balance at 31         48,779     6,639     24,676   841,659    60,425   982,178
March 2012                                                                     
                                                                               
Dividends paid -           -         -          -         -  (42,890)  (42,890)
note 5                                                                         
                                                                               
Net return on              -         -          -   155,512    42,946   198,458
ordinary                                                                       
activities                                                                     
                                                                               
Balance at 31         48,779     6,639     24,676   997,171    60,481 1,137,746
March 2013                                                                     

.

BALANCE SHEET

FOR THE YEAR ENDED 31 MARCH

                                                  2013         2012
                                                                   
                                                 £'000        £'000
                                                                   
Fixed assets                                                       
                                                                   
  Investments held at fair value through     1,340,948    1,175,075
profit or loss                                                     
                                                                   
Current assets                                                     
                                                                   
  Debtors                                        9,410       11,399
                                                                   
  Cash and cash funds                               87          207
                                                                   
                                                 9,497       11,606
                                                                   
Creditors: amounts falling due within one     (15,084)      (7,139)
year                                                               
                                                                   
Net current (liabilities)/assets               (5,587)        4,467
                                                                   
Total assets less current liabilities        1,335,361    1,179,542
                                                                   
Creditors: amounts falling due after more    (197,615)    (197,364)
than one year                                                      
                                                                   
Net assets                                   1,137,746      982,178
                                                                   
Capital and reserves                                               
                                                                   
Share capital - note 6                          48,779       48,779
                                                                   
Share premium                                    6,639        6,639
                                                                   
Capital redemption reserve                      24,676       24,676
                                                                   
Capital reserve                                997,171      841,659
                                                                   
Revenue reserve                                 60,481       60,425
                                                                   
Shareholders' funds                          1,137,746      982,178
                                                                   
Net asset value per ordinary share                                 
                                                                   
Basic note 7                                   581.89p      502.03p

These financial statements were approved and authorised for issue by the Board
of Directors on 28 May 2013.

Signed on behalf of the Board of Directors

Jim Pettigrew
Chairman

.

CASH FLOW STATEMENT

FOR THE YEAR ENDED 31 MARCH

                                                  2013         2012
                                                                   
                                                 £'000        £'000
                                                                   
Cash inflow from operating activities           38,965       42,082
                                                                   
Servicing of finance                          (19,250)     (19,251)
                                                                   
Capital expenditure and financial               23,055       21,204
investment                                                         
                                                                   
Equity dividends paid - note 5                (42,890)     (44,018)
                                                                   
Net cash (outflow)/inflow before                 (120)           17
management of liquid resources and                                 
financing                                                          
                                                                   
Management of liquid resources                     160        (160)
                                                                   
Increase/(decrease) in cash                         40        (143)
                                                                   
Reconciliation of net cash flow to                                 
movement in net debt                                               
                                                                   
Increase/(decrease) in cash                         40        (143)
                                                                   
Cashflow from movement in liquid                 (160)          160
resources                                                          
                                                                   
Exchange movements                                   -            6
                                                                   
Debenture stock non-cash movement                (251)        (252)
                                                                   
Movement in net debt in the year                 (371)        (229)
                                                                   
Net debt at beginning of year                (197,157)    (196,928)
                                                                   
Net debt at end of year                      (197,528)    (197,157)

.

NOTES TO THE FINANCIAL STATEMENTS

1. PRINCIPAL ACCOUNTING POLICIES

The principal accounting policies adopted in the preparation of these financial
statements are set out below. These policies have been consistently applied
during the year and the preceding year, unless otherwise stated.

(a) Basis of preparation

Accounting Standards Applied

The financial statements have been prepared in accordance with applicable
United Kingdom Accounting Standards and with the Statement of Recommended
Practice (SORP) `Financial Statements of Investment Trust Companies and Venture
Capital Trusts', issued by the Association of Investment Companies in January
2009. The financial statements are also prepared on a going concern basis.

2. INCOME

                                                             2013         2012
                                                                              
                                                            £'000        £'000
                                                                              
Income from listed investments                                                
                                                                              
UK dividends                                               41,071       41,547
                                                                              
Scrip dividends                                               823          743
                                                                              
Overseas dividends                                         10,986       10,527
                                                                              
Income from money market funds                                  7            9
                                                                              
                                                           52,887       52,826
                                                                              
Other income                                                                  
                                                                              
Interest on VAT recovered on management fees (note              -           18
3)                                                                            
                                                                              
Underwriting commission                                         -           13
                                                                              
Total income                                               52,887       52,857

Dividends include special dividends of £462,000 (2012: none) recognised in
revenue. No special dividends were recognised in capital during the year (2012:
£398,000).

3. INVESTMENT MANAGEMENT FEES

                                      2013                      2012           
                                                                               
                            Revenue  Capital    Total  Revenue  Capital   Total
                                                                               
                              £'000    £'000    £'000    £'000    £'000   £'000
                                                                               
Investment management fee     1,804    4,207    6,011    1,662    3,877   5,539
                                                                               
Performance fee                   -   11,492   11,492        -    3,584   3,584
                                                                               
                              1,804   15,699   17,503    1,662    7,461   9,123

Details of the investment management agreement are disclosed in the Report of
the Directors contained in the Annual Financial Report. At 31 March 2013
investment management fees of £558,000 (2012: £485,000) and a performance fee
of £11,492,000 (2012: £3,584,000) were accrued.

In the year ended 31 March 2012, £18,000 of interest in respect of VAT
recovered in previous periods was received. This was credited to revenue. No
such amounts were received in the current year.

4. RETURN PER ORDINARY SHARE

The basic, capital and total returns per ordinary share are based on each
return on ordinary shares after tax and on 195,116,734 (2012: 195,116,734)
ordinary shares, being the weighted average number of shares in issue during
the year.

5. DIVIDENDS

                                                 2013               2012       
                                                                               
                                             pence     £'000    pence     £'000
                                                                               
Dividends paid and recognised in the                                           
year:                                                                          
                                                                               
Third interim paid in respect of previous     5.00     9,756     4.75     9,268
year                                                                           
                                                                               
Special paid in respect of previous year         -         -     1.26     2,458
                                                                               
Final paid in respect of previous year        7.00    13,658     6.55    12,780
                                                                               
First interim paid                            5.00     9,756     5.00     9,756
                                                                               
Second interim paid                           5.00     9,756     5.00     9,756
                                                                               
Unclaimed dividends                              -      (36)        -         -
                                                                               
                                             22.00    42,890    22.56    44,018
                                                                               
Dividends on shares payable in respect of                                      
the year:                                                                      
                                                                               
First interim                                 5.00     9,756     5.00     9,756
                                                                               
Second interim                                5.00     9,756     5.00     9,756
                                                                               
Third interim                                 5.00     9,756     5.00     9,756
                                                                               
Proposed final                                7.80    15,219     7.00    13,658
                                                                               
                                             22.80    44,487    22.00    42,926

The proposed final dividend is subject to approval by Ordinary Shareholders at
the AGM.

6. SHARE CAPITAL

                                               2013                2012        
                                                                               
                                             NUMBER   £'000      NUMBER   £'000
                                                                               
Allotted, called-up and fully paid                                             
                                                                               
Ordinary shares of 25p each             195,116,734  48,779 195,116,734  48,779

7. NET ASSET VALUE (NAV) PER ORDINARY SHARE

(a) NAV - debt at par

The shareholders' funds in the balance sheet are accounted for in accordance
with accounting standards; however, this does not reflect the rights of
shareholders on a return of assets under the Articles of Association. These
rights are reflected in the net assets with debt at par and the corresponding
NAV per share. A reconciliation between the two sets of figures follows:

                                        2013                    2012          
                                                                              
                                    NAV  Shareholders'      NAV  Shareholders'
                                                                              
                                    per          Funds      Per          Funds
                                  share                   share               
                                                                              
                                  PENCE          £'000    PENCE          £'000
                                                                              
    Shareholders' funds          583.11      1,137,746   503.38        982,178
                                                                              
    Less: Unamortised discount                                                
    and                                                                       
                                                                              
    Less: expenses arising                                                    
    from debenture                                                            
                                                                              
    Less: issue                  (1.22)        (2,385)   (1.35)        (2,636)
                                                                              
    NAV - debt at par            581.89      1,135,361   502.03        979,542

(b) NAV - debt at market value

The market value of the debenture stocks is determined by reference to the
daily closing price, and is subject to review against various data providers to
ensure consistency between data providers and against the reference gilts.

The net asset value per share adjusted to include the debenture stocks at
market value rather than at par is as follows:

                                        2013                    2012          
                                                                              
                                    NAV  Shareholders'      NAV  Shareholders'
                                                                              
                                    per          Funds      Per          Funds
                                  share                   share               
                                                                              
                                  PENCE          £'000    PENCE          £'000
                                                                              
    NAV - debt at par            581.89      1,135,361   502.03        979,542
                                                                              
    Debt at par                  102.50        200,000   102.50        200,000
                                                                              
    Debt at market value                                                      
                                                                              
    - 111⁄2% Debenture Stock    (57.64)      (112,469)  (61.67)      (120,341)
    2014                                                                      
                                                                              
    - 73⁄4% Debenture Stock     (67.74)      (132,162)  (64.56)      (125,965)
    2022                                                                      
                                                                              
    NAV - debt at market value   559.01      1,090,730   478.30        933,236

The number of ordinary shares in issue at the year end was 195,116,734 (2012:
195,116,734).

8. RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH THE MANAGER

Invesco Asset Management Limited (IAML), a wholly owned subsidiary of Invesco
Limited, is Manager, Company Secretary and Administrator to the Company.
Details of IAML's services and fees are disclosed in the Report of the
Directors.

Fees paid to Directors are disclosed in the Annual Financial Report. Full
details of Directors' interests are set out in the Report of the Directors in
the Annual Financial Report.

9. This Annual Financial Report announcement is not the Company's statutory
accounts. The statutory accounts for the year ended 31 March 2012 have been
delivered to the Registrar of Companies. The statutory accounts for the year
ended 31 March 2012 received an audit report which was unqualified, did not
include a reference to any matters to which the auditors drew attention by way
of emphasis without qualifying the report, and did not include a statement
under either section 498(2) or 498(3) of the Companies Act 2006. The statutory
accounts for the financial year ended 31 March 2013 have been approved and
audited but have not yet been filed.

10. The Audited Annual Financial Report will be posted to shareholders shortly.
Copies may be obtained during normal business hours from the Company's
registered office, Quartermile One, 15 Lauriston Place, Edinburgh EH3 9EP. A
copy of the Annual Financial Report will be available from Invesco Perpetual on
the following website:

www.invescoperpetual.co.uk/investmenttrusts

11. The Annual General Meeting of the Company will be held at 11.00 am on 19
July 2013 at the Weston Link, National Galleries of Scotland, Princes Street,
Edinburgh.

By order of the Board

Invesco Asset Management Limited - Company Secretary

28 May 2013

a d v e r t i s e m e n t