Proposals Re Future of Comp'y

ISIS Smaller Companies Trust PLC
02 August 2006



To:           RNS

From:         ISIS Smaller Companies Trust plc

Date:         2 August 2006



              PROPOSALS REGARDING THE FUTURE OF THE COMPANY

Summary

•   Broadening the Company's investment policy to include investment
in Continental European quoted smaller companies in addition to smaller
companies quoted on the London Stock Exchange

•   Appointing Montanaro Investment Managers Limited as investment
manager - Montanaro is an independent fund management group with a proven track
record in investing in UK and Continental European quoted smaller capitalisation
companies

•   Identifying substantial investor demand to enable Shareholders,
not wishing to continue with their investment, to exit at a price significantly
closer to net asset value

•   Introducing an active discount management policy to ensure a
sustained improvement in the rating of the Company's shares

•   Changing the investment management terms so as to align, more
closely, the interests of the Investment Manager and Shareholders

Andy Irvine, Chairman of ISIS Smaller Companies Trust plc, said: 'Following
consultation with shareholders, it became clear that a number of them wished to
exit their investment at significantly closer to net asset value than the
prevailing share price.  Having conducted an in-depth appraisal of the many
proposals which had been submitted, the Board concluded that the Montanaro
proposals were most likely to reinvigorate the Company whilst addressing the
requirement of certain shareholders for an exit.  We were impressed by the
vision, energy and commitment of Charles Montanaro and look forward to working
with him and his team to build value for shareholders.

This decision was not taken lightly by the Board and we wish to record our
sincere gratitude to F&C Asset Management for their co-operation throughout this
process.'

Introduction

On 3 April 2006, it was announced that the Board had been advised by F&C Asset
Management plc that Stephen Grant, the Company's lead fund manager, would be
leaving F&C.  Following that announcement the Board received a number of
approaches regarding the Company's future management arrangements.  As a result,
the Board has reviewed the Company's management arrangements and considered a
broad range of proposals for the Company's future.

Having consulted with the Company's largest shareholders and potential new
investors in the Company, the Board is now proposing:

•   to appoint Montanaro Investment Managers Limited in place of
the Company's existing investment manager;

•   to broaden the Company's investment policy so as to permit
investment in Continental European quoted smaller companies in addition to
smaller companies quoted on the London Stock Exchange and to amend its
investment objective accordingly;

•   to change the Company's name to 'Montanaro European Smaller
Companies Trust plc' to take account of the change in its investment manager and
policy; and

•   to implement an active discount management policy.

The proposed changes to the Company's investment objective and policy and name
are subject to Shareholder approval, which will be sought at the Company's next
annual general meeting which is expected to be held in early September 2006.
The change in the Company's investment manager and the implementation of an
active discount management policy are subject to Shareholder approval of the
proposed changes of investment objective and policy.

Background to the Proposals

Following the announcement earlier this year of the departure of the Company's
lead fund manager from F&C the Board received a number of approaches regarding
the future of the Company.  The Board invited various investment management
groups to submit detailed proposals for the Company's future.  A broad range of
proposals were received and the Board, in conjunction with its financial adviser
(Intelli Corporate Finance Limited), has evaluated their merits in depth.

As part of its deliberations the Board consulted with the Company's largest
shareholders.  It was apparent that a number of them wanted to realise some, or
all, of their investment at a significantly narrower discount to net asset value
than that at which the Shares have traded in the past.  Having regard to the
prevailing market ratings of investment trusts in the UK smaller companies
sector, the Board does not believe that this would be readily achievable if the
Company continues with its present investment objective and policy.  One aspect
which the Board took account of in its deliberations was the value a Shareholder
might expect to receive were the Company to be wound up.

The Board believes that the Proposals satisfy the wishes of the major
Shareholders and are in the best interests of Shareholders as a whole.  In
particular, having consulted with potential new investors in the Company, the
Board believes that, by appointing Montanaro as its investment manager,
broadening its investment mandate and adopting an active discount management
policy, the Company will attract new investors.  This will, in turn create
demand for Shares through the secondary market at prices representing a
significantly narrower discount to net asset value than that at which the Shares
have traded in the past.  Such demand should enable those Shareholders who want
to realise some, or all, of their investment at a price significantly closer to
net asset value than the prices at which the Shares have traded in the past to
do so.

Change of Investment Manager

Subject to Shareholder approval of the proposed changes of investment objective
and policy, the Company will appoint Montanaro Investment Managers Limited in
place of the Company's existing investment manager.

Montanaro is an independent fund management group established by Charles
Montanaro in 1991.  It specialises in analysing and investing in UK and
Continental European quoted small/mid-cap companies.  Montanaro's team of 16
investment professionals have combined investment experience of more than 200
years.

As at 30 June 2006, Montanaro was managing almost £300 million, mainly for
financial institutions (insurance companies, pension funds and local
authorities) and investment funds, including Montanaro European Smaller
Companies plc, an Irish, Dublin-listed open-ended investment company launched in
December 2000.

Montanaro will manage the Company in a similar manner to Montanaro European
Smaller Companies plc.  The performance of that fund to 30 June 2006 is
summarised in the following table.
                                                                      Return to 30 June 2006
                                              6 Months         1 Year        3 Years        5 Years      Since Launch1

Montanaro European Smaller Companies plc -      16.0%          41.3%          132.9%         113.3%         121.6%
NAV total return2

MSCI Europe Small Cap Index (in sterling        10.9%          31.1%          125.3%         96.4%           90.2%
terms) - total return

  Notes: 1Montanaro European Smaller Companies plc was launched on 11 December
                              2000; 2gross of fees
                        Sources: Montanaro and Bloomberg

Montanaro has advised the Board that it intends to invest £1.0 million in the
Company by acquiring Shares through the secondary market.

Changes of Investment Objective and Policy

Subject to Shareholder approval at the Company's next annual general meeting
which is expected to be held in early September 2006, the Company's investment
objective will change and will be as follows:

'to achieve capital growth by investing principally in European quoted smaller
companies'

Following this change in investment objective, the Company will aim not only to
achieve capital growth but also to outperform the MSCI Europe Small Cap Index
(in sterling terms).

It is anticipated that the Company will initially invest principally in quoted
smaller companies within the European Union, Iceland, Norway and Switzerland
(but without restricting the Company from investing in smaller companies quoted
on other European stock exchanges).  In addition, the Company may invest in
companies listed on non-European stock exchanges that derive significant
revenues or profits from the European region.

The Company's investment policy will be flexible, enabling it to invest in all
types of securities.

The Company will not invest more than 10 per cent., in aggregate, of the value
of its gross assets at the time the investment is made in other investment
trusts or investment companies admitted to the Official List.

Montanaro intends to adopt a gradual approach to realigning the Company's
current portfolio to a portfolio consistent with the new investment policy with
a view to minimising the realignment costs.

Investment Management Agreements

Subject to Shareholder approval of the proposed changes of investment objective
and policy, the Company's existing investment management agreement will be
terminated.  As that agreement is terminable on six months' notice and
protective notice was given earlier this year, a payment will be required to be
made to the Company's existing investment manager based on the shortfall in the
notice period actually given.  Based on the total assets (less current
liabilities, excluding loans, and other deductions required under the investment
management agreement) of the Company as at 30 June 2006, the Directors do not
anticipate that this payment will exceed £45,000.

A new management agreement will be entered into with Montanaro to take effect
from the termination of the existing investment management agreement  The
proposed new investment management agreement may be terminated by either party
giving not less than six months' notice (provided that such notice may not be
given by the Company prior to the first anniversary of Montanaro's appointment).
  Under the proposed new investment management agreement the investment
management fee will be 1.0 per cent. (plus VAT) per annum of the Company's
market capitalisation (payable monthly).  Montanaro has agreed to waive this fee
for the first six months of its appointment.

Montanaro may also be entitled to receive an annual performance-related fee
based on the outperformance per Share over the total return on the Company's new
benchmark index.  The performance fee payable will be 15 per cent. (plus VAT) of
the amount by which the increase in the net asset value per Share in any
accounting period having adjusted for:

(i)       the impact of any accruing performance fee; and

(ii)      any dividends paid or payable by reference to the period in question;

exceeds the total return on the benchmark index plus 2 percentage points over
the relevant accounting period.  It will be calculated based on the
time-weighted average number of Shares in issue during the relevant period.
Furthermore, a performance-related fee will only be payable in respect of any
period if, and to the extent that, the closing net asset value per Share exceeds
the higher of:

(a)      the opening net asset value per Share for the relevant period;

(b)      the net asset value per Share on the last accounting period end by
         reference to which a performance fee was paid (if any); and

(c)      the net asset value per Share on the last business day prior to the
         date on which Montanaro's appointment becomes effective.

The total amount of any performance-related fee payable in respect of any
accounting period shall not exceed 2.0 per cent. of the net assets of the
Company at the end of such accounting period.  Calculation periods for the
performance-related fee will correspond to the accounting periods of the Company
or such part of an accounting period as Montanaro acts as the Company's
investment manager.  The performance-related fee shall be payable annually in
arrears.  50 per cent. of any performance-related fee will be paid in cash, with
the balance being settled by the issue of new Shares to Montanaro (the issue
price of such Shares will be the net asset value per Share at the time of their
issue).  Montanaro has agreed that it will not sell any Shares issued to it in
partial satisfaction of any performance-related fee in the three-year period
following their issue unless the Board has approved such sale.

The Board believes that basing the investment management fee on market
capitalisation (rather than net, or gross, assets as is more common) and
settling half of any performance-related fee through the issue of new Shares (in
conjunction with the restrictions on the sale of such Shares) will provide an
incentive to Montanaro not only to achieve capital growth but also to give
attention to the Company's market rating, thereby aligning Montanaro's interests
more closely with those of Shareholders.

Change of Name

The Board is proposing that, subject to Shareholder approval of the proposed
changes of investment objective and policy, the Company's name be changed to
'Montanaro European Smaller Companies Trust plc'.  Such change will be subject
to Shareholder approval at the Company's next annual general meeting which is
expected to be held in early September 2006.

Discount Management Policy

The Board believes that, by appointing Montanaro as its investment manager and
broadening its investment mandate, the Company will attract new investors.  This
should result in an improvement in the Company's market rating.  Nevertheless,
with a view to achieving a sustained improvement in the rating of the Shares,
the Board intends to implement an active discount management policy, buying back
Shares if the market price is at a discount greater than 5.0 per cent. to the
fully diluted net asset value per Share.  This policy will come into effect if
Shareholders approve the changes of investment objective and policy.

Purchases of Shares will only be made through the market for cash at prices
below the prevailing net asset value per Share (as last calculated) when the
Directors believe such purchases will enhance Shareholder value.  Furthermore,
the making and timing of Share buy-backs will also be subject to a number of
other legal and regulatory constraints and other factors (including, for
example, the ability to purchase Shares in the market, the Company's ability to
fund any Share buy-backs and the Company's authority to buy back Shares being
renewed at least annually) and will remain at the discretion of the Board.

The Company will be seeking to renew its authority to buy back up to 14.99 per
cent. of its issued share capital at its next annual general meeting and, in the
event that this authority is fully used, will seek further approval to renew the
authority.

Costs of Implementing the Proposals

The Directors estimate that the costs of implementing the Proposals (including
the payment to be made to F&C for early termination of the existing investment
management agreement and VAT but excluding any portfolio realignment costs) will
be less than £380,000, equivalent to approximately 0.6 per cent. of
Shareholders' funds as at the close of business on 31 July 2006.

As mentioned earlier, Montanaro has agreed to waive its investment management
fee for the first six months of its appointment as a means of contributing to
the costs of implementing the Proposals.  The Directors estimate that, based on
Shareholders' funds as at the close of business on 31 July 2006 and assuming a
Share price discount of 5.0 per cent., the aggregate amount of the investment
management fee (including VAT) waived by Montanaro would be approximately
£280,000, equivalent to approximately 0.5 per cent. of Shareholders' funds as at
the close of business on 31 July 2006.

Circular to Shareholders

A circular containing full details of the Proposals and the notice convening the
annual general meeting of the Company will be posted by the Company to
Shareholders shortly.

Enquiries

Andrew Irvine         Chairman, ISIS Smaller Companies Trust plc        Tel: [phone]
Gordon Neilly         Intelli Corporate Finance Limited                 Tel: [phone]

Notes

Intelli Corporate Finance Limited, which is authorised and regulated in the
United Kingdom by the Financial Services Authority, is acting for ISIS Smaller
Companies Trust plc and for no one else in connection with the Proposals and
will not be responsible to anyone other than ISIS Smaller Companies Trust plc
for providing the protections afforded to clients of Intelli Corporate Finance
Limited or for affording advice in relation to the Proposals.

This announcement does not constitute an offer to acquire or a solicitation of
an offer to sell any securities.

APPENDIX - Definitions

The following definitions apply throughout this announcement unless the context
requires otherwise.

'Board'' or 'Directors''                 the board of directors of the Company from time to time
'Company'                                ISIS Smaller Companies Trust plc
'F&C'                                    F&C Asset Management plc
'Montanaro'                              Montanaro Investment Managers Limited or, where the context so requires or
                                         permits, the group of companies
'Proposals                               the proposals to change the Company's investment objective and policy, to
                                         appoint Montanaro in place of the Company's existing investment manager, to
                                         change the Company's name and to adopt an active discount management policy
                                         described in this announcement
'Shareholders''                          holders of Shares
'Shares''                                ordinary shares of 50p each in the capital of the Company




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